Flight Over The Sky.....: Battered Airlines See Better Times Ahead

Commercial airlines, continuing to fight their way back to profitability, see signs of rebound in some sectors

Printed headline: Break in the Clouds?

Economic conditions appear to be improving in fits and starts, and air travel demand is reviving somewhat, but the airline industry is still in rough shape after a collapse in passenger and cargo traffic brought on by the global economic crisis.

Particularly worrisome to airlines has been that premium (first- and business-class) travel began declining at a faster rate than other types. The industry’s hard-won return to net profitability, which finally was achieved in 2007, proved to be short-lived.

In response, airlines are engaging in a variety of tactics, including capacity control, cost reductions, consolidation activity, exploitation of ancillary revenue streams and various adjustments to their business models. The degree of success of these moves will help determine the competitive landscape of the industry for years to come.

The reaction also has included an increase in consolidation activity, whether through bankruptcy, merger or marketing alliance. Global marketing alliances such as Star, SkyTeam and Oneworld have become major forces. The attitude of antitrust authorities has generally been favorable toward the alliances, but this may be starting to change, especially in Europe.

Meanwhile, the big airline alliances could have a significant impact on the commercial aircraft market due to the concentrated buying power they represent. Already, some preliminary moves are being made: A working group of Star member carriers has begun discussions with aircraft and engine manufacturers to outline its preferred specifications and program schedules for new narrow-body airliners to succeed the Airbus A320 and Boeing 737 families.

The timetable for the appearance of these new families is one of the big questions in the airliner market. With a lot already on their plates, Airbus and Boeing are in no hurry to launch all-new narrowbodies, particularly when they are still able to build hundreds of their current single-aisle models each year. Increasingly, though, the calls for such new aircraft are becoming more frequent and more insistent from within the operator community.

Bombardier’s launch of its new CSeries family of 100-145-seat airliners might also put some pressure on Airbus and Boeing in the narrow-body market, should sales of the CSeries begin to take off. With its composite technology and Pratt & Whitney geared turbofan engines, the CSeries promises to bring new operating efficiencies to the field. However, Airbus and Boeing could choose to size their new families at 150 seats and up, leaving the 100-149-seat market to Bombardier and others.

Other narrow-body competitors are under development in China and Russia. The recently established Commercial Aircraft Corp. of China (Comac) is developing an indigenous narrow-body family, seating 130-200 passengers, called the C919. First flight is scheduled for 2014, followed by service entry in 2016.

This timing is critical as, ideally, the C919 would enter service at least a few years ahead of the new Airbus and Boeing narrowbodies to get a jump on the market. Among the obstacles that the C919 will have to navigate to compete on the world stage are the long and costly Western certification process and establishment of a global support network.

These hurdles also loom for the new MS-21 narrow-body family from the Russian consortium United Aircraft Corp. (UAC). The MS-21 series comprises three models seating 150, 180, and 210 passengers. Initial flight is planned for 2014, with deliveries following in 2016, the same timeline as for the C919.

Meanwhile, the immediate challenge for Airbus and Boeing is to manage their shrinking, but still robust, order backlogs by adjusting build rates in order to better reflect market demand. In addition, both companies have new aircraft in the development pipeline that are slated to enter service within the next several years.

In the wide-body market, the key battle is between Airbus’s A350 and Boeing’s 787 and 777. Airbus was initially caught off guard by the sales success of the 787, and took its time in responding to the new Boeing midsize airliner. However, the eventual Airbus response, the A350, is clever and ambitious. Targeting both the 787 and much of the 777 product family, the A350 may force Boeing into retooling its own wide-body lineup much sooner than it might have wanted.

Another challenge to airlines and manufacturers alike will be dealing with a new set of government regulations on aircraft emissions. An emissions-trading regime is being established in Europe for the aviation sector, which will lead to increased costs for airlines and their customers as well as increased revenue for European governments. Eventually, the program could evolve into a worldwide program covering aircraft emissions.

Unlike in many previous airline crises, regionals have not escaped the ill effects of the present downturn. Previously, they were often able to find growth opportunities as major carriers shrank their networks and parked capacity. In the current situation, though, the majors have been extending capacity cuts to their regional partners, which are then forced into deciding how to downsize fleets and restructure operations. Meanwhile, air traffic is slumping on regional routes.

Some bright spots do exist in the regional ranks. In the U.S., for example, Republic and SkyWest airlines have both remained financially strong. Indeed, Republic is in such good shape that it recently acquired two national carriers (Midwest and Frontier). Republic has also used its financial strength to shore up some of its major airline partners to preserve business.

One of the keys to Republic’s fiscal health is that it has made a determined effort to rightsize its fleet by replacing smaller, uneconomical aircraft with larger, more profitable models. Republic is, of course, not the only regional carrier to pursue such a strategy, and many more will do so in the future.

The next few years will be critical for the regional airline industry, especially in the U.S. market. A large number of capacity purchase agreements between majors and regionals are due to expire. Some may be put out to bid, and others will simply be renegotiated. In all cases, though, both sides will pay extra attention to the wording of contracts, flexibility of terms and length of deals.

Second, a number of pilot contracts at major airlines will be up for renewal, providing opportunities to revisit the scope clause issue. The majors are certain to press their pilots to allow regional partners to fly 90- or even 100-seaters, which the clauses now prohibit them from doing.

Once the present downturn ends and sales of regional aircraft begin to pick up, most of the growth in the regional aircraft market will come at the top end, in the 90-130-seat range. This will be true even if the current scope clause restrictions remain intact, as independent regionals, low-fare carriers and major airlines will buy these aircraft in large numbers.

Bombardier’s new CSeries family will span the market between the top end of the regional market and the low end of the large airliner market. The CSeries will compete against 100-125-seat regional jets from Embraer and Comac, as well as against narrowbodies from Airbus and Boeing. Launch of the CSeries is a bold and expensive move for Bombardier but otherwise, the Canadian company would be limiting itself to an RJ market that tops out at 100 seats.

Embraer, for its part, has been considering a number of options to refresh and expand its own product line, including the possible launch of a 120-plus-passenger airliner that would compete directly with the CSeries. Embraer also has been exploring reentry into the regional turboprop market.

New competitors are emerging in the upper reaches of the regional jet market, including such aircraft as the Comac ARJ21, Mitsubishi Regional Jet (MRJ) and Sukhoi Superjet 100. China’s ARJ21 series consists of two models, the 78-90-seat ARJ21-700 and 98-105-seat -900. Service entry of the -700 is scheduled for late 2010.

Mitsubishi’s MRJ family comprises the 78-seat MRJ70 and 92-seat MRJ90. A 100-seat variant is under consideration. The MRJ will be powered by a version of Pratt & Whitney’s geared turbofan. First flight is scheduled for 2012, followed by deliveries in 2014.

At least two versions of the Superjet 100 are planned, a 75-seater and a 95-seater. A larger model, capable of transporting up to 120 passengers, is being considered. Alenia Aeronautica is a major participant in the Superjet 100 program, producing components and helping to manage sales.

ATR and Bombardier are the major players in the regional turboprop arena. Market demand has revived considerably in the past few years, driven by high fuel prices, air traffic growth and a need for carriers to reduce operating costs. Moderating fuel prices and slowing air traffic in the second half of 2008 did blunt some of the momentum in the turboprop market. However, fuel costs are rising again, and turboprop sales should pick up once air travel demand improves.