The Regional Jet Market: A Victim of its Own Success?

Not every company can say that product demand is one of its biggest challenges, but the development of regional aviation has contributed to large overtime bills for regional jet manufacturers as they workaround the clock to meet the needs of fledgling markets.

Back to basics

Regional jet manufacturers such as Bombardier are increasingly looking to expand the capacity and the size of aircraft to meet new customer demands.

"The game in the regional jet market is really in the 70- to 90-seat market," says Trung Ngo, head of marketing and sales at Bombardier.

Bombardier has faced some difficult times in this market. The CRJ700 and CRJ900 have not captured the market as anticipated. Sales for the CRJ900 have averaged about 13 aircraft a year since the programme's launch in 2001 and sold a total of about 62 units in that period.

Ngo says that the market is yet to realize the operational benefits and large cost savings that this aircraft offers. "The million-dollar question is when will customers buy them," says Ngo.

The CRJ900 programme has added five customers in the past 18 months.

Bombardier is still trying to emulate the kind of success that it experienced with the CRJ200. Although the 50-seat regional jet seems to have all but waned, Bombardier is investing heavily in the CRJ platform, now its bread and butter.

The manufacturer has faced difficulty in the US and Europe with a lot of uptake from European carriers.

US airlines are still emerging from bankruptcy and are, therefore,reluctant to acquire new aircraft. However, the trend has been for these carriers to buy regional jets because of the efficiency they offer and the low labour costs associated with them.

"Having a regional aircraft is the ultimate in outsourcing becausethese aircraft really lower total labour costs and burn less fuel," says Ngo.

He says that, despite the efficiency gains, startup carriers are unlikely to acquire these aircraft during their development phase. Start-ups are likely to buy larger 180-seat aircraft such as the A320 orthe 737-700/-800.

These aircraft enable the start-ups to capture a greater portion of the market and to fly into busy hubs.

"Some of the airlines they take are 180-seat aircraft, which meansthat you need a lot of people to fill those planes. The CRJs are half the capacity of an A320 or a 737," says Ngo.

Bombardier continues to have a commanding position in the regionaljet market.

It has 53% market share in the 20- to 99-seat market and a 37% share of the market for 100-seat aircraft.

It has also solidified its position, for now, as the market leader, with 60% of all new aircraft orders in the 20- to 99-seat market going its way.

The manufacturer will soon launch the CRJ900X and the Q400X, derivatives of the CRJ900 and Q400. The CRJ900X will have a seating capacity for 98 passengers, compared with the CRJ900 that seats 86.

The regional jet market is expected to shift again to the higher 100- to 149-seat market.

Bombardier has pegged its future on the growth of this market with53% of sales expected to come from this segment. A push into this market may see it compete aggressively with the A320 family and the 737. Bombardier expects to earn revenue of $370 billion from the sale ofnew aircraft between 2006 and 2025.

Whether Bombardier can compete with Airbus or Boeing is one factor. However, what is certain is that greater competition will benefit customers and passengers.

As Ngo says, hard work is needed to maintain the position of the world's third-largest manufacturer because the competition is lurking close behind.

Meeting market needs

Regional aircraft manufacturer ATR has enjoyed new success in developing markets such as those in the Middle East. It is delivering aircraft to Pakistan Airlines and has become a major name in the region.

While ATR is present throughout the world, it pays close attentionto the rapid demand for air travel in countries such as China and India.

"The line of the economic growth in India is exactly the same as the traffic growth," explains Filippo Bagnato, ATR's chief executive officer. "The only limit could be the level of speed that the Indian system is able to apply to the [development of the] infrastructure."

ATR is at the forefront of aggressive fleet growth by Indian carriers, such as Air Deccan and Kingfisher Airways. Air Deccan announced plans in January 2005 to acquire 30 new ATR 72-500 aircraft and six second-hand aircraft, while Kingfisher Airways placed firm orders for 15 aircraft and took options on 20 more at this year's Farnborough Air Show. It was this order and one from Finncomm for three ATR 72-500sthat allowed the manufacturer to announce a successful half-year turnover.

ATR has received 50 orders in 2006 at a value of $684.9 million.

Bagnato did not hide his glee about China's recent change in attitude towards the regional market. Lao Airlines already flies two ATR 72s and the demand for turboprop aircraft is growing. Some of ATR's fuselage sections are constructed at the Shaanxi aerospace facility in Xian as part of a long collaboration with the region.

The manufacturer's plans for China include the installation of a mechanical centre, a maintenance centre and a customer support centre in China. A similar set up already exists for India.

In addition to India and China, Bagnato confesses that the Africanmarket was a "great surprise" for ATR.

"It is now a priority," he beams, adding that the manufacturer hasalready had success there, with Tanzanian airline Precision Air ordering six ATRs. "Africa is another potential market and we should not forget that, in 2005, traffic growth in the region was 11%."

