Manufacturers of smaller aircraft are facing a tough couple of years, with some casualties already in sight. However, most agree that the slump has bottomed out and some are already predicting that recovery will be speedier than they first envisaged
Eight months have passed since the terrorist attacks in the USA threw the international aviation community into turmoil and confusion. During that time, the mood among the surviving regional aircraft manufacturers has gone from despair, as airlines cancelled or deferred orders, to cautious optimism as those same airlines began to report renewed growth.
But while the worst slump in airline history may be levelling out, the next couple of years will be tough. Casualties have already emerged. Fairchild Dornier has run out of cash and is fighting for survival, while BAE Systems took the opportunity to belatedly bow out of regional aircraft manufacture.
A look at last year's order books provide a stark reminder of the scale of the shock. A rush of business over the previous two years had tied up production to around 2004/5, so a lull was to be expected. But the actual fall was unprecedented. Business for regional jets more than halved, with new orders falling from 805 to 385, and ducking to just 312 after allowing for cancellations. Turboprops, already reduced to a niche market, also suffered. New sales were down by around one-third to a little over 50 aircraft.
At the same time regional jet production continued to rise, leaving manufacturers eating into the backlog built up in the good years. At the end of 2001 order books for all regional aircraft stood at over 1,300 aircraft including a modest 91 turboprops.
For Brazilian manufacturer Embraer, 2001 was indeed a year to forget. After winning a massive 418 firm orders in 2000, it netted just 30 new deals in 2001 and airlines were quick to seek deferrals on deliveries until conditions improved. Nevertheless, it is still left with a backlog of 476 aircraft worth around $10 billion,
As an immediate response to 11 September Embraer announced cuts in staff and its production plans for the two years ahead. It says that no firm orders have been cancelled since then, although the cancellation of around 60 options will probably cost it around $1 billion. Revised output now call for 135 deliveries this year and 145 next, against the 161 and 205 forecasted. It also laid off 1,800 staff to save $15 million in a move which chief executive Mauricio Botelho says was "necessary to preserve profitability".
After 2003, new competitions are expected to initiate another growth phase. In the more immediate term it should know by June whether Swiss (formerly Crossair) will take up its 15 options on the ERJ145 family, and if a deal can be concluded with TAM for 25 firm and 75 optioned Embraer 195s.
A frustrating wrangle with China over delivery of 30 ERJ145s, on the question of industrial participation by the Chinese industry, also adds to the uncertainty. Embraer, like Bombardier and Fairchild Dornier, also faces import tariffs of 23% to China, which have soured relations, although China hints that the tax issue will be resolved shortly.
Buoyant Bombardier
In sharp contrast, Canada's Bombardier emerged from 2001 virtually unscathed. It netted 230 firm orders and suffered no cancellation in the final quarter. This gave the company a backlog of 569 aircraft worth around $15billion. It did less well with the Dash-8 turboprop family, winning orders for a dozen. Notably, its only remaining competitor, ATR counted twice that many. For this year, Bombardier plans to deliver a total of 190 regional jets and 36 Dash-8Q series turboprops.
In spite of its strong showing, Bombardier prepared for a rough ride by announcing 3,800 job cuts and by scaling back CRJ200 production. The latter was in recognition of a general consensus that the 50-seat jet market has reached a plateau, especially in the USA, and that the emphasis has shifted to the 70-100-seat aircraft. However, as airlines have re-confirmed fleet plans, 800 workers have been re-hired to support CRJ production at Montreal alone.
A blemish on Bombardier's year was the ruling against Canada by the World Trade Organisation (WTO) which, at least for now, has brought to a close the long-running and bitter subsidies row with Embraer. The WTO concluded that the Canadian government's low-interest loans to secure deals worth around $4 billion from Air Wisconsin and Comair in the USA and Air Nostrum in Spain, broke trade rules.
Bombardier accepted the decision and talks between the Brazilian and Canadian governments were set for April. Embraer is now gunning for Fairchild Dornier, saying that $330 million worth of loans and loan guarantees by the German government and state-owned banks also breached WTO guidelines.
The WTO, however, is the least of Fairchild Dornier's worries. After running out of cash to continue development of its 728/928 regional jet family and failing to find a new investor, the company has initiated insolvency proceedings. Its owners, US investment firm Clayton, Dubilier & Rice (CDR) and Allianz Capital Partners of Germany, together with the state-owned banks, had agreed to provide $870 million in January, but in the light of the current market downturn this was contingent on bringing a new investor on board. However, the financing package remains in place and would be made available if a strategic partner is found.
Under German law, receiver Eberhard Braun has three months to rescue the insolvent company, before bankruptcy proceedings can commence. The Bavarian state government in the meantime will ensure sufficient cash is available to continue operations as normal.
Speculation has been rife for some time on possible suitors, although Fairchild Dornier refuses to name the interested companies. After initial signs that it might consider buying out a competitor, Bombardier has since categorically denied interest. The focus is now on Boeing, although it backed out of a first round of negotiations to acquire Fairchild Dornier in March.
The worsening situation, however, may make it easier to renegotiate. The possibility of Boeing acquiring Fairchild Dornier adds a new and intriguing dimension to the regional aircraft business. Both Boeing and Airbus, with the 717 and A318, have been moving down the seating range, while regional manufacturers have been moving upward. The increasingly close links between mainline carriers and their regional partners is also blurring operational boundaries between the two.
