Summary:
This article compares the regional jet markets in China and the United States. There is a huge contrast between the regional aircraft markets in China and the United States: regional routes in the United States are mainly operated by regional aircraft, and regional flights in the mainland are mainly operated by narrow-body aircraft. According to the preliminary analysis, the reason is that Continental Airlines believes that operating low-traffic routes with regional aircraft is less profitable than operating with narrow-body aircraft, and believes that regional aircraft are not as profitable as mainline aircraft. This misunderstanding has led to a huge difference in the regional aviation markets between China and the United States.
In this paper, a static model and a dynamic evolution model of airline route profit structure based on route profit analysis are established. According to the dynamic evolution model, the profitability of regional aircraft operating low-traffic routes is higher than that of narrow-body aircraft, and airlines can improve profitability by introducing regional aircraft capacity. The main reasons for cognitive bias are the improper selection of the comparison range and the fact that the flight slot value is not included in the financial accounting system.
The dynamic evolution model is used to discuss the operation mode of regional aircraft, and it is believed that it may be a misunderstanding to find a route suitable for the profitable operation of regional aircraft, and several economic operation modes suitable for regional aircraft are discussed. The influence of economies of scale on the introduction of regional aircraft by airlines is demonstrated.
Several suggestions were put forward for the economic operation of regional aircraft and the national regional aircraft development strategy.
This paper argues that the use of regional aircraft to operate regional routes is beneficial to the country, society and airlines, and can achieve a win-win situation for all parties. Airlines should vigorously introduce regional aircraft, and the state should provide economic and policy support for airlines to operate regional aircraft.
I. Introduction
The three major airlines in the United States are also the three largest airlines in the world, and each of them operates not only thousands of large aircraft, but also hundreds of regional aircraft. According to the 2019 annual reports of the three companies, at the end of 2019, United States Airlines operated a total of 1,547 aircraft, including 942 mainline aircraft and 605 regional aircraft, accounting for 39.1% of the total number of aircraft. Delta Air Lines operates a total of 1,340 aircraft, including 898 mainline aircraft and 442 regional aircraft, accounting for 33.0% of the total number of regional aircraft. United Airlines United States operates a total of 1,358 aircraft, including 777 mainline aircraft and 581 regional aircraft, accounting for 42.8% of the total number of aircraft.
In terms of total volume, the OAG database shows that all airlines in United States operated a total of 1,816 regional aircraft at the end of 2019, accounting for 28.8% of the total number of aircraft, and regional aircraft operated a total of 3.01 million flights in 2019, accounting for 37.1% of the total number of flights United States.
After the outbreak of the new crown epidemic in 2020, the number of regional aircraft in the United States market decreased, and after the epidemic ended, there were new orders for regional aircraft. From August 2021 to March 2024, Tianxi Airlines signed three orders for a total of 55 E175 aircraft. United States Airlines signed an order for 133 E175 aircraft in March 2024.
According to statistics from the Civil Aviation Administration of China, the mainland had a total of 191 regional jets at the end of 2019, accounting for 5.0% of the total number of transport aircraft. According to TravelSky, in 2019, only 21.9% of all regional flights were operated by regional aircraft, and 78.1% of regional flights were operated by narrow-body aircraft.
The above data reflects a huge contrast, the regional routes in the United States market are mainly operated by regional aircraft, the regional routes in the Chinese market are mainly operated by mainline aircraft, the regional aircraft market in the United States is very developed, while the regional aircraft market in China is very underdeveloped.
Why is Continental Airlines reluctant to operate regional routes with regional aircraft? At present, a more common explanation given by airlines, governments, manufacturers and academics is that the operating cost of regional aircraft is high, the profit level of regional aircraft is lower than that of mainline aircraft, and the profit level of airlines operating regional aircraft is not as high as that of operating mainline aircraft, and even operating regional aircraft is not profitable at all, and it is necessary to use the profits of mainline aircraft to make up for the losses of regional aircraft, so airlines lack the motivation to introduce and operate regional aircraft. For this reason, there are very few regional aircraft in the Chinese air transport market.
The United States aviation market is the largest aviation market in the world and the most developed aviation market. Airlines in the United States mainly use regional aircraft to operate regional routes, indicating that they believe that it is profitable to operate regional routes with regional aircraft, or that United States airlines believe that operating regional routes with regional aircraft is more profitable than mainline aircraft.
