Darren Shannon / Washington DC
It has been over six months since doom-mongers said the imminent demise of the 50-seat regional jet was clearly evident in Delta Air Lines’ and Northwest Airlines’ decision to cull 45 Bombardier CRJs from their feeder systems as part of their bankruptcy reorganisations. Then apparently irrefutable proof came in December with the collapse of Washington Dulles start-up Independence Air – another Bombardier operator – a failure that supposedly rang the death knell on attempts to create a secondary market to absorb the flux of used 50-seat aircraft.
|
| Most of Independence Air’s CRJ200s have been found homes |
Yet on the eve of the US Regional Airline Association convention in Dallas, Texas next week what was expected to be a loud bang has so far proved little more than a whimper, with almost all of the 82 Bombardier CRJ200s and CRJ440s and 14 Embraer ERJ-145s currently listed as parked either placed or about to be assigned to operators, and residual prices stabilising at fair market rates.
That is not to say the future of the 50-seat regional jet – and that of Bombardier, the manufacturer of most of the more than 2,200 aircraft currently in operation and chief proponent of the 50-seat secondary market – is guaranteed. In the months following the first large-scale return of mostly CRJ200s to lessors and guarantors, the commercial aviation industry wondered if the dip in aircraft values and lease rates would be permanent, and bring another residual-value collapse like that which marked the end of regional aircraft manufacturing at Fairchild and Saab in the 1990s.
But the crash did not come. Instead, the US majors, including Delta and Northwest, have affirmed their commitment to their regional fleets, while new commercial 50-seat production has been halted by both Bombardier and Embraer, pilot concessions brokered in the USA (see P26) have retained scope clauses, a decision that for now guarantees a place for the 50-seat jet in the world’s largest aviation market.
“There was some concern toward the latter part of last year, because it was obvious that we were tied so closely to the health of the US market,” which is home to more than 1,300 50-seat regional jets, or 60% of the total fleet, says Bombardier Aerospace vice-pesident asset management Rod Sheridan. “In hindsight it was obvious this could happen, but during the mid- to late-1990s rush for 50-seaters across North America and Europe, we really had no opportunity to develop other substantial and sustainable markets,” he adds. That lack of global diversity created a challenge when Bombardier and GE Commercial Aviation Services (GECAS) – which, by its relationship with owner trustees, had to remarket 40 Independence Air CRJ200s – approached carriers in new markets such as Africa, Asia, eastern Europe, the Indian subcontinent and Latin America. “We were talking to airlines that are used to operating a [Boeing] 727 twice a week on a route, especially those in Africa and Latin America,” says Sheridan. “What we had to do was show them that for a quarter of the cost they could have a CRJ200 and operate every day. Not only do they get more frequencies, they also get more capacity.”
Although the creation of a secondary market “has been slower than we would like”, Sheridan and his compatriots at GECAS say they have placed or are about to place most of the parked CRJ200/440 fleet, including all 40 of those on GE’s books and at least 12 of the 42 CRJs now owned by Export Development Canada (EDC), a government agency that guaranteed some of Bombardier’s sales.
“The secondary market was hard to create because most of the aircraft are on leveraged leases of 16 or so years, with a high level of US market presence,” says GECAS senior vice-president regional jet programmes Todd Freeman. “If anything, there was a silver lining to the US Chapter 11 bankruptcies as they gave us the ability to take the returned aircraft and offer them on flexible lease terms, which in itself helps create a secondary market,” he adds.
Although leveraged leases may have stifled the growth of a secondary market, many industry observers say these same long-term leases were a major factor in staving off the collapse of the entire 50-seat regional jet sector.
Says Embraer senior vice-president sales and financing Paulo Cesar de Souza e Silva: “There is no question that the 50-seat market is under pressure, in part because there were far too many sold in the past four years. But despite some US airlines choosing Chapter 11 as a way to restructure, and scope clauses relaxing a little bit, the majority of the 50-seaters in the USA and Europe are on long-term leases which will be hard to break.”
Importantly, these leases have also kept the 220 or so older CRJ100s (which average almost 10 years) off the used market, and should keep them in operation for most of their operational life.
In addition, of the existing regional jet owners and lessees, it is smaller operators like Air Sahara and Malév that are hoping to reduce their fleets, not the large European operators like British Airways and the USA’s SkyWest.
Adds Cesar: “The mission of the 50-seater still remains the same as it has always been: long, thin routes. And although there is some pressure from the relaxation of scope, which brings with it the natural progression towards the larger 70-, 90- and even 100-seat aircraft, redeployment of the 50-seat regional jet is possible, particularly in the USA, where carriers such as Continental [Airlines] remain committed to the aircraft.”
Valid economics
According to GECAS data, the economics of the 50-seater remain valid, especially when compared with a 70-seat regional jet. Figures supplied by the lessor indicate that with fuel at $0.53/litre ($2.02/USgal), unit costs on a 550km (300nm) trip are almost identical for 50- and 70-seaters at a little under 10¢/km, and total dollar spend drops almost 36% from $3,725 for the larger aircraft to $2,741 for the 50-seater.
