The 50-seat market continues to cause considerable anxiety for investors as both Bombardier [BBD] and Embraer [ERJ] cut production and forecasts, and as the market seeking larger equipment grows. While values of both the CRJ200 and ERJ145 are feeling the effects of increased pessimism, the former type is...
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The 50-seat market continues to cause considerable anxiety for investors as both Bombardier [BBD] and Embraer [ERJ] cut production and forecasts, and as the market seeking larger equipment grows.
While values of both the CRJ200 and ERJ145 are feeling the effects of increased pessimism, the former type is perhaps experiencing the greater pressure. Troubled Independence Air is reportedly seeking to sell four owned CRJ200s as a means of raising cash. The sale price will be an important barometer of the current market conditions for the CRJ200, though perhaps distorted by the number involved and need for a quick sale. With a total of 83 other leased CRJ200s now the subject of renegotiation by Independence, the level of reduction will be determined by lessors' confidence in being able to place the aircraft in the open market.
Lessors will not be buoyed by the latest announcement by Bombardier. The manufacturer has reduced its forecast production rate for the CRJ200 once again, only a month after the previous announcement. The company now expects to produce only 54 CRJ200s in the fiscal year 2005-2006, compared to the 68 indicated in October. A production rate of less than five per month creates economy-of-scale difficulties. With such a slowdown in demand for new aircraft, placing a number of used aircraft will be problematical unless either the value or lease rate is sufficiently attractive. The cause of the seemingly swift switch in gauge from the 50 to 70-90 seaters has been caused by rising operating costs, contained yield improvement and rising lease/finance costs. There is a fine line between profit and loss for the 50 seaters. With only 50 seats, if load factors are around 75-80 percent, this means that peak flights will already be full. To achieve higher load factors, carriers would have to virtually give away the few remaining tickets for the off peak flights. The inability to charge or carry more means that operators are having to look at larger equipment just as they did with the 30-seat turboprops 20 years ago.
The predicament facing the 50-seat market is all the more evident with the massive drop in forecast sales by Embraer. The Brazilian manufacturer has cut its 20-year forecast for the 50-seat market from over 2,600 units to less than 2,000. For the 61-90 seat market, the number of expected deliveries has actually increased. Bombardier concurs with Embraer's estimate and also anticipates that demand for the 50 seaters will be less than 2,000 over 20 years. Even an estimate of 2,000 seems generous. The current ERJ145 and CRJ200 are unlikely to be manufactured for more than another 10 years at the very most, during which time some two-thirds of the projected production is likely to have been delivered. With a market size of less than 1,000, neither Bombardier nor Embraer are likely to contemplate launching an all new product, though this will leave the market open to the Russian and Chinese. Should one of the major 50 operators collapse in the next year or so, there is likely to be even less opportunity to achieve even 1,000 deliveries in the next 10 years.
The boom period for the 50-seat market appears to have lasted approximately six years. The lack of interest from the major lessors, at least in the form of the traditional operating lease used for the larger narrowbodies, emanated from concern over the potential for upsizing in the medium term. Such caution now appears to have been vindicated.
While values of the 50-seat market are facing a decline, the number in service, the limited opportunity to move to large equipment due to scope clauses, the fall in the price of fuel, and the growing economy are all factors likely to ensure that any deterioration is limited. The expectation that values have the potential to fall by more than 20 percent during the course of the next year appears misplaced. However, the demise of a major operator is likely to result in such short-term weakness.
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