Why is this discrepancy? The author believes that the main reasons are as follows: the profit level of United States airlines operating regional routes with regional aircraft is indeed higher than that of mainline aircraft, and United States airlines also think so; However, the profit level of mainland airlines operating regional routes with regional aircraft is not lower than that of mainline aircraft, but they mistakenly believe that it is lower than that of mainline aircraft, and under this cognition, corresponding decisions are made, so they mainly use mainline aircraft to operate regional routes. This issue is analyzed in depth and relevant suggestions are put forward for the advice of experts and colleagues in the field.
2. Airline route profit structure model
(1) Static model
According to the theory and practice of management accounting in the civil aviation industry, the total operating costs of airlines are divided into variable costs and fixed costs, and the revenue minus the variable costs equals the marginal contribution, and the marginal contribution minus the fixed costs equals the profit.
Depending on the level of profit, an airline's flights can be divided into three categories. One is profitable flights, which have a high load factor and a high level of revenue, and the revenue earned by the airline from operating such flights is greater than the total operating cost of the flight, and the more such flights are flew, the more profit the airline will make. The second type is relative loss-making flights, the load factor of such flights is not high, the income obtained by the airline from operating this type of flight is less than the total cost, but greater than the variable cost of flight operation, and the operation of this type of flight is a loss from the perspective of financial accounting, but because its income can also compensate for part of the fixed costs after compensating for the variable cost, the more such flights are flew, the less the airline loses. The third category of flights is absolute loss-making flights, which have a low load factor, and the airline earns less revenue from operating such flights, which cannot even compensate for the variable costs, and the more such flights are flew, the more the airline loses.
Both absolute and relative loss-making flights are loss-making flights, but different operational decisions are required for these two types of flights. The operating profit of the airline is the profit obtained by the airline from operating profitable flights, and the balance after making up for the loss of loss-making flights.
In developed countries with high growth rates in air transport, these three types of flights are common among airlines. Due to the differences in development strategy, base layout, aircraft structure, development speed, management level, marketing ability, etc., these three types of flights account for different airlines in different proportions.
Referring to the above classification method, airline routes can also be divided into profitable routes, relative loss routes and absolute loss routes. In mainland China, around 2015, before the pandemic, loss-making routes may account for about half of an airline's total routes, and during the epidemic and the recovery period after the epidemic, loss-making routes account for a larger proportion.
The profit structure of all narrow-body aircraft operating routes of an airline in a certain period can be modeled as shown in Figure 1 according to the way of profitability from high to low and from the inside to the outside.
Figure 1: Airline narrow-body aircraft route profit structure model
Similarly, the routes operated by wide-body aircraft and regional jets of an airline can also be modeled separately as shown in Figure 1. All flights operated by an airline can also be modeled according to the profitability level shown in Figure 1, as shown in Figure 2.
Figure 2: Model of the profit structure of all flights of airlines
The model clearly shows that the routes and flights of an airline can be divided into three types: profit, absolute loss, and relative loss.
To improve profitability, airlines need to take a variety of measures at all levels of strategy and tactics to increase the number and profit of profitable routes and flights, and reduce the number and loss of absolute and relative loss routes, flights.
Can an airline operate only profitable routes and not loss-making routes? Why is the airline's route profit structure the way it is? How does this change over time? What are the implications for us to optimize the profit structure of routes? These questions are answered in the dynamic evolution model.
(2) Dynamic evolution model
1. The number of various routes and flights continues to increase
With the economic and social development of a country, the scale of the economy will gradually expand, the per capita income level will gradually increase, the number of people taking the plane and the number of flights will gradually increase, and the scale of the country's air transport will continue to expand. This phenomenon can be explained by Engel's law in the generalized sense.
Since the reform and opening up in 1978, the mainland has experienced rapid economic growth, and the civil aviation industry has also achieved rapid growth, and the scale of transportation has expanded rapidly. The passenger traffic of China's civil aviation industry increased from 3.43 million passengers in 1980 to 660 million in 2019, an increase of 191 times. The number of routes increased from 180 in 1980 to 5,521 in 2019, an increase of 30 times. The number of transport aircraft increased from 140 in 1980 to 3,838 in 2019, an increase of 26 times, and the number of small aircraft was replaced by large aircraft.
Figure 3: Trend of changes in the number of civil aviation routes and transport aircraft in China
Figure 3 shows the trend of the number of domestic routes and transport aircraft of China's civil aviation from 2000 to 2019. As can be seen from the figure, the number of transport aircraft and routes on the mainland is growing rapidly and is still in the process of continuous growth.
