Despite last year experiencing the most severe dip in overall new orders for a decade, regional jet manufacturers are optimistic that theirs is the aviation niche market most likely to see strong recovery
An imminent order for a minimum of 100 regional jets from US Airways will be a rare glimmer of sunshine on an otherwise bleak landscape for the world's two remaining regional jet manufacturers. Although regional airline growth remains in double digits, the aggressive fleet acquisitions of the past few years have slowed markedly, at least for the present.
Last year, overall new orders for regional jets fell to their lowest level since 1993. Embraer and Bombardier together took in little more than 80 new orders, with cancellations taking the net total down to below 60. Adding in figures from the now defunct Fairchild Dornier, left the year-end totals showing a net loss of some 120 orders. Two years ago at the height of regional jet boom, net orders had topped 700 and were still close to 300 in 2001.
For Bombardier 2003 began with its new chief executive Paul Tellier attempting to shore up flagging investor confidence and raise some much needed new capital. Reporting a sizeable loss for its financial year through to January 2003, the Canadian group made a C$1.3 billion ($900 million) provision to cover changes in the way it accounts for regional and corporate aircraft production costs, as well as write-downs of inventory and used aircraft.
Until the uncertainty over the future of carriers like United Airlines and Air Canada is resolved, few new large orders are expected to emerge in the key North American market. Meanwhile, smaller, independent regionals are expected to struggle to find financing for future orders and even existing deliveries.
Nevertheless, there is continued optimism that once the dust settles on the world's recent wave of crises and the major economies pick up, the clouds will lift and the regional jet manufacturing sector will again be vibrant.
Even in current conditions, the regional jet manufacturers are doing better than their counterparts in the large aircraft market, even after 11 September. "We think we are in the right niche. If we were producing huge 300-400 seat aircraft, I wouldn't be sleeping very well," says Tellier at Bombardier.
The upcoming US Airways order - probably for Embraer's 50-seat ERJ-145 and its new 70-seat Embraer 170 - would significantly alter the carrier's operations, letting it replace more expensive narrowbody aircraft on shorter routes from its hubs.
US Airways catch-up
In particular, the 50-seaters would allow "some catching up", according to US Airways president and chief executive officer David Siegel. The carrier, now emerged from Chapter 11 bankruptcy protection, had the most restrictive of pilot agreements on the regional jet issue - initially allowing the carrier's affiliates to operate just 70 regional jets. Now, as part of the restructuring plan agreed to by the pilots, it may operate up to 465 regional jets, including the 140 by its non-owned affiliates, through to 2008.
The bulk of the new regional jets will be operated by the new US Airways regional airline division: MidAtlantic Airways. On a fast track, it wants to begin taking delivery of the aircraft this autumn and begin operations in the fourth quarter. The airline's agreement with its pilots allows US Airways to operate regional jets with up to 76 seats. The aircraft, to be equipped with economy- and first-class cabins, will be flown by currently furloughed mainline pilots.
Although Siegel says the competition for "a significant order" is between the Embraer family of jets and that of Bombardier, the order is likely to go to Embraer. Siegel has been unabashedly singing the praises of the 170, calling it "revolutionary" and an aircraft with the cabin comfort of a large narrowbody jet that "will change the industry".
Siegel also has a history with Embraer. He was president of Continental Express in 1996 when it became the first North American customer for Embraer's 50-seater, giving a strong lift to the Brazilian aircraft maker even before the aircraft was certificated. The Continental Airlines regional affiliate, which was last year floated under the ExpressJet name, currently operates 200 Embraer jets and has 74 more on firm order. The carrier and Embraer recently agreed on a revision of the delivery schedule, however, reducing 2003 and 2004 deliveries by a total of 27 and moving them into 2005 and 2006.
The US Airways order would be a boon for either manufacturer. Although new orders were not rolling in, Bombardier delivered a not-insubstantial 191 regional jets in its financial year to the end of January 2003, up from 161 the year before. It expects deliveries to remain at about the same rate in the year ahead. Embraer delivered some 121 regional jets last year, excluding corporate and military versions, down from over 150 in 2001. Its plan too is to keep numbers just above 2002 levels over the next couple of years. On present reckoning that would give Bombardier an order backlog equivalent to just under two years of production and Embraer one of just under three.
Another potentially large order, although probably not an immediate prospect, is from Lufthansa. It has been weighing proposals for aircraft to replace the 60 Fairchild Dornier 728s it had on order with the failed manufacturer.
Long-term confidence
Manufacturers are confident that the market will return. "Are we going through some tough times?" asks Bombardier's Tellier. "Yes. Are we at the bottom of the trough? I don't know. But are we well positioned for recovery? Do we have the right product? My answer is yes." He adds that the regional jet niche remains well positioned. "Our niche is the backbone or cornerstone of airline restructuring around the world."
Embraer president Mauricio Botelho has a similar view, saying that the manufacturer has sales campaigns under way in Europe, America and the Asia-Pacific, with some "very interesting" movement in Europe. "But we don't expect to see too much happening in a short time. Next year things will be more solid."
