Opening up the skies to regional jets

Open skies give of existing airlines and new ones the ability to better service local commuter routes by using higher flight frequencies and regional aircraft.

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By  Neil Denslow Published  April 29, 2003

I|~||~||~|If you have tried to catch a plane from Cairo to Riyadh or Jeddah, even with a confirmed ticket, you will know the frustration of being bumped. Airline check in officials just shake their heads as you fight with crowds of people all trying to get on the same, overbooked, flight. It is one of the effects of monopoly; airlines do not really care because, apart from going by road, there is nothing else a passenger can do.

Remove the monopoly; allow additional airlines to service the routes, and competition does wonders to change this attitude. Ticket prices for local commuting are driven down; making it easier to travel, which stimulates the local economy. The business case for open skies has been demonstrated to be strong both in the USA and to a more limited extent in Europe.

Closer to home, Bahrain has embarked on an open skies policy, allowing more airlines to land at Bahrain International airport (see article on p.26). Traffic and business had stagnated at the kingdom’s airport from the first Gulf War up to the late 1990s, but this changed in 2000 when traffic jumped by 15% from the year before, marking the first big increase that the airport had seen in a number of years.

According to David Ryan, director of marketing at Bahrain’s Ministry of Transportation and Civil Aviation Authority, this was because the authorities began to open up and introduced an open skies policy. “We gave permission to Emirates to fly in here, Gulf Air increased its Gulf frequencies and we opened air services to Air Iran. Meanwhile other airlines like Cathay Pacific and KLM increased their flights,” says Ryan.

Bahrain is now looking to capitalise on that increased flow by expanding the capability of its airport and Gulf Air has expressed the desire to buy regional jets to better serve routes to the subcontinent as well as the Gulf.

Open skies might define the policy needed, but it does not of itself guarantee that any one airline can make money. Just upping the number of planes flying into and out of an airport does not necessarily improve profitability. You have to use the right aircraft in the right way. Sticking 300 seater planes on short regional routes is not particularly cost effective unless you know you can fill them at a price. People expect to pay less for a trip from Riyadh to Jeddah than they would for a trip from Riyadh to London. The costs of flying the distance are just a small part of the costs of owning and operating the plane. So if you want to get your short-haul ticket prices down, you have to operate the most cost-effective plane on the route with as much flexibility as possible.

What busy commuter routes need is an aircraft that allows airlines to increase the frequency of flight with less people flying but more often and yet still make money at lower ticket prices.

There are aircraft around that do that job. One company that wants to sell planes to airlines in the region is Embraer, the Brazilian company famous in aviation circles for its ERJ 135, 140 and 145 models. These planes, which seat, respectively 37, 44 and 50 people, have all carved out a niche for themselves in areas where aviation is often the most viable form of travel between two points in a country. Around 1000 have been sold to date, of which 620 have been delivered.

||**||II|~||~||~|The case for regional jets, as they are called in the industry, is all about efficiency and serving the customer, as Frederico Curado, executive vice president, airline market, Embraer, explains. “The business case for smaller jets, anywhere in the world, is frequency. Instead of having one flight a day, putting in a 777, and it being packed with people, you can deploy more aircraft, more frequently throughout the day,” he says.

“It’s a concept that began in the USA in the 1970s and is spreading throughout the world. The latest place to witness this kind of development is China, with more aircraft and higher frequencies,” he continues.

Confident that the message is getting through, a new generation of aircraft is currently under development, the Embraer 170, 175, 190 and 195. These new models, which seat 70 to 110 people, target a segment that Embraer, in Curado’s words, sees as, “wide open.”

The first model, the 70 seater Embraer 170, is an advanced stage of testing. The company says it already has around 118 firm orders and 208 purchase options for the 170/190 family.

Curado sees the primary competitors in the 70-110 seat segment as Airbus, Boeing and Bombardier, yet he is confident the company can gain market leadership. “We see this segment as a big opportunity because there are currently no products available, and so we have been investing heavily since 1999 in the development of the four models,” he says.
But is the message about regional jets getting through here in the Middle East? After all, most Middle Eastern airlines, with the notable exception of Emirates, have not traditionally paid too much heed to the idea of efficiency and customer satisfaction.

“I believe airlines in the Middle East will look at this very seriously,” says Curado. “When you increase frequencies, you actually increase demand because people are given a service they would not have otherwise. Typically, [regional jets] are also used by higher yield passengers.”

James Hogan, CEO at Gulf Air, hinted in a recent interview with Arabian Business (a sister publication) that the airline sees a place in its fleet for regional jets. Gulf Air, he said, has three clear businesses: conventional long haul serving global destinations, a planned economy-only airline for expatriates and a short-haul business serving regional destinations.

“We have a regional business within the GCC that may be enhanced by using aircraft from Embraer and Bombardier’s 70 seat planes,” says Hogan. “We would like to introduce them by 2005.”

Away from the GCC, ATR’s (Avions de Transport Régional’s) ATR 42-500 has been chosen by Egypt for the start up of a domestic shuttle service between Cairo and Hurghada, Sharm El Sheikh and Luxor. Six ATR 42-500s have been taken on a lease agreement that also includes crew members.

Other statements back up the case for regional jets. Consider this quote from Chautauqua Airlines, a small local airline based in Indianapolis. “Regional jets made sense before September 11, and we think they make even more sense afterward,” says Warren Wilkinson, marketing vice president at the airline. “They can operate the same mission with a reduced level of seats to make it economically viable.”

ATR, the joint venture between Alenia Aeronautica and EADS, claims that regional passenger traffic has been growing at 11.8% annually over a 30 year period, compared to 5.1% for worldwide passenger traffic. It also claims that operating margins at regional US airlines are in the 10-15% bracket, compared to negative territory for US majors.

Of course, in the aftermath of the 11th September, regional jet makers have suffered with the rest of the industry. However, whereas Boeing had to cut 30% of the jobs at its commercial aviation business, Bombardier had to lay off just 10% of its workforce (3800 people) and Embraer released 1800 staff, around 14% of its workforce.

Looking forward, Embraer is positive about its future prospects. For financial year 2002, net sales reached US $2.52 billion and net income was $222.6 million, The order backlog on the 31st December 2002 totalled $22.2 billion, $9 billion in firm orders and $13.2 billion in options.

Embraer estimates that 8610 commercial regional jets (defined as planes with 30-120 seats) will be delivered worldwide between 2003 and 2022, at a market value of an estimated $180 billion. The Middle East & Africa region will account for an estimated 250 of those deliveries over the 20 year period.

The company has a range regional jets that runs from the twin turboprop Embraer 120 that will carry 30 passengers 1482 km up to the Embraer 145, which is 50 seat twin turbofan.

If an open skies policy does become more prevalent in the region and/or the idea of regional jets does take off here, Embraer will undoubtedly benefit. So too will many members of the flying public, who may more easily find another flight.||**||

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