In line with the rapid growth of China's civil aviation, the number of destinations, aircraft, routes and flights operated by various airlines has also continued to increase. This is the need for airlines to develop and improve their competitiveness. In a fast-growing air transport market, the influence of a flight company will quickly decrease if it does not increase in size.
In the process of increasing routes and flights, not only the profitable routes and flights have increased, but also the number of routes and flights with relative losses and absolute losses has also increased.
2. Absolute new routes are loss-making routes in the short term
As can be seen from Figure 1, an airline's narrow-body aircraft routes are divided into three categories: profit, absolute loss, and relative loss. Theoretically, an airline's current flight structure should be optimal. Because if it is not optimal, the airline can adjust the aircraft from absolute loss routes to relative loss routes, from relative loss routes to profitable routes, and from routes with large losses to routes with low losses by adjusting the flight structure of routes in the market. In the case of an airline currently operating a route that is still losing money, its new route should be a loss-making route with a lower level of profitability. This is the second feature of the dynamic evolution of the profit structure of the route.
It should be noted that the newly opened routes include absolute new routes and relatively new routes. The so-called absolute new route is a route that no airline has operated on this route before the company launched the route. The so-called relatively new route means that before the company launched the route, there were already other airlines operating on the route, which is a new route for the airline, and an increase in the number of flights for the operation of the entire route, that is, an increase in flight density. "Newly opened routes are loss-making routes in the short term" is aimed at absolutely new routes. Additional flights on many busy routes may still be profitable, and new routes opened by airlines may be profitable.
3. Loss-making routes and flights can be transformed into profitable routes and flights
In the narrow-body aircraft route profit structure model shown in Figure 1, the number of passengers on each route continues to increase as the air transport market develops. With the increase in the number of passengers, the supply and demand relationship of the route has gradually changed, from oversupply of capacity to balance between supply and demand, and in the process of this transformation, the revenue level of airlines has gradually increased. With the improvement of the income level of airlines, some relatively loss-making routes and flights have gradually become profitable routes and flights, and some absolute loss-making routes and flights have gradually become relatively loss-making routes and flights, and the loss of loss-making routes and flights has gradually decreased. This is the third feature of the dynamic evolution of the profit structure of the route.
4. Loss-making routes and flights can be transformed into profitable routes and flights is the fundamental reason for airlines to operate loss-making routes and flights
It is precisely because loss-making routes and flights can be turned into profitable routes and flights in the future that airlines will endure short-term losses in order to gain more profits for a long time in the future. If an airline predicts that a route will not turn into a profitable route for a long time in the future, the company will suspend the route and start a route with a shorter expected loss period. For airlines, finding routes with short loss periods and good prospects is a process of trial and error, which requires frequent adjustments.
If a market is static and loss-making routes in this market do not translate into profitable routes, airlines will ground loss-making routes and only operate profitable routes.
5. The principle of "grandfathering" in the flight slot allocation system is an external mechanism for airlines to operate loss-making routes
At present, the flight slot allocation system of countries around the world generally implements the principle of "grandfathering", that is, after an airline flies a route, as long as it wants to continue to operate, the take-off and landing time at the airport will always belong to it, and other airlines cannot take it. The criterion for airlines to prove that they want to continue operating is that the flight fulfillment rate at that time reaches a certain level, which is currently generally 70% to 80%. An airline takes a flight slot on a route by operating a loss-making route, and when the route becomes a profitable route, the airline can make a profit by operating that flight time.
From a certain point of view, bearing the operating loss of a loss-making route is an investment to obtain a profitable route in the future, and it is also the cost of obtaining profitable flight slots, and if the airline does not make this investment, it will not be able to obtain the operating profit of the route in the future.
Conversely, if slot allocation does not enforce the "grandfathering" principle, but instead reallocates slots each season by lottery, then airlines have no incentive to operate loss-making flights under such a system where airlines can make a profit without having to incur the cost of losing money.
If an airline only wants to operate profitable routes and does not want to operate loss-making routes, then the company can only operate busier routes, and the scale of such airlines will be slow, and the short-term profit margins will be high, but the long-term development will be less and less influential. The reason for this is that such flight slots are scarce and competitive, and airlines rarely add such flight slots.
Therefore, the "grandfathering principle" in the flight slot allocation system is an external mechanism for airlines to operate loss-making routes.