Commenting on the outlook for ATR, Bagnato says: "There is a need for between 1,000 and 1,200 airplanes over the next 10 years. The average requirement is for 100 to 120 planes a year. The turboprop, in particular, has a good future."

Being Brazilian

In January Embraer convinced shareholders that a corporate make-over would help transform the regional jet manufacturer into an independent group with a global presence.

Empresa Brasileira de Aeronautica (old Embraer) merged with Rio Han Empreendimentos e Participacoes to become new Embraer in April 2006.

New Embraer is registered with Comissao de Valores Mobiliarios (CV-M) and is listed on the Novo Mercado segment of the Sao Paulo Stock Exchange. The company's American depositary shares are also listed onthe New York Stock Exchange.

Before the merger, Embraer's book value amounted to R$4.8 billion ($2.2 billion). Consequently, the increase in the capital stock of new Embraer arising from the merger will be of R$3.8 billion.

Embraer's corporate restructuring happened at the same time as themanufacturer was rolling out its new regional aircraft. The Embraer 190 was designed for the 70- to 110-seat market and the Embraer 195, launched in January last year, was designed for the 100- to 110-seat market. These aircraft have scored highly among investors and financiers.

Embraer has received 253 firm orders for the ERJ 190 aircraft, while the ERJ 195 has received 36 firm orders.

In addition to the success of these aircraft, Republic Airlines inthe US has bought 30 ERJ 175s, bringing to 78 firm and 75 options the total number of E-Jets on order for Republic.

These aircraft were originally options under the amended and reinstated purchase agreement between Embraer and US Airways. US Airways has transferred to Republic its right to purchase these aircraft.

During the first half of 2006, Embraer delivered nine ERJ 145 aircraft, 17 Embraer 170 aircraft and five Embraer 175 aircraft.

In total, the number of deliveries for Embraer's commercial aviation section reached 51 for the first half of the year.

The 145 family has 864 firm orders. "There is additional potentialfor this aircraft in many parts of the world," says Luis Sergio Chiessi, director of market forecasting at Embraer. "The US and European markets are saturated with 50-seater jets. We are seeing the development of a secondary market, with aircraft moving from one obligation or airline to another."

The secondary market arises from the movement of aircraft from thenorthern hemisphere and into southern hemisphere countries that are willing to accept used aircraft at a lower price.

Embraer is equally excited about China and has a joint venture with state-owned China Aviation Industry Corporation II (Avic II) to produce 145 aircraft locally.

"The extent of regional aviation in China is small when compared to other parts of the world but the potential is huge," says Chiessi. "A 50-seater airplane would work nicely for this low-density market, which has a lot of city pairs."

Chiessi forecasts that China will order more 50-seat-jets. "The Chinese have a habit of buying 737 aircraft and A320 aircraft for the domestic market. There are a lot of smaller secondary cities that do require 50-seater aircraft. Almost 60% of the city pairs in China havea demand of less than 130 passengers per day."

Despite the size of the Chinese population, Chiessi remains unconvinced about the need for big jets.

"Airlines that operate in a low-density market with 150-seater aircraft would have to fly two or three times per week to break even," he says.

He adds: "This is a poor level of service and the Chinese economy will not be supported by airlines that fly just three times per week.One or two flights per day would be considered an adequate level of service. This is why China needs more smaller planes."

Apart from frequency issues, Chiessi points out that the basic economics that would enable Chinese airlines to prosper are also missing. At certain airports, for example, a 150-seat aircraft pays the samelanding fee as a 50-seat aircraft. "This does not create an incentive for smaller capacity airlines," says Chiessi.

He adds: "The Chinese government acknowledges the need to develop a regional aviation market in order to feed the hubs and connect secondary routes to city pairs. This may take one or two years, but they will create the economic conditions that will make regional aviation viable."

Embraer is equally optimistic about opportunities in Russia. "The market has a fleet of over 240 airplanes with capacities of between 30 and 60 seats," says Chiessi.

He adds: 'There is pressure to replace the old aircraft, which have an average age of 30 years."

Chiessi also recognizes strong potential for sales of the 75- and 76-seat aircraft in the US market.

JetBlue has signed 101 firm orders for the ERJ 190 and 100 optionsfor the same size. TAM from Ecuador, Copa from Panama, Aero Republica from Columbia, Air Canada and US Airways are a few of the other clients.

Air Canada has signed 45 firm orders and 60 options for the Embraer 190. US Airways has signed 57 firm orders and 50 options.

Last December Finnair exercised four of its Embraer 170 options, converting them to Embraer 190 firm orders. These aircraft are in addition to the original firm order of 12 Embraer 170s placed in June 2004. The extra four jets will be delivered in 2007.

Customers for the ERJ 195 include Royal Air Jordanian, Flybe (14 orders), Swiss (15 orders) and Gecas (three orders). In total, the ERJ170, ERJ 175, ERJ 190 and ERJ 195 programmes have accumulated 485 orders and 442 options as of July this year. This includes Republic's order of 30 aircraft.

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