If you go to just about any commercial airport in the U.S. today, you'll see plenty of jets that seat 37-50 passengers. Small regional jets exploded in popularity in the late 1990s and early 2000s. Airlines first used them to replace turboprops as "hub feeders" and later used them to serve new routes that did not have enough traffic for mainline service but were too long for turboprop flights. (Eventually airlines also used them to add frequencies between larger markets.)
However, the airline industry has changed dramatically in the last 10 years. Jet fuel prices have skyrocketed from less than $1 per gallon to around $3 per gallon. Business travelers have grown tired of the cramped conditions (and lack of first class seats) on 50-seat jets. Recently, pilot shortages have become yet another headache for 50-seat-jet operators.
As a result of all these headwinds, Delta Air Lines (NYSE:DAL) is moving aggressively to slash its 50-seat-jet fleet. United Continental (NYSE:UAL) and American Airlines (NASDAQ:AAL) have been slower to phase out these planes, but pilot shortages at regional airlines like Republic Airways (NASDAQOTH:RJETQ) are starting to force their hands. In fact, small regional jets could be nearly extinct in just five years!
Too expensive to fly
Several factors are conspiring to make small regional jets obsolete. The rise in fuel prices noted above is the most obvious one. Jets tend to burn more fuel than similar-size turboprops, and smaller aircraft tend to burn more fuel per seat than larger aircraft. As the smallest class of jets in commercial service, regional jets with 37-50 seats are the biggest fuel-guzzlers out there!
When United announced plans to replace some of its 50-seat jets with 76-seat Embraer E-175s, it stated that the E-175 burns 10% less fuel per seat. This may not seem like a lot, but the E-175 has a high proportion of premium seats: 12 seats in United First and 16 in Economy Plus, compared to all-economy seating on 50-seat jets. This means that United can earn higher unit revenue with these planes at the same time as it reduces its unit cost.
Maintenance costs are another killer for small regional jets. This is accentuated by the fact that many 50-seat jets are now around 12-15 years old, a time when major engine overhauls are often necessary. For planes that are barely profitable to fly in the first place, investing hundreds of thousands of dollars to keep them going is a bitter pill to swallow.
That's one of the biggest reasons why Delta is radically downsizing its fleet of 50-seat jets. The company more or less stopped doing engine overhauls on small regional jets last year. When the engines need major work, the aircraft are being retired. Delta is replacing them with 76-seat jets (which have a roughly 10% unit cost advantage according to United's analysis) as well as small mainline planes that have even lower unit costs.
The growing pilot shortage may be the last straw for small regional jets. In the past, one of the big "equalizers" for these planes was extremely low labor costs. First year co-pilots at regional airlines have an average base salary of just $22,400, according to The Wall Street Journal. Even after five years, the average base salary is only $35,100. However, this situation is unsustainable.
Tougher rules for pilot training have caused the supply of new pilots willing to work for meager regional airline wages to dry up. Meanwhile, major airlines are raiding the regional airline pilot ranks to replace retiring pilots and to comply with new crew-rest regulations. Regional airlines cannot raise salaries to a level that would attract new pilots and still fly for a price that would make sense for their legacy carrier partners.
A quick exit
Delta recognized the declining viability of 50-seat jets before its peers. The company had an astounding 474 50-seat regional jets in service in 2009, but plans to shrink that fleet to no more than 125 planes by the end of 2015.
United and American have planned slower transitions away from 50-seat jets. United is adding 70 E-175s to its fleet in the next two years, and the company had originally planned to use them to replace 50-seat jets on a roughly one-for-one basis. As of a month ago, United planned to remove 34 small regional jets from its fleet in 2014 while adding 27 large regional jets. This would have left 327 50-seat regional jets in the United Express fleet at year-end.
However, earlier this month, United announced plans to end hub service in Cleveland this spring, citing the regional airline pilot shortage. Republic Airways is ending all of its 50-seat jet flying for United by mid-year. (It's also removing all of its 44-seat jets from service with American Airlines by the end of 2014.) SkyWest (NASDAQ:SKYW) subsidiary ExpressJet -- which is United's top feeder carrier -- is also facing a pilot crunch, forcing it to cut flights.
These developments probably mean that United is busy revising its 2014 fleet plan to include fewer regional jets. The situation at American Airlines is similar. As of last month, its fleet plan included 305 small regional jets at year's end, but that number is likely to shrink.
Just this week, the pilots union at wholly owned regional subsidiary American Eagle Airlines voted down a new contract. The pilots expect American to rapidly downsize the carrier's flight schedule and the union plans to help pilots find other jobs -- which shouldn't be hard given the demand for well-qualified pilots across the industry.
Foolish bottom line
Today, the three big U.S. legacy carriers still have nearly 1,000 small regional jets in service through their regional airline partners. However, five years from now, small regional jets could be more or less extinct. Fuel costs and maintenance costs are both prohibitively expensive, and cheap pilot labor will soon be a thing of the past.
Many of the routes currently flown by small regional jets will be "upgauged" to large regional jets in the next few years. Some may be dropped. A significant number could even be returned to mainline service, albeit with fewer frequencies. Regardless, 50-seat jets will become a rare sight by the end of the decade.
Adam Levine-Weinberg owns shares of Republic Airways Holdings. Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool recommends Embraer-Empresa Brasileira. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.