What does it mean when an airline makes a $1.3 billion investment and immediately dumps a large portion of it in the garbage? A recent move by United Airlines to purchase brand new 76 seat regional jets but only use two-thirds of the seating capacity raises just that question. It’s a story that might not close with the airline on top – if you pay attention to factors like historical precedent.
United ushered in 2019 by touting a new era of premium luxury for customers. The airline backed up the claim this month by kitting out a new fleet of regional jets in style, with ten first-class seats, 20 extra -leg- room economy plus seats, and only 20 regular coach class seats in the back. In addition, each aircraft will have a snack station and four California-sized closets.
United’s move and artful communications strategy might make you think that the focus is on you, the beloved customer. It might be. But it bears another look. As one former United executive said to me years ago, “I’ve never met a closet who bought a ticket.” In other words: if you have an expensive asset, use it to maximum advantage.
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This aircraft, to be certified as the CRJ550, will be a new variant of Bombardier’s CRJ-700 series aircraft. Unlike the 70-to-76-seat CRJ-700, however, these aircraft will be modified to carry just 50 passengers and to weigh in under 75,000 pounds. The numbers might not mean much to customers, but they are magic for United.
The major airlines and their pilots have negotiated for years how many aircraft may be operated by so-called “regional” airlines. It matters greatly to the pilots unions, since starting salaries at the regional airlines can be as low as $30,000, less than half of typical pay at the Majors. Unsurprisingly, airline management would like regional airlines to fly more and larger jets. The pilots would like to see all but the smallest aircraft flown by the better-paid mainline pilots.
So far, there is no clear winner of the slow-motion sparring match.
Under the current contract, United has agreed to a “scope clause” that allows no more than 255 of the larger regional jets (70-76 seats) to be farmed out to the minor league. In this context, United’s new de-rated 76-seaters will masquerade as 50-seaters by the contract terms, allowing them to be operated by cheaper crews. For context, purpose-built 50-seat RJs are no longer manufactured, having fallen out of favor when fuel prices spiked eleven years ago.
The CRJ550 may therefore be more of a chess move by United. On the one hand, it shows that United recognizes that labor will have the upper hand in the next round of contract negotiations, which has already started. Globally, the supply of pilots has been tightening for several years, pinched by rapid growth at Middle East and Asian airlines and regulatory changes in the U.S., among other factors. In the last round of negotiations, U.S. pilots scored pay raises of 18-23% at the Majors, and over 40% at Spirit and Hawaiian. United knows it will not achieve any relief from its current scope clauses in this round.
At the same time, the maneuver signals to pilots that United is not going to roll over. In a draw from Economics textbook chapters on game theory, the company is showing that it is effectively prepared to burn money rather than give in to labor. After all, United could have chosen to operate these routes with 126-seat mainline narrowbodies instead, perhaps scaling back the number of departures per day to match the number of total seats. Instead, United is prepared to throw away part of each new plane to show the pilots’ union that it has options.
In a similar game, American purchased a special variant of the common 50-seat Embraer regional jet to skirt scope clauses in the late 1990s. With only 37 seats, the Embraer 135 allowed American to increase the number of aircraft that could be subcontracted to its regional partner. Like most shortened aircraft variants, this model had higher costs per seat-mile than the more common 50-seater and American retired them early, though they are still in use at some other airlines.
There is also precedent for under-configuring aircraft. In 2000, American Airlines outfitted a fleet of Fokker 100s with just 56 seats to combat the upstart Legend Airlines. American’s normal Fokker 100s carried 87 seats. At the time, flights out of Dallas Love Field with over 56 seats were limited to Texas’ seven neighboring states under the Wright Amendment. Upsetting the status quo, Legend launched with an exclusive new terminal and 56-seat aircraft to establish a new market. American, feeling a threat to its hub at nearby Dallas Fort Worth, fought back hard both in the courtroom and at the airport. Legend capitulated in eight months.
Another case was Midwest Express Airlines. This outgrowth of Kimberly Clark’s corporate flight department operated luxurious two-by-two seating on a fleet of DC-9s (normally with two-by-three seating) out of Milwaukee in the 1980s and 90s. Midwest’s proposition was business class service at coach prices. The airline regularly obtained a fare premium over its competitors of 20 to 30 percent. Alas, what Northwest Airlines, Airtran and other competitors ultimately proved was that Midwest’s fare premium was a result of offering the only nonstop service on business-oriented routes rather than a product passengers were willing to pay extra for. Once it faced new nonstop competition, Midwest was quickly forced to add seats to its planes and reduce fares. The airline did not survive, eventually being merged with the ultra low cost carrier Frontier Airlines.
Also in the early 2000s, several entrepreneurs attempted to offer all-business-class service across the Atlantic, using less than half the potential capacity of Boeing 767s and 757s. These airlines, with names like MAXJet and EOS may be hard to remember because they did not last long. In the end, incumbents had better access to corporate customers for the front of the cabin, and extra revenue from economy passengers in the back. Putting 48 seats on a plane built for 185 (EOS’ 757-200s) gives you less flexibility in the market and fewer ways to earn revenue.
There are many examples of airlines under-configuring aircraft for strategic reasons. Each case seems like a good idea at the time. Some have even been good ideas over the long term, such as JetBlue’s decision in 2006 to reduce its all-coach A320s to just 150 seats from 156, obviating the need for a fourth flight attendant—although even JetBlue is currently in the process of reconfiguring its A320s with thinner slimline seats to bring the seat count up to 162. Outside that modest range, however, low-density aircraft have often been short-lived. A $40-million asset — or even more — is a costly way to make your point, whether signaling to competitors or tweaking labor.
As a customer, I hope United’s new bet is successful. After all, the trend toward higher density aircraft adds stress for all of us, even if we’re lucky in enough to sit in the front today. All the same, history is not on United’s side for this one – and it might not be until closets become paying customers.