In terms of aircraft available, Bombardier has already fielded a full complement of its family of regional jets. It was first into the market with the 50-seater in 1992 and delivered its 700th this spring. "We invented the concept of the regional jet," Tellier notes. The company began delivering its 70-seat CRJ700 Series aircraft in 2001 - 68 were in service with eight customers at the end of 2002 - and delivered the first CRJ900 aircraft, which seats up to 86 passengers, to launch customer Mesa Air Group in February. Mesa operates the CRJ900 with 80 seats in two classes as part of the America West Express network.
Bombardier also continues to produce its Dash-8Q series turboprops, albeit in increasingly modest numbers. Bombardier still contends that turboprops are more efficient on short-haul sectors and can find a home alongside regional jets, but the year-end figures are less convincing. Last year it output just 29 aircraft, but netted no new orders, leaving the backlog at a paper-thin 15 units.
For Embraer, an order from US Airways for the 170 would make up some ground lost with the recent decision by beleaguered Swiss to halve its orders for the 170 and the larger, 108-seat Embraer 195 to 15 each and put off first delivery of the 170 to summer 2004. According to Frederico Fleury Curado, Embraer's executive vice-president for civil aviation, the change means that Alitalia will take delivery of the first 170 in August, following certification by Europe's Joint Aviation Authorities. Alitalia will take six of the 12-14 170s Embraer expects to deliver this year.
In developing its family of larger jets, Embraer expects first flight of the 78-seat Embraer 175 to take place soon and to be certificated by mid-2004. Much of the flight test certification work for the 170 will transfer to the 175 programme, as the systems are virtually identical, says Curado, explaining that only some structural differences and a slightly longer airframe separate the two.
Then follows the 78-seat Embraer 190, which the company expects to be able to field at the end of 2005. Although there is no customer signed up yet, Curado says the company is confident there will be one as certification approaches. Contracts with most customers include a clause allowing them to switch model types, so customers such as General Electric Capital Aviation Services, Alitalia or Swiss may sign up.
The regional jet has become an indispensable part of the air transport landscape in the USA, allowing carriers to replace or supplement mainline aircraft to reduce costs on unprofitable routes while maintaining market presence. James Parker, analyst at Raymond James & Associates, notes that despite the crisis, regional jet flying continued to grow at a healthy pace over 2002 and for good economic reasons.
Airlines can see a definite profit improvement by replacing narrowbodies with regional jets, he argues. On one Delta Air Lines route the carrier was losing $1,600 a flight operating a 118-seat Boeing 737-200, carrying on average 76 passengers. When it replaced the 737 with a 50-seat regional jet, the result was an average load of 43 passengers and a $721 segment profit. "Labour costs were up and fares were down so there was a price-cost squeeze," he says.
The 33 passengers not accommodated on the regional jet may go to low-fare carriers operating the same route. "So this change benefits all three sectors: Delta, the regional and the low-fare carrier," he concludes. "Downsizing enhances regional airline growth and shifts majors' lower-priced traffic to the low-fare airlines."
According to Doug Abbey, president of the AvStat Associates consultancy and executive director of the new Regional Air Service Initiative trade body, 36% of the routes on which regional jets were placed in the USA over the last 10 years, were all new; about 25% were "major" replacements; 20% were to supplement mainline service; and 19% replaced or supplemented turboprop services.
The regional jet also is being used on increasingly long segments, much longer than originally planned. Of the new services announced since the beginning of last year, more than half have been for routes longer than 800km (500 miles) - the traditional regional airline stage length, Abbey's data shows. Some routes being flown are in the 2,400km range.
For its longer-haul flights, ExpressJet last year began taking delivery of the latest ERJ-145 model - the XR - which extends the range of the aircraft about 550km to 3,700km (2,000nm), allowing flights as long as three and a half hours, block time. The XR means the Continental regional can keep within the 59-seat scope clause limitation in their pilots' pact and still fly longer segments.
"These aircraft are certainly being used way beyond what people would expect five or six years ago," Embraer's Curado says. It was expected then that the main driver for using regional jets was to replace turboprops, but that did not happen. "Instead of substituting for turboprops, they have been deployed on long thin routes and to expand the catchment area from the hub, and for some hub bypass," he adds.
Curado thinks, however, there may be more turboprop replacement in the future. Even if the regional jets are not optimal on some shorter routes and might mean higher operating costs, they bring the regional jet values of speed and comfort, he says. It may pay off, he says. An airline has to weigh the costs of keeping a subfleet of turboprops when the bulk of its fleet is jet.
Scope clause modification
Although most are not predicting the death of scope clauses, economic pressures on airlines are resulting in substantial modifications. American Airlines is said to have reached agreement with its Allied Pilots Association that would allow its American Eagle partner to operate 110 regional jets for every 100 mainline aircraft operated, but would limit them to 50 seats. That would be an improvement over the current 44-seat limit, but 70-seaters would have to be flown by APA pilots.
An altered but very complicated scope clause at United would allow United Express carriers to fly the same number of block hours as the mainline carrier, but would impose certain hub-to-hub and point-to-point restrictions.
"I don't think scope clauses are going away but they are changing, Any loosening is related to jets-for-jobs," says Deborah McElroy, president of the Regional Airline Association. "The biggest challenge for regionals now is to keep costs in check. We can price ourselves out of the market if our costs are too high."
Source: Airline Business
