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“Regional Airlines: The Most Dynamic Segment of Aviation”

Remarks of Peter Bowler, President, American Eagle to the  Aero Club, May 23, 2000

Thank you, and good afternoon. I appreciate the opportunity to be here with you today to talk a little bit about what -- in my unbiased opinion -- is the most interesting and dynamic segment of the aviation industry today: Regional airlines.

A quick scan of the industry landscape reveals that carriers operating regional aircraft are growing quickly, improving customer service and generating relatively strong returns. They are also at the center of many of the industry's hottest and most contentious issues. These issues include scope clauses, capacity constraints, air traffic control, service to small communities, and competition between major carrier networks and global alliances.

Before diving into a discussion of these issues, I'd like to take just a moment to tell you about American Eagle so that you will understand my perspective on this business.

Established in 1984 as the regional affiliate of American Airlines, we've grown over the years from a collection of independently owned franchise carriers. Today we are a wholly owned subsidiary of AMR, the parent company of American Airlines. We conduct business as three part 121 carriers: American Eagle Airlines, which is our continental U.S. operation; Executive Airlines, which operates as American Eagle in the Caribbean; and Business Express Airlines, the largest regional operator in the Northeast that we acquired last year and are gradually integrating into American Eagle. 

We have a fleet of 211 turboprops and 67 regional jets that range in size from 34 to 66 seats. We operate more than 1,700 flights a day from 8 hubs to nearly 140 communities throughout the United States, Canada, the Bahamas and the Caribbean. Last year we carried 14 million customers. 

My 12,000 fellow employees represent almost every profession in the industry, with backgrounds as diverse as the regions we serve and a commitment to provide safe, reliable air transportation between small cities and large metropolitan centers. 

Now that I have beaten my chest about how big we are and how there is hardly anywhere we don't go, let me talk about the benefits, complexities and challenges of being small. 

After all, we fly small aircraft relatively short distances, mainly to small communities. On average we generate about $2,400 per departure (not per passenger!) compared to about $25,000 per departure for our sister company, American Airlines.

Our corner of the airline business has not received anywhere near as much exposure as the international growth and alliances undertaken by the majors. However, having strong regional networks here in North America has become increasingly important. 

An indication of the importance of regional networks is the fact that over the course of the last year one of our competitors has followed American's and Continental's lead and acquired its biggest regional affiliates. Several others have shifted the nature of their economic relationships to a "fee per departure" arrangement, which gives the mainline carrier more influence over route and schedule decisions. 

The reason for all of this focus is that the business traveler headed across this continent or to central Europe or the Far East often originates in a small community two or three hundred miles from one of this country's international connecting hubs. As the communication and electronic revolutions make geographic location less critical, smaller communities are increasingly attractive places to live and work, provided, of course, that when you want or need to travel, you can do so relatively easily.

Collectively, the customers originating in these smaller communities, combined with international customers destined for places like Champaign, Dubuque, or Green Bay, play a critical role in assuring the success of international routes from a city like Chicago to major centers in Asia, Europe or Latin America. 

Another major development has been the introduction of the regional jet, which has extended the reach of connecting hubs dramatically -- enabling more direct routings and more intense competition. In addition to the superior range and speed capabilities of regional jets, or "RJs" as they are frequently called, customers just feel better about jets than propellers -- a sad fact, but true.

Simply put, the RJs are a big deal - not just to the airlines operating them and the customers and smaller communities they serve - but to the entire industry. This new generation of aircraft enable American Eagle -- and unfortunately, our competitors as well -- to connect many city pairs which previously could not support non-stop service, either because the markets were too small or because the distances were too far to operate effectively with turboprop aircraft.

During a two-hour trip on a turboprop -- which is about the limits of our aircraft -- one of our turboprops can travel between 400 and 600 miles. By contrast, a fully loaded 50-passenger Embraer 145 can fly approximately 1,000 miles, at speeds over 500 miles per hour and altitudes close to 40,000 feet. Suddenly, markets like Boston to Richmond; or Dallas/Fort Worth to Greenville/Spartanburg or Savannah, are not only possible, they are very attractive.

Currently, there are 441 RJs in service in the United States, accounting for about 18% of the industry's total regional fleet. Because the RJs tend to be slightly larger and fly further than the average turboprop, this 18% of the fleet provided 31% of all regional airline seat miles in 1999. By the end of this year, RJs will be operating well over half of the ASMs offered by regional carriers.

And the RJ revolution is really just getting started. All told, the U.S. industry alone has 1,011 RJs on order, and options for over 1,000 more. That's a total of over 2,400 regional jets in service or on order or option, compared to a current combined fleet size for the regional industry of approximately 2,200.

At American Eagle, our fleet currently includes 67 Embraer regional jets, and we are taking delivery of 2 or 3 per month, with more than 240 additional jets on order and option. By November of this year, 100% of American Eagle's operation at Chicago O'Hare will be flown with RJs, along with substantial numbers of our flights from Boston, LaGuardia, and DFW.

I can't resist pointing out that Eagle will be the first regional operator to make one of its major hubs 100% jet!

We have been using jetbridges for all of our departures from Chicago for almost two years, and we are now more than half way through the renovation of our terminal G concourse - a project that is creating lots more space and light and smiling faces as well. 

I apologize for the diversion, but every small carrier president also has to do double duty as a sales guy as well!

While the popularity and economics of regional jets make them a perfect fit for many markets, the higher costs associated with RJs mean we are likely to see turboprops continuing to operate for some time. While their range and speed capabilities are greater, RJs burn twice as much fuel per hour as turboprops, require slightly longer runways, have much higher ownership costs, and result in higher labor costs. Additionally, the baggage carrying capability per passenger for several popular regional jets are considerably less favorable than certain kinds of turboprops. 