In addition to the flight schedule system, certain air traffic rights allocation policies with quantitative restrictions are also an important external institutional reason for airlines to operate loss-making routes, especially international routes.
6. Switching to large aircraft to operate high-profit routes can increase the company's profits
In the narrow-body aircraft route profit structure model shown in Figure 1, with the development of the air transport market, the profitability of high-profit routes in the core area is getting higher and higher, and the corresponding market situation is that there are more and more passengers, the flight load factor is getting higher and higher, and the relationship between supply and demand is gradually changing to short supply. In this situation, airlines need to increase the number of flights on this route in order to increase profitability. If the number of flights cannot be increased due to flight schedule constraints, it will be necessary to expand the number of aircraft types, replace small narrow-body aircraft with large narrow-body aircraft, or replace narrow-body aircraft with wide-body aircraft, and put more capacity into the market to capture more profits.
After 2010, busy airports such as Beijing, Shanghai, Guangzhou, and Shenzhen, Chengdu in mainland China have a trend of replacing narrow-body aircraft with wide-body aircraft due to the scarcity of flight schedule resources.
Figure 4: Trend chart of passenger traffic on China's civil aviation busy routes
Figure 4 illustrates the tremendous growth in passenger traffic between the busy airports of Beijing, Shanghai, Guangzhou, Shenzhen, and Chengdu in the past 20 years, with each route exceeding 3 million passengers in 2019, including more than 8 million passengers on the Beijing-Shanghai route. With the increase in passenger traffic between these busy airports, the number of flights operated by wide-body aircraft is increasing, as shown in Table 1.
The data in Table 1 shows that the proportion of wide-body aircraft flights operated by these busy routes in mainland China has increased year by year, with the proportion of wide-body aircraft flights from Beijing Capital Airport to Shanghai, Guangzhou, Shenzhen, and Chengdu all exceeding 50% in 2019, of which the proportion of wide-body aircraft flights to Guangzhou routes is as high as 85%. With the expansion of China's civil aviation market, the proportion of flights operated by wide-body aircraft on these busy routes will further increase, and the number of wide-body aircraft flights on some busy routes will gradually increase from scratch and from less to more.
In addition to the trend of replacing narrow-body aircraft with wide-body aircraft, there is also a trend of replacing the current smaller narrow-body aircraft with larger narrow-body aircraft on high-profit routes for narrow-body aircraft. In the last decade or so, Boeing has replaced the 737NG with the 737MAX with a larger number of seats, and Airbus has adapted to this trend with the larger 320neo and 321neo instead of the 320ceo and 321ceo. In fact, the Boeing 737 has become larger with each generation from the first generation to the current fourth generation, which also shows the trend of narrow-body aircraft getting larger in the long run.
According to this principle, the route profitability of regional aircraft operation should also be switched to narrow-body aircraft operation after the profitability level of the route is increased to a certain extent.
7. Switching to small aircraft to operate high-loss routes can increase the company's profits
According to the above points 4 and 5, it can be seen that the purpose of an airline's operation of loss-making routes and flights is to occupy flight slots and cultivate the market, and to make profits after the routes are profitable in the future, and the current losses are the costs paid to occupy flight slots, and it is also an investment to obtain future profits.
From this point of view, the smaller the loss per loss-making flight, the shorter the loss time of the route, the lower the airline's time occupancy cost, and the more beneficial it is for the airline.
In order to reduce the loss of loss-making flights, in addition to reducing costs by strengthening management and improving marketing capabilities to increase revenue, the conversion of narrow-body aircraft to regional aircraft is an important strategic cost reduction measure.
For example, if a new route has only 60 passengers and is operated with a 180-seat 737 or 320, the load factor is less than 35%, and the route is generally an absolute loss. If the route is operated by a 70 to 90-seat regional aircraft, all other things being equal, the load factor will reach 67% to 86%, which is relatively loss-making or profitable.
This is because the total operating cost of a flight is positively correlated with the total number of seats on the aircraft, with regional jets having significantly lower fuel consumption, maintenance costs, airport service charges, purchase prices and rentals than narrow-body aircraft. With the same number of passengers, the total operating costs of a similarly skilled regional aircraft flight are necessarily much smaller than that of a narrow-body aircraft. In addition, the amount of route subsidies for regional aircraft is higher than that for narrow-body aircraft, and the reduction of the Civil Aviation Development Fund for regional aircraft, two factors have led to a further higher relative income level per regional aircraft passenger than narrow-body aircraft.
