Delta pilots oppose big regional jets, could be issue for Embraer, Mitsubishi

© Reuters. A Delta Air Lines Airbus A330 aircraft takes off at the Charles de Gaulle airport in Roissy

By Allison Lampert

MONTREAL (Reuters) - Delta Air Lines Inc (N:DAL) pilots are expected to keep existing rules in their new labor contract that prevent the U.S. No. 2 carrier from flying aircraft above a certain weight on regional routes, in a blow to Embraer SA (SA:EMBR3) and Mitsubishi Heavy Industries Ltd (T:7011), whose latest models exceed that limit.

The pilots' new labor contract will keep what is known as a "scope clause," which restricts planes heavier than 86,000 pounds and with more than 76 seats from being flown on regional routes, two sources familiar with the matter told Reuters.

Voting results on the new contract are expected on Dec. 1.

The clause effectively protects well-paid pilot jobs at major airlines, as it prevents the carrier from using bigger planes on outsourced regional routes, which generally pay less well and have inferior working conditions.

When planemakers such as Brazil's Embraer and Japan's Mitsubishi designed their latest regional jets, with heavier but more fuel-efficient engines, they expected the scope clause to have loosened, but unions have managed to hold on to it.

Delta's vote will follow similar decisions by unions at American Airlines Group Inc (O:AAL) and United Continental Holdings Inc (N:UAL) earlier this year and in 2015.

Pilots' opposition to relaxing scope clauses is a problem for Embraer’s E175-E2 regional aircraft that is to be delivered in 2020, and Mitsubishi’s MRJ90 jet, slated for delivery in mid-2018, which both exceed the weight limit.

UBS downgraded Embraer to a 'sell' rating this week after it resumed coverage, citing risks from the scope clause pushback at American, Delta and United. Analyst Darryl Genovesi said it was unlikely the carriers would fly the E2 on only mainline routes, due to higher costs.

"This puts the viability of the E175-E2 at risk since most of the demand for it originates at those three airlines," Genovesi wrote in a note to clients.

MORE EFFICIENT

Regional carrier SkyWest Inc (O:SKYW), which operates flights for Delta, among others, is the launch customer for the E175-E2, with 100 firm orders.

In a statement, Embraer said its existing E-175 dominates the 70-seat market where it holds 84 percent of market share and the Brazilian planemaker would continue to sell that jet past 2020 if scope clauses do not change.

However, the statement said: "Embraer believes scope clauses will eventually be relaxed in the future as fuel prices increase and airlines look for more efficient products."

A Mitsubishi spokesman was not available for comment, outside normal business hours in Japan.

In September, the company said it is working with customers to address weight issues for the MRJ90, which is about 600 kilograms (1323 lbs) too heavy.

U.S. pilot unions have taken an increasingly hard line on higher salary demands and are making fewer concessions to U.S. carriers.

Their current stance against changing scope clauses could, however, be a boon for Embraer's Canadian rival Bombardier Inc (TO:BBDb), which sees it as an opportunity to boost sales of its CRJ-900, which fits current weight limits, one of the sources said.

Mesa Air Group Inc [MESAR.UL] Chief Executive Jonathan Ornstein said he will not purchase new planes that do not comply with existing scope clauses as he does not believe the current limits will be changed in the near future.

Instead, the Arizona-based regional carrier will buy more current generation E-175s, along with additional CRJ900s to replace 38 regional jets being phased out over the next four years.

"I don't think there's any chance the pilots will change their weight requirements. Zero," Ornstein said.