If any of you have traveled through San Juan or Miami lately and remember the number and size of bags checked in by the person in front you, you may understand why we operate ATR fleets at these hubs!

The upshot is that for many shorter-haul markets, especially markets which are largely leisure in nature, turboprops are likely to remain an attractive alternative. It may turn out that a whole new generation of low cost regional carriers, operating turboprops retired by the larger operators, will begin competing in these turboprop markets and to other underserved communities. 

Before departing from the topic of the economics of regional jets it only makes sense to comment on one of the most contentious issues hanging over our business, namely the issue of "scope clauses" in the contracts between the major airlines and the unions representing their pilots.

The fundamental issue boils down to this: Pilots at the major carriers are concerned that all of this growth in regional jet flying is a threat to their well being and their future prosperity. As a result of this concern, most pilot unions today have "scope clauses" in their contracts which limit the number and size of jets which can be operated by regional affiliates.

Our view -- and I believe it is shared by the management of most regional and mainline carriers alike -- is that RJs are not only good for majors and their pilots, they are absolutely essential! Mainline pilots, and the airlines whose careers they are inextricably tied to, need strong hub networks. Regional jets have become essential tools in building hubs and competing against the hub networks of other carriers and alliances.

Even if you do not buy the argument that regional jets are key to building and defending hubs, the simple facts are that very few regional carriers are buying new turboprops. Thus, even if a carrier did not want to meet the customer demands for RJs, and even if they wanted to forgo the opportunity to grow with connecting traffic from the new spokes that only RJs can operate, at some point, this carrier would simply have to shrink. 

As aging turboprops are retired, the routes they operate would have to be abandoned -- which would in turn result in reduced mainline flying because there would be that many fewer connecting passengers. Of course, by this point in the debate the whole issue becomes moot because someone else's RJs would have stolen all of this traffic over its hubs.

Some in favor of strict scope limits propose that the RJs should be flown by mainline carriers at essentially mainline rates of pay, benefits, and work rules. At this point it is helpful to go back to one of the figures I mentioned earlier -- that regional carriers tend to generate only a fraction of the revenue generated by a mainline carrier on a per departure basis. 

It is not an accident that virtually no U.S. carriers operate RJs in the mainline. In fact, I am aware of only one mainline carrier in the world that operates RJs itself -- and they desperately wish they could transfer this flying to a regional affiliate!

At American Eagle we have tried to be especially sensitive to the concerns of American's pilots. Since we took delivery of our first RJ, we have not replaced mainline flying with RJs on any routes and have not augmented existing AA routes with incremental RJ trips. Rather, we have used RJs to replace turboprops and to open new routes to AA hubs and focus cities. We've already seen the beginning of a phenomenon where Eagle RJs start new routes which are then turned over to American Airlines once they have been successfully developed and can be operated profitably with larger jets.

In addition to feeding the hubs, the economics of regional jets enable Eagle to strengthen the AA network in key cities like Boston, and at New York's LaGuardia and JFK airports, that have not operated as traditional hubs. In these markets the increased breadth of service offered by Eagle makes the AA network more attractive to local residents, especially business travelers.

Many of the majors are attempting to reach agreements with their pilots on the scope issue. But while the outcome of the RJ-scope debate will have a lot to do with how the industry plays out in the years to come, it is certainly not the only hot topic we find ourselves in the middle of these days.

Obviously, one issue all of us in the aviation world are wrestling with is the air traffic control system. While ATC-related delays are bad for everyone, they are particularly bad for the regionals. A twenty or thirty minute delay on a three hour flight is one thing. The same delay on a one hour flight is relatively more disruptive -- we simply have less time to make it up -- and can throw a whole day's worth of flying off kilter. 

Even more problematic is the impact of "ground stops," which is the term used to describe what happens when a weather or ATC event causes the air traffic controllers to hold aircraft on the ground at their originating airport. Naturally, longer haul flights are less affected by this practice because they are more likely to be enroute already, and thus cleared to land. In our case, since our average trip length is less then 250 miles, our planes are usually told to stay on the ground until the weather passes or the congestion eases.

Another wrinkle in the ATC situation is the fact that - as I mentioned - the new generation of RJs can fly at much higher altitudes than turboprops can, which means regional carriers are now, in effect, sharing an already crowded air space with the major carriers. 

Clearly, there are a lot of changes taking place and difficult issues under debate in the regional business these days. But what does all this mean for the future? 

For the major airlines, the traffic provided by regional affiliates will play an increasingly important role in determining growth and profitability. The majors will continue to dedicate time and resources to build these networks. In some markets, regional carriers carry the codes of several mainline carriers, an arrangement which creates obvious load factor benefits for the regional and aids the mainline carriers as well. This is practice that we may see more of.  

In small and medium-sized communities throughout the United States, I think we will see a variety of different outcomes. Some communities will get lots of new service, as competition for spoke influence grows. However, regions with too many small airports may suffer, because diffusion of demand across a broad number of nearby airports tends to diminish the chances of service from any single airport being successful. 

Most importantly, from the consumer's perspective, aside from the ongoing problems of ATC and airport congestion, these trends seem to be mainly good news -- more non-stop service, more regional jets, more jetbridges and better facilities, and lots more competition.  

I'd like to thank you for your kind attention and the Aero Club for inviting me to speak.  I believe we have a few minutes set aside for Q and A, so if anybody has question, I'll try to give you an answer.