In the end, Fairchild Dornier's attractive new 70-110-seat family may prove tempting for Boeing to take. This in turn would then open the door for Embraer to move closer still to Airbus, whose shareholder EADS already holds a small stake in the Brazilian manufacturer. Bombardier is watching closely.
Chinese puzzle
Meanwhile, Fairchild Dornier is also eagerly awaiting a decision by AVIC II to see if it has been selected as the Chinese industry's foreign partner in its efforts to develop a regional jet family, which could be based on its proposed 528 model. To help sway the Chinese, Fairchild Dornier has offered more subcontracting work on its 328JET and 728 models, but faces a similarly strong push by Embraer and Bombardier. The latter, in particular, is well positioned in China, with activities that extend beyond aerospace - although, it is focusing more on component manufacture.
Also waiting in the wings is Alliance Aircraft, which claims to have signed an agreement with Harbin Aircraft Manufacturing (HAMC) to build the 35-seat SL-100 in China, and China's own plans, through the Aviation Industry of China's AVICI branch, for the ARJ21 family of 70-90-seat jets, which could fly in 2005.
Subsidy spats, insolvency and ownership changes aside, Fairchild Dornier was less affected by the airline downturn than its rivals, as its production level - under four aircraft per month - was low in any case. After September, and following the announcement that it would cease building the 328 turboprop, production levels have been set to meet existing orders at two per month, although the rate can be ramped up again if required.
Once the larger 728 comes on stream - it was rolled out on 21 March - initial production for that model will be five aircraft per month. However, a delay in the start of the flight test schedule, now set for sometime this summer, is compounding the company's difficulties.
The German manufacturer insists, however, that it can make up the time and certificate the aircraft in mid-2003. This assumes, of course, the company's survival. Last year, it took firm orders for 53 aircraft, compared to 63 the year before, almost all for the 328JET.
Meanwhile, BAE Systems, long since consigned to play a fringe role, met long-standing expectations and cancelled its proposed RJX development. After an extended marketing campaign, the programme had generated firm orders for only 14 aircraft. This essentially means that the 146/Avro RJ family has finally run its course.
After the headlong rush over the past decade into ever-smaller regional jets, there is now a marked focus on the larger 70-110-seat jet market, with all three manufacturers offering a raft of mostly new technology aircraft. After a wait-and-see approach adopted in the wake of 11 September, sales campaigns are now back in overdrive, encouraged by signs that majors are stepping down in size to more closely match capacity with demand, and by a belief that there could a loosening of scope clauses in the USA. All of this suggests a potentially wider market coverage for regional jets.
Market share is being fiercely contested, with firm orders of nearly 440 aircraft on the books. Bombardier has stolen a march on the competition, since its CRJ700 and CRJ900 models account for half of all orders. This advantage is particularly marked in the USA, where the 70-seat CRJ700 has been in service since February 2001. Although certification and production issues have slowed deliveries, the aircraft has been the model of choice by majors for their regional partners.
The 86-seat CRJ900 made its first flight in February 2001 and remains on course for service entry in the first quarter of 2003, beating the competition by at least two years.
While the larger CRJs are direct derivatives, offering commonality throughout the range, the equivalent Embraer 170/190 and Fairchild Dornier 728/928 families are totally new designs. As a result, they lag behind the Canadian company in bringing these new types to the market. That said, both manufacturers claim an advantage in new technology and cabin size, which is large enough to carry standard freight pallets.
Maiden flights
The ERJ-170 made its delayed maiden flight at the company's Sao Jos‚ dos Campos plant this February, and Embraer says it will meet its year-end delivery schedule to main customer Swiss. The 90-seat 190 is scheduled to enter service in June 2004.
Fairchild Dornier was due to fly its 728-100 in April, but says that delays in development of certain components has pushed the first flight date to the third quarter of 2002. It is also concentrating its attention on a longer-range, higher payload 728-200, which it says has elicited interest from airlines around the world, and will replace the -100 model by 2004. The initial 728-100 is scheduled for delivery to Lufthansa CityLine in July 2003 and the 928 will follow into service in early 2005.
With the slump in air traffic having apparently bottomed out, the pain of the past few months is beginning to recede. Although 2002 appears certain to remain flat for airlines and aircraft manufacturers alike, the more pessimistic projections for next year may be confounded by a faster than expected recovery.
Bombardier and ATR also believe that predictions of the imminent demise of the turboprop, which they call a "low-cost producers in short- to medium-range markets", are excessive. Bombardier forecasts deliveries of 1,750 turboprops over the next 20-years, with most demand for larger aircraft in the 50- to 70-seat class.
That said, industry consolidation and the development of routes using regional jets have sounded the death knell not only for the smallest turboprops, but as a consequence, for services to smaller US communities.
According to the most recent FAA forecasts, 1,694 city-pairs have lost service altogether in the past 10 years. This can be attributed largely to the demise of the 19-seat aircraft, as airlines move to larger aircraft, which traffic between many of these communities cannot support. Raytheon's Beech 1900D remains the only aircraft in production in the West, but its orders have slowed dramatically: at the end of 2001, its backlog was just 13 aircraft.
The only other aircraft in this category is China's Harbin Y-12, which is built in small quantities and only for specific markets. In Europe and elsewhere in the world, too, airlines make do with old types no longer in production, with no prospects of replacement aircraft on the horizon. The 19-seater could make a comeback but that is an unlikely prospect considering the average regional aircraft size is expected to increase to 48 seats over the next decade. So, it seems, the future for the regional market is jets, jets and more jets.
Source: Airline Business
