British Aerospace's reluctance to commit itself to the development of a new European regional jet says more about the state of the civil-aerospace market worldwide than can any bunch of encouraging traffic statistics. In the regional-jet business, the old law of supply and demand has been turned on its head: the greater the demand grows, the less attractive it is for manufacturers to supply.
Manufacturing airliners is not like any other capital-goods business. Selling an aircraft (rarely at an initial profit) is only the beginning of a set of liabilities and contingencies which can dog the manufacturer for the next three decades. Not only does it have to provide a support service for the aircraft, but it often has also to provide financing and value guarantees.
A company such as British Aerospace can end up carrying contingencies and liabilities worth billions of dollars on the aircraft it has put into the market. It is to be hoped that it will never have to pay up on those liabilities, but they are always there cluttering the balance sheet which in turn hampers the manufacturer's ability to raise fresh cash for more promising or strategic investments.
In those circumstances, an aircraft manufacturer must choose even more carefully than others do the projects in which it will invest. BAe has the prospect of investing $1billion or more in Airbus Industrie's A3XX ultra-large airliner; of picking up a share of the development of the AE31X Express; of investing in the A340-500/600 and several other prospective Airbus variants to spend its civil-aircraft budget.
Against such developments, it must be harder than ever for a private-sector, non-government-assisted company (even one which may be able to borrow some launch money on a repayable-loan basis from its government) to invest in the regional-aircraft business. Not only are the contingencies and liabilities which accompany all civil-aircraft sales there in buckets in the regional market, there is the added complication of the market not wanting to pay anywhere near the manufacturing price (far less one incorporating a profit element) for the product. Even allowing for the comparative lavishness of the furnishings in a business jet and its need to operate at higher flight levels, it seems incongruous that an eight-seat corporate express can be more expensive than a 50-seat airliner which uses similar engines and systems. If ever there was a product that was doomed to be a loss-leader, it must be the regional jet.
It is against this background that BAe finds itself at odds with its partners in Aero International (Regional) over the launch of the proposed Air Jet 70-seat regional jetliner. As its senior executives readily admit, the company has already burned its fingers in the regional market, not once, but several times, and it is disinclined to try again unless there is a long-term benefit from it which BAe could not more reliably gain from another market.
For some manufacturers and countries building regional jets is not a business in which concepts such as profit, or loss-leading, count as highly as reaching national technology or employment goals.
(This, after all, is the market in which the two leading players - Embraer and Bombardier - are pursuing each other through the World Trade Organisation with reciprocal allegations of excessive government support.)
There has to be a very good case for pursuing a market in which a $20 million aircraft sells for $15million or less. Merely satisfying unrealistic aspirations from a market which is driven more by the perceptions of its passengers than by economics is not one. If local political and economic factors make it possible for a manufacturer to pursue that market and make at its local level, in its own circumstances, a decent return, then good luck to it. The chances of circumstances combining so fortuitously in Western Europe in the 1990s are so remote as to be almost invisible. That does not mean that European manufacturers should abandon their existing investments in the regional market - just that they should resist making new ones without the most careful consideration.
AI(R) is warning partners like BAe that, if they do not invest quickly in the Air Jet, then they will miss the bus: BAe is wise to hesitate. The small regional jet is one bus that the European industry can well afford to miss.
Source: Flight International
