NICHOLAS IONIDES / SINGAPORE
Sales breakthroughs in the key markets of China and Japan over the past two years have opened up major opportunities for regional jet manufacturers to expand their business in the booming Asia region
Just a few years ago, the world's regional jet (RJ) manufacturers paid little attention to Asia. Their resources were focused on the fast-growing US and European markets. Today it is a very different story, following sales breakthroughs in the previously untapped and potentially huge markets of China and Japan. As a result, the world's main manufacturers of modern regional jets are focusing an increasing amount of their time in Asia and are expanding their presence with new offices on the back of positive sales forecasts.
"In Asia the potential market is very big," says Luiz Fuchs, Embraer's chief representative and managing director for the Asia-Pacific, whose Singapore office opened late last year. "It will be a combination of things - some will replace turboprops, others will replace larger [Boeing] 737-size aircraft and others will open new markets. This is just the beginning. These aircraft are going to help open new routes, allow higher frequencies and help feed international flights."
It all really began in Asia in August 1999, when Fairchild Dornier announced a ground-breaking deal in the Chinese market, which is seen as far and away the biggest in the region over the next two decades. The market was broken when Hainan Airlines in the south of the country ordered 19 32-seat 328JETs and took options on 20 more. (Military-run China United Airlines has had five Bombardier Canadair Regional Jet CRJ-200s for years but they are used for VIP transport.)
Soon after Hainan became the first airline in China to operate modern RJs on scheduled services, Shandong Airlines ordered five 50-seat CRJ-200s and Sichuan Airlines ordered five 50-seat Embraer ERJ-145s. Bombardier has since sold regional jets to other carriers in China, and Embraer says two airlines are awaiting government approval to order up to 40 of its jets.
Around the same time as the breakthrough China deals, Bombardier was negotiating CRJ sales in Japan with Japan Airlines (JAL) subsidiary J-Air and with start-up carrier Fair Inc. J-Air announced in October 1999 that it would buy two CRJ-200s and deliveries took place early this year. Bombardier's negotiations with Fair Inc also ended successfully, as the new independent carrier bought two used CRJ-100s from Lauda Air and ordered two CRJ-200s directly from Bombardier.
So why the sudden ordering spree in Asia? The reasons vary by market, but the bottom line is that the region is ready for modern regional jets. Asia traditionally follows trends in the USA and Europe, which have seen a boom in the sector over the past five to 10 years. Passengers are now demanding more flights with RJs, which they see as more advanced than turboprops, even if the latter are cheaper for airlines to operate.
There is also a regulatory aspect to developments in some Asian countries. In China, where the economy remains planned, the government is working to build a US-style "hub-and-spoke" route network. Since 1999 it has shown that it is eager to approve RJ orders by the country's carriers, while often discouraging the purchase of larger Airbus and Boeing aircraft.
In Japan, deregulation has resulted in restrictions on small aircraft operations being revoked. Increased competition resulting from other forms of deregulation has also resulted in larger carriers pulling bigger aircraft off some thin routes, leaving them to be served by commuter carriers with smaller aircraft.
Despite manufacturers' hype about how great RJs can be for the region's carriers, fundamental problems face Asia that will, for at least the foreseeable future, make small jet operations in much of the region largely unprofitable.
Infrastructure is one issue. Short runways at some secondary airports in the region are not designed to handle RJs. Spare parts distribution and maintenance capacity are also problems. In addition, government regulation has kept domestic air fares very low in markets such as China, Malaysia, Indonesia, Thailand and Vietnam.
"Domestic fares in some countries are ridiculously low," says Embraer's Fuchs, who concedes it will take two to three years for RJ operations to break even in many markets. "In the long term, it's definitely going to be a profitable operation," he says, arguing that Asia is now in an investment frame of mind, and some carriers are taking the lead here.
Agressive Hainan
In China, for example, Hainan Airlines is trying to encourage other carriers to order regional jets because it says it cannot be one of just a small number developing the market. Hainan is the country's most aggressive RJ operator, now flying 19 328JETs and winning government approval to firm up its 20 options and order one more of the type.
Hainan says it has found regional jets "marvellous" for domestic operations, particularly for services in less-developed areas such as the north of the country. But it claims that many of China's 30-odd airlines are still not willing to embrace the operation of aircraft smaller than the 737 or Airbus A320 and invest in market development.
It also acknowledges that it will take time to make money on RJs, partly because air fares remain artificially low. But this will eventually change as China's middle class grows and the government has pledged to allow airlines to set their own fares at some stage.
In China and beyond, investment is also needed from the aircraft manufacturers. This has been coming steadily, in the shape of spares and support centres being established across the region.
Although low fares and infrastructure problems will remain for a few more years, the region's carriers have some advantages over their counterparts in the USA. One is the lack of scope clause limitations in contracts with pilots which have made it difficult for some US carriers to expand their RJ fleets.
In many parts of Asia, the manufacturers and airlines also see a fresh opportunity to create new market segments. Unlike in the USA and Europe, where RJs are often used to replace turboprops, in many Asian markets turboprops have never been flown. As a result, there have been no services in more remote parts of some countries, such as China and India. Similarly, in many of these countries, airlines could only put large aircraft on routes, so frequencies were often limited.
Within Asia, China is seen as the Holy Grail for manufacturers. It is by far the biggest potential market, with forecasters predicting a need for about 500 regional aircraft over the next 20 years. Turboprops have never really caught on and manufacturers expect most of those aircraft to be regional jets seating between 30 and 110 passengers.
"There is certainly a prestige aspect to buying regional jets over turboprops - some of the airlines may see turboprops as older technology," says one Asian airline analyst. He adds that it is too early to tell if carriers in China will be able to make money from RJs. "The orders may also be due to the availability of financing. They may have difficulty finding financing for turboprops or larger jet aircraft, but the regional jet manufacturers are quite willing to provide it."