Therefore, in the case of airlines with regional aircraft, airlines can use regional aircraft instead of narrow-body aircraft to operate high-loss routes, thereby reducing flight losses and increasing corporate profits.
According to this principle, an important reason for the popularity of A321XLR aircraft with an ultra-long range is that replacing a high-loss wide-body aircraft with this aircraft can increase the company's profits.
8. Optimizing the capacity of the aircraft with the seasonal changes in market demand can increase the company's profits
The demand for air transport increases with economic development, but also varies seasonally, weekly, and daily morning and evening. In the mainland, the annual summer, Spring Festival, May Day, and National Day holidays are all periods of strong demand for air transportation, and airlines will operate more flights, with high load factor and price, and more routes and flights will become profitable. On the contrary, in the off-season, more routes and flights become loss-making. Every day too early, too late and weekends are people's rest time, air transport demand is low, the flight load factor and price are low at this time, and the flight schedule at this time is low or loss-making.
With these changes in routes and flight revenue levels, airlines have to suspend some flights in the off-season, suspend large models, and replace large models with small models to operate loss-making routes. For the same route, different aircraft types should also be used to operate flights at different times of the day in the morning and evening. These are the common practices of airlines. Of course, now that many airlines are pursuing a single type of aircraft, these companies do not have the opportunity to reduce losses by replacing large aircraft with small models, and only have the option of reducing costs by suspending flights.
Figure 5: Monthly trend of China's civil aviation flight volume
Figure 5 shows the monthly flight volume of the mainland's civil aviation from 2015 to 2019. As you can see from the graph, the number of flights continues to increase every year, but a large number of flights are suspended during the off-season every year. Some flight groundings may result in the loss of flight slot priority due to the fact that the flight schedule implementation rate is not up to the required level.
9. The model should match the route and market
As can be seen from the points 6 and 7 of the dynamic evolution model, it is necessary to switch to large-scale aircraft for high-profit routes operated by narrow-body aircraft, and to use regional aircraft for high-loss routes operated with narrow-body aircraft.
As can be seen from point 8 of the dynamic evolution model, high-loss routes operated by narrow-body aircraft in the off-season should be operated by regional aircraft, and high-loss routes operated by wide-body aircraft in the off-season should be operated by narrow-body aircraft.
This kind of reasonable matching of aircraft type and route, aircraft type and market is the most efficient way for airlines to allocate resources, which helps to maximize the profits of airlines.
The above-mentioned matching principle requires the operation of wide-body aircraft on intercontinental routes; Narrow-body aircraft are used for domestic trunk lines and adjacent international routes, and wide-body aircraft are also used for routes with large domestic passenger traffic and tight flight schedule resources; Low-traffic routes are operated by regional aircraft.
The size is short, the inch is long, regional aircraft, narrow-body aircraft and wide-body aircraft have their own economic operation scope, a company will be more reasonable to match the model with the market, routes will improve their profitability and market competitiveness.
(3) Discussion on the scope of application
The airline route profit structure model theory can be applied in many ways.
It can provide theoretical support for airlines to formulate aircraft type structure strategy, route network strategy, base layout strategy, development speed strategy and other aspects.
It can provide a reference for social investors to formulate aircraft type strategies and set profit expectations when setting up airlines.
It can provide a reference for aircraft manufacturers to formulate aircraft product development strategies, marketing strategies and marketing strategies. For example, whether there is a need to develop short-range wide-body aircraft in China's domestic market, whether there is a need to develop small regional aircraft, how to match the range of regional aircraft with that of narrow-body aircraft, and how to formulate regional aircraft sales strategies.
It can provide a reference for the country to formulate a development strategy for civil aircraft products. In particular, the theory of model and route, market matching, the introduction of regional aircraft capacity by airlines can improve profitability, can support the expansion of the domestic market of regional aircraft, regional aircraft have a broad space for development in the world, and the country should strengthen the development strategy of regional aircraft.
This paper mainly uses the model to demonstrate that the profitability of regional aircraft in low-traffic routes is higher than that of narrow-body aircraft, and airlines should introduce regional aircraft capacity, make suggestions for aircraft manufacturers' regional aircraft marketing strategies and marketing strategies, and make suggestions for national regional aircraft development strategies.
This article was published in Civil Aviation of China Issue 9, 2024