MIAMI — Alaska Airlines will soon place an order for 30 new large regional jets (RJs) to replace 15 Bombardier Dash 8 Q400 turboprops, according to comments from the carrier’s executive team on its fourth quarter and year-end 2015 earnings conference call.
The airline is in the final stages of negotiations with manufacturers, and the order is expected to be placed in the first quarter of 2016, with deliveries commencing in 2017. The 15 Q400s to be phased out are currently scheduled to come off lease in 2018, and Alaska Airlines intends to offer the RJs as replacement flying to its subsidiary Horizon Air, who is Alaska’s primary regional partner. However, the placement of these aircraft at Horizon is contingent on pilots and flight attendants approving changes to their respective collective bargaining agreements (CBAs).
The order is the E175s to lose
At the moment, Alaska Airlines’ regional operation is primarily serviced by a fleet of 50 Q400s at Horizon Air. In addition to the 50 76-seat turboprops (with two more aircraft on order), Alaska also contracts 15 regional jets from CPA behemoth SkyWest, split between eight 70-seat Bombardier CRJ700s and seven 76-seat Embraer E175s. However, plans are to replace these CRJs with additional E175s. “We will also be replacing our eight CRJ-700s with Embraer 175s,” said Alaska’s Chief Commercial Officer Andrew Harrison on the earnings call, adding that the E175s “have 8.5% more capacity and allow us to sell premium seats and give us greater range.”
Clearly, the tradeoff between the CRJ700s and the E175s was a no brainer for Alaska, based on the reasons that Harrison outlined. But the contest with the Bombardier CRJ900, which offers similar seating capacity to the E175 is less clear cut. The CRJ900 offers similar performance capabilities to the E175 (the range gap has been reduced thanks to Bombardier’s improvements), it can handle a first class cabin, and slightly better operating economics on many of the routes that Alaska would likely operate the aircraft on. Both aircraft are operated in large numbers by SkyWest and would be new at Horizon, so there aren’t really any tangible commonality benefits.
The tiebreaker may well be the customer experience. Despite Bombardier’s best efforts to improve the pasenger cabin, the CRJ900 offers a notably inferior passenger experience versus the E175, and with the ongoing Delta v. Alaska battle at its largest hub in Seattle, a key element of Alaska’s relative value proposition is offering a superior passenger experience to Delta. That sales pitch would be undermined by the selection of the CRJ900, and so in a relatively even contest overall (the CRJ900 and E175 have been neck in neck for many recent large RJ orders), that was likely the tiebreaker.
The Q400 is not dead at Alaska Airlines, but longer stage lengths limit growth
Meanwhile. the news around the Q400 is yet another blow for Bombardier’s so-called “prop-jet.” To be clear, Alaska remains committed to the Q400 (it will still have 37 in its fleet after these 15 are retired). The Q400 is a highly efficient aircraft that serves a definite niche in the U.S. airline industry, and has been critical to building out Alaska’s regional network over the last several years.
The problem comes due to structural changes in Alaska’s route network. Unlike United, which retired the Q400s over problems with operating economics, the Q400s work great for Alaska’s short haul routes in the Pacific Northwest. The problem is that Alaska already has service in pretty much every viable short haul market in the region, and as it competes with Delta in Seattle, Alaska has increasingly adopted a strategy of adding “long and thin” destinations such as Milwaukee, Oklahoma City, and Omaha.
The Q400 is a great aircraft for routes under 400 miles, but outside of that range, the E175s offers better operating costs because of the Q400’s slower flight speeds (and thus increased time-based compensation for pilots and flight attendants). This cutover flight distance is pushed downwards by the current price of fuel (the cost advantage for turboprops is driven mostly by fuel efficiency), so the shift in network growth to longer routes is compounded by the broader economic environment.
There are several routes longer than 400 miles currently operated by the Q400, such as Eugene-San Jose, and these would be the first to be replaced by E175s as the Q400s come off lease. The remainder of the E175s would be used to open new routes, and it is increasingly clear that Alaska views the route network enabled by large RJs as a critical strategic priority.
In fact, Harrison stated this point blank on the earnings call. “[The large RJs are] an area where we think we have plenty of room for profitable growth in 2016 and beyond,” he noted, adding that, “The four markets we launched thus far [in 2015] are already profitable with six months — within six months of launch.”