The delay in the arrival of the new Embraer [NYSE: ERJ] regional jets is turning out to benefit the values of BAE Systems' [PNK: BAESY] BAe146/Avro regional jets (RJs), at least in the short term. The values of the BAe146 and Avro RJ have been facing difficulties over the last two years. The weakening values can be attributed to greater availability as previously stalwart operators have experienced financial troubles or overall collapse.

The development of the rival Embraer ERJ170/190 family represents a new and serious challenge to the BAe146/Avro RJ, which has enjoyed a virtual monopoly in the 80-90 seat segment of the burgeoning RJ market for much of its 20-year production run.

The partial revival of the Fokker 100 through a new support program also meant more difficult trading conditions for the BAe146/Avro RJ. Meanwhile, the Bombardier [Toronto: BBDb] CRJ700 and CRJ900 also are eating into the traditional BAe146/Avro RJ market. The width of the BAe146/Avro RJ fuselage has always been a major selling point, though the four engines have not.

The Embraer ERJ170/190 is seen as the principal rival to the Avro RJ due to its widebody interior and new design. Though the development of the Embraer 170 was clearly focused around the needs of Swiss International Air Lines [SWIS: SWIN] in terms of being able to operate to London City airport, the expansion of the Embraer regional jet family to the Embraer 175, 190 and 195 represents a major threat to the capabilities of the Avro RJ.

Bringing the Embraer 170/190 family to market has proved tough for the Brazilian manufacturer. The Embraer 170 was originally slated to arrive in 2002 but the date was pushed back to late 2003 due to a number of relatively minor but cumulative problems, which is common for a new aircraft type.

The Embraer 170 recently received provisional Federal Aviation Administration (FAA) certification, which allows crew training and flight-proving flights to be undertaken before full certification is granted in February 2004, when deliveries will begin to US Airways [Nasdaq: UAIR].

The Embraer 190 and 195, which offer larger capacity and therefore rival the Avro RJ85 and RJ100, were scheduled to enter service in 2004, but this date has now slipped to possibly the latter half of 2005.

The BAe146 and Avro RJ should benefit from these delays in several ways. The initial delivery slots are already accounted for, so new customers may not be able to secure delivery slots until late 2006. Similarly, new orders for the Embraer 170 may not be fulfilled until 2005. In the meantime, BAe146 and Avro RJ will be viable alternatives, albeit on a stopgap basis.

The operating costs of the BAE Systems products also compare favorably with the new aircraft. They are at least half the capital cost of the new Embraer products, in terms of both rentals and prices, and also feature a longstanding maintenance and spares support package.

>>Paul Leighton, editor of Aircraft Value News, contributed this report. Visit http://www.aircraftvalues.net.<<