The creation of a hub-and-spoke network is a key part of the Chinese government's 10th five-year plan for economic development, which runs through to 2005. The promise is that tariffs will be cut, airport infrastructure improved and financial incentives offered to airlines. Domestic carriers are also being encouraged to operate services jointly, while more foreign investment is sought, for regional airlines and airports alike.
As Fairchild Dornier chairman Chuck Pieper put it at the Zhuhai airshow in China late last year: "The market for the regional jet in China is largely untapped, but the requirement is growing rapidly."
To date, sales of RJs have only been to smaller carriers, but many expect that to change soon. Embraer is known to have agreed a deal with giant China Southern Airlines covering the sale of up to 30 ERJ-145s, while China Eastern Airlines has been seeking approval to buy a similar number of CRJs.
In contrast to China, the start of regional jet orders in Japan is primarily a result of deregulation, in part because of the 1997 removal of operating restrictions on commuter carriers. Until then, airlines with aircraft of fewer than 60 seats were not allowed to fly on routes served by scheduled carriers.
With deregulation and increasing competition from new discount carriers, the three majors - JAL, All Nippon Airways and Japan Air System (JAS) - have been taking their larger aircraft off many of the country's thinner routes, leading to new opportunities for small operators.
J-Air says it hopes to "develop a niche market in Japan" with its 50-seat CRJs, which are progressively replacing its 19-seat British Aerospace Jetstream 31s. The carrier now operates two CRJ-200s and will add two more next year. It has options on three more, which it aims to receive in the 2003 fiscal year.
"There is pent-up demand for swift transport on routes between regional cities," says the carrier. "Surface transport, trains and buses currently serve this. This demand is not big enough for airlines that are only offering medium or large aircraft with limited schedules, but small aircraft operating several flights can offer service levels which are customer-friendly and also profitable."
Hiroshima-based J-Air's executive vice-president, Satoru Mizutani, says in JAL's staff magazine: "We are aiming for medium-size markets, smaller than the 150-seat 737, or higher-frequency routes where it's better to have two or three daily flights with a CRJ that has one-third the seats rather than just one 737 flight a day."
JAL is optimistic about RJ development. Using domestic traffic data compiled by the government, its strategic planners have estimated that just over 100 routes in the country would be suitable for 50-seat jet operations.
Fair Inc's reasons for operating RJs are similar to J-Air's. "Jumbo jets used to fly between the local routes," says a spokeswoman. "However, they were not expected to make profits, so the big three airlines are evacuating such routes. If people get used to regional jets, they will understand their convenience and they are going to take them more often."
The start-up carrier has been operating from Sendai to Osaka since August 2000, and in April this year it added its second CRJ-100, also on a Sendai-Hiroshima-Kagoshima routing. The two CRJ-200s arrive next year and new routes are under consideration.
Fair Inc believes its future lies in operating more than just in remote parts of the country. It is seeking approval to operate into Tokyo's Haneda airport, the busiest in Asia, where Boeing 747s and other widebody aircraft types carry thousands of passengers on domestic flights each day. "We need to get a spot in Haneda airport at an early stage," says the spokeswoman.
The Japanese Government has yet to award slots at Haneda for use by regional jets, but this is expected to change in future as new slots are made available and market trends continue to shift.
Other developments may also spur regional jet growth in Japan. With government rules requiring traffic alert and collision avoidance systems (TCAS) to be installed on domestic aircraft in the coming years, airlines will have to replace older turboprops, such as ageing home-grown NAMC YS-11s.
JAS subsidiary Japan Air Commuter (JAC) is planning to replace its 12 30-year-old YS-11s by 2006. It says it has considered replacing them with regional jets but runway restrictions at many of the airports to which it operates mean it is likely to order turboprops, such as Bombardier's 70-seat Dash 8 Q400.
Fuchs says the carrier was very interested in adding Embraer regional jets but could not because of operational restrictions. He feels that in time, however, JAC and others will order RJs. Accordingly, Embraer predicts sales of 20 of its aircraft in Japan within five years.
Forecasts for the region are constantly being updated because of rapidly changing market conditions. But Fuchs says Embraer believes all manufacturers will share in sales of about 500 RJs seating between 30 and 110 passengers in the Asia-Pacific (including Australasia) between 2002 and 2011. This excludes China, where some predict this same amount could be sold over the next 10 to 20 years.
Although China and Japan are expected to be the biggest markets in Asia - excluding Australasia - India is also a potentially huge prospect and Fuchs says that "sooner or later" the country's carriers, such as privately owned Jet Airways, will order regional jets. Jet Airways has been creating a feeder network to support its 737 operation by adding ATR 72-500 turboprops and has not ruled out RJ operations.
Expanding horizons
Indonesia, Vietnam, Taiwan and Thailand are other potential markets, and Hong Kong is seen as one that is likely to be cracked soon. The city's second carrier, Dragonair, has won board approval to add RJs to its fleet of Airbus A320, A321 and A330 types, and an order is expected in the coming months. It wants to launch services to cities in mainland China that cannot be served profitably with larger aircraft.
But operators say it will take time to build awareness of RJs in the Asia-Pacific because they are new to most travellers. Mizutani of J-Air says: "Awareness among customers is still very low." Fair Inc also says passengers are not familiar with RJs and it has been a challenging sell. It claims, however, that "people who have taken our CRJs once seem satisfied with its comfort very much".
And if sales forecasts are to be believed, this lack of awareness is unlikely to remain for long. Passengers in the Asia-Pacific are likely to see RJs at an airport near them soon.
Source: Airline Business
