Earlier this year, United Airlines (NASDAQ:UAL) became the launch customer, in conjunction with regional partner GoJet Airlines, for the CRJ-550, a 50-seat derivative of the CRJ-700 regional jet. The CRJ-550 provides an innovative workaround for pilot scope clauses -- which limit many airlines' usage of large regional jets -- while offering a vastly superior customer experience compared with other 50-seat jets.
On Sunday, United put its first 10 CRJ-550s into service. This highly touted new aircraft type will help United catch up to American Airlines (NASDAQ:AAL) and Delta Air Lines (NYSE:DAL) in terms of offering first-class and extra-legroom seats to business travelers in smaller markets. However, in the long run, the CRJ-550's higher unit costs will probably come back to bite United.
United has had a 50-seat jet problem
The three major U.S. network carriers use regional jets operated by a variety of regional airlines to connect smaller markets to their hubs. Meanwhile, the carriers' mainline jets are primarily used for flights from the hubs to other big cities. This approach keeps trip costs down in smaller markets, since regional airlines pay employees less, while enabling American, Delta, and United to offer customers comprehensive route networks.
However, pilot unions at the major airlines have bargained hard to ensure that their members' jobs aren't outsourced to lower-paid regional jet pilots. In the U.S., regional jets are typically limited to 76 seats. In addition, airlines are allowed to operate only a limited number of larger regional jets, in the 65- to 76-seat range. The limits on 50-seat jets are less strict.
That said, the limits on using larger regional jets are not the same across the three big network carriers. American Airlines has the most flexibility. By the end of next year, its regional affiliates will operate 318 76-seat jets, some of which still sport an older configuration with 79 seats, as well as 131 CRJ-700s, most of which have 65 seats.
Before 2012, Delta and United were both allowed 153 76-seat jets plus another 102 70-seat jets. But in that year, Delta Air Lines reached an agreement with its pilots allowing the carrier to add 70 more 76-seat jets to its regional jet fleet in return for adding 88 small narrow-body planes to its mainline fleet. United has the same flexibility, but it has been unwilling to take on small narrow-bodies, saying they're too costly to operate.
As a result, United relies far more on 50-seat jets than its rivals do. Delta has 117 50-seat jets remaining in its fleet. American will be down to 163 by the end of next year, compared with 204 at the end of 2018. By contrast, United Airlines has more than 300 -- and no plans to shrink its 50-seat jet fleet. In a world where 50-seat jets typically don't have first-class seats and often don't have extra-legroom economy seats, either, United was at a big disadvantage in competing for high-fare business traffic in the small cities where it operates lots of these small regional jets.
The CRJ-550 is a workable solution -- for now
United's CRJ-550s feature an ultra-spacious layout, with 10 first-class seats, 20 extra-legroom seats, and just 20 standard coach seats. Since it is based on a model that can fit far more seats, there is plenty of extra room on the CRJ-550. This space is devoted to a self-serve snack and beverage station for first-class customers and luggage closets that will allow more carry-on bags to be stowed on board rather than gate-checked.
To comply with United's pilot contract, the CRJ-550 has a reduced maximum take-off weight, limiting its range. However, that's not a major problem, as most regional jet routes are fairly short. The CRJ-550s will be deployed at United's Chicago hub initially and will eventually be used in Newark and Washington, D.C. as well.
United Airlines hopes that having lots of premium seats available for upgrades on the CRJ-550s will help it attract business travelers on routes where they are deployed. That could also have a beneficial spillover effect on the rest of its network, as these customers connect at United's hubs to mainline flights.
Of course, the CRJ-550 is more expensive to operate than a standard (i.e., smaller) 50-seat jet. But United expects to generate enough extra revenue in the business-focused markets where it will be deployed to offset the incremental costs. For now, United has committed to 54 CRJ-550s, which should all be ready by the end of 2020.
The economics of the CRJ-550 will get worse over time
A big reason the CRJ-550 is affordable for United Airlines is that these are not actually new planes: They are refurbished CRJ-700s. The CRJ-700 was fairly popular in the U.S. 10 to 15 years ago. However, it is now seen as an outdated plane with narrower seats, smaller aisles, and smaller overhead bins than Embraer regional jets. Given the lack of demand, it was probably cheap to buy or lease these planes for conversion to the CRJ-550 type.
On the other hand, the vast majority of the global CRJ-700 fleet was built more than a decade ago. Indeed, the initial batch of CRJ-550s consists of aircraft built between 11 and 18 years ago. That's not especially old -- but as those aircraft age over the 10-year contract period, maintenance costs will increase significantly. Regional airline pilot pay is likely to rise, too, because of a growing shortage of commercial airline pilots.
GoJet will have to bear some of these costs. But United ultimately needs to shoulder most of the burden, which will make the CRJ-550 increasingly uneconomical to operate over time. Meanwhile, American and Delta will have very few 50-seat jets remaining in their fleets a few years from now. Their larger regional jets will be newer on average, and incremental costs can be spread over more seats.
Thus, United Airlines' experiment with spacious 50-seat regional jets is likely to be beneficial in the short run by boosting the carrier's unit revenue in markets where the CRJ-550 is deployed. However, in the long run, United may find that it solved its revenue problem only to create a new cost problem instead.