And it appears that enough airlines have been convinced, even if it will be months before the full extent of EDC’s and GECAS’s new leases are known. However, details of the first of these new contracts are emerging, and allow a little insight into the future of the 50-seat secondary market.
Start-up carriers are already dominating the secondary market, with EDC placing two and possibly as many as eight CRJ200s with Mesa Air Group’s Hawaiian venture Go and a further three with Nigeria’s Arik Air. GECAS also confirms it has placed two aircraft with start-up Georgian National Airlines, while Mexican start-up Aerolineas Mesoamericanas (ALMA) is due to launch services this summer with at least two of GECAS’s 50-seat Bombardiers.
Each of these four start-ups has signed short-term operating leases – three years for Arik, six for ALMA – and the top executives at ALMA, Arik and Go say that lease rates are low. Although none of the airlines will disclose their payments, consensus estimates hover around $100,000/month, a significant saving over the $115,000-120,000/month market prices charged for the three- and four-year-old models being offered by EDC and GECAS.
All four carriers will operate the 50-seaters on routes of around 550km, and ALMA, Arik and Go say the aircraft are expected to generate demand for services that will later be served by larger regional jets – promising incremental sales for Bombardier and Embraer – or narrowbodies.
ALMA and Go also indicate that they may expand their CRJ200 fleets. Even the lack of proven success at any of these carriers is of little concern, says Mesa chairman and chief executive Jonathan Ornstein. “At the prices we are talking, the CRJ200s make good sense,” he says.
However, the very stability being created by Go and the other new lessees is also pushing rates higher. “We are seeing sale prices stabilise, and when this happens, lease rates rise. If you want to get in, get in now,” says Ornstein.
Start-ups
Most of the used 50-seat regional jets are expected to be placed in small numbers (three to five aircraft) with start-ups, and few established operators are expected to follow Air Canada, which Flight International’s sister database ACAS says has taken eight of GECAS’s CRJ200s for its Jazz feeder operation. But it is clear that some markets targeted by both Bombardier and Embraer are not producing results.
Asia, and particularly China, is proving a difficult market to break into with no hint of an operating lease being signed any time soon, although the main reasons are cultural. More disappointing is the lack of a big Indian deal, a glaring omission in aviation’s largest growth market.
“The bottom line is Indian carriers do not want the 50-seat jet,” says Bravia Capital Partners chief executive Bharat Bhisé, who has just formed an Indian joint venture with Infrastructure Leasing & Financial Services. “There is no one reason, but I will note that in India the fuel tax on a turboprop is 1.4% – for jets it is 22% – and loads are hovering around 50% to 60%,” he says. “We are focusing on ATR 72s and [Boeing] 737-800s in India,” he adds.
GECAS, however, maintains that at least one Indian carrier is set to sign an operating lease on some of its used CRJ200s.
The ATR 42 and 72 may also hinder the introduction of a 50-seat regional jet freighter, as operators favour the cheaper turboprops (see below). Despite this, Bombardier says at least two dozen, and maybe as many as 50 regional jets, could be converted for cargo operations.
The 50-seat secondary market has few supporters among the established lessors. “There is a substantial oversupply of used 50-seat regional jets, particularly from Bombardier, that exceeds the level of non-US demand,” says International Lease Finance chairman and chief executive Steven Udvar-Hazy. “The market absorption rate is lower than supply/availability, so both residual values and lease rates are under downward pressure. ILFC as a matter of corporate policy has completely avoided the 50-seat jet market due to their relative unit cost handicap,” he adds.
Alec Matt, finance and business development manager for Fort Lauderdale, Florida-based lessor Jetscape says: “We are not dabbling in the regional jet market. For one it takes the same amount of effort to work on each regional jet transaction as it would for a larger aircraft, but you get less return. Second, and more importantly, the regional jet secondary market is in a proving period right now. The initial placements appear to be with secondary airlines, and that risk just cannot be justified.”
The risk, which was pronounced in the wake of Independence Air’s liquidation, may have abated. Data from Avitas and BACK Aviation indicate current market values for regional jets are at normal rates of depreciation, with five-year-old aircraft priced around $11 million, and an eight-year-old model about $9 million.
Despite all the concern and effort concentrated on a 50-seat secondary commercial market, one sector may make all this debate moot. Bombardier’s Sheridan, echoing views held by many in the regional jet industry, sees huge demand for a corporate conversion market, focused predominantly on the growing number of wealthy Russians, some of whom are driving the boom in multi-billion dollar VVIP sector (Flight International, 25 April–1 May).
“You can take a fair-priced CRJ and convert it for, say $1 million, and there you have a fairly new aircraft for less than a third of one straight off the production line,” says Sheridan. And despite the lack of interest from established lessors, the Bombardier executive notes a growing number of inquiries on CRJ200 availability from hedge funds and other investors, all seeking to benefit from the long-running boom in corporate aircraft demand.
A recent study by Boston Consulting says 80,000 millionaires were created in Russia during the past 15 years. Only 200 or so of Russia’s nouveaux riche are needed to make the 50-seat regional jet secondary market debate as redundant as last year’s warnings on the aircraft’s demise.
Source: Flight International
