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Monday, December 12, 2005

50-Seat Regional Jet Rates Slip as Demand Eases and Production Is Suspended

Lease rentals for the 50-seat regional jets have exhibited a decline due to reduced demand and a concern over the levels of actual and potential availability.

The lease rentals of the Bombardier CRJ100/CRJ200 have been most impacted by recent problems, although those of the Embraer 145 are also weakening by association. The announcement that production of the Embraer 145 will effectively cease next year comes on the heels of Bombardier's decision to suspend production of the CRJ200. However, for the CRJ200 the contraction of operations and the potential demise of some operators have resulted in a more discernible impact on lease rentals.

During the post-9/11 period, values and lease rates of the 50 seaters enjoyed one of the least notable declines. The constraints imposed by scope clauses created an artificial demand for 50 seaters. Some estimates suggest that twice as many 50 seaters were ordered and delivered as the U.S. market could sustain had scope clauses not existed. The development of larger regional jets was effectively stalled for perhaps three to four years as manufacturers sought to meet demand - and due to the lack of potential orders for 70-90 seaters. This demand was inevitably short-lived and the market is now beginning to react to conditions that limit the impact of scope clauses.

The high price of fuel has also impacted the operating economics of regional jets when compared to similar capacity turboprops and larger regional jets. Whereas market imperatives in terms of passenger perception and route structure previously determined the selection of regional jets, in-service experience and the expiration of warranties has forced operators to recognize the sometimes higher cost of operating smaller regional jets. With depressed yields comes the need for lower operating costs.

Lease rates in 2003 and 2004 increased such that rates of below $100,000 were the exception rather than the rule, although those of the out of production CRJ100ER were beginning to show signs of vulnerability. The rates of the older CRJ100/CRJ200s are now likely to range between $50,000-$80,000 per month with some short-term, distressed rates likely to be nearer the bottom of the range. Where $100,000 may have once been viewed as an important psychological barrier, rates are now considered to have easily breached this level.

With the market for the 50-seat regional jet market expected to remain fragile in the coming years due to the replacement of existing units and limited demand in the U.S., values and lease rentals of the CRJ200 and ERJ145 can be expected to decline further. Embraer has a second production line in China, which may be used to fulfill additional orders. The Brazilian manufacturer is also examining the possibility of establishing a joint venture in Russia that could produce the ERJ145.

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