After a banner year in 2006, the rate of growth has slowed this year, despite being slightly higher than this time last year. Even so, manufacturers painted a robust future for the industry as regionals with high load factors and narrow-bodies with low load factors force what Bombardier (BBD) calls “capacity optimization.”
The news comes at a time when carriers are trying to decide whether or not to add capacity. Air Wisconsin CEO Jim Rankin reported that regional growth rate was between 25 and 35 percent five years ago but today, his airline is facing a one-to-two percent rate per year. Other airlines reported a similar experience. Despite that, airline presidents reported challenging times as they make large fleet additions such as SkyWest’s (SKYW) aircraft this year and Republic Holdings’ (RJET) 63 aircraft.
Speaking at the last week’s Regional Airline Association meeting Embraer (ERJ) Vice President Sales and Marketing North America Bruce Peddle indicated the industry would grow 3.5 percent to five percent annually driven by regional aircraft expansion. He said the company also sees growth with low-cost carriers and other business models such as Mesa’s (MESA) off-shore operations and ExpressJet’s (XJT) point-to-point service. “Regionals are 47 percent of all domestic departures in the U.S. along with 65 percent of the trans-border market,” he said, adding 38 percent of the company’s backlog is devoted to mainline carriers. Today, three out of four passengers that connect through a hub connect on a regional jet.
Of particular concern to airlines, according to Bombardier, which also briefed press at last week’s meeting, is load factor. Nearly 600 hundred routes have a load factor of more than 80 percent setting the stage for significant gauge growth. It also reported that another 600 routes now served by narrow-bodies are less than 60 percent load factor, creating a significant down-gauging opportunity. “This means there are over 1,000 new routes ready for capacity optimization,” said Steve Ridolfi, president of Bombardier Regional Aircraft.
Bombardier said the average aircraft size for regionals reached 70 seats for the first time this year with the number of 20- to 36-seat aircraft cut in half. With the 60- to 79-seat size having fueled growth, the company predicted the 80- to 99-seat category will be the next big growth phase for the regional industry.
Peddle indicated that one of the biggest changes from the pre-911 period was the diversification of regionals from having a single partner to servicing several networks. In addition, he cited the growth of the RJs at 3600 percent in the last decade and the increase in stage length. The average stage length for RJs, he said is 391 nautical miles compared to 179 for turboprops.
While the hub-and-spoke system will remain the model, Peddle indicated that there are 136 potential markets for direct point-to-point service which would yield 25 to 75 passengers per day. He also sees an 18 percent growth in new market opportunities trans-border.
Embraer projects a need for 170 RJs each year for the next 20 years for a total of 3,480 aircraft. Nearly 1,000 will be in the 30- to 60-seat range to replace existing 50 seaters during the second half of the forecast. Peddle said that 40 percent of growth will be natural growth in current markets but 60 percent will come from new opportunities as network carriers right-size their fleets and down gauge from narrow-bodies. He sees the decision on replacing narrow-bodies coming in 2015. Today, 32 percent of domestic flights have less than 100 passengers aboard offering a direct market opportunity for the ERJ 190/95.
While Embraer, with no new turboprop offering, does not see a long-term return of the turboprop, Bombardier, with its Q400, of course, disagrees. The company reported that relentless pressure on labor and yields will force a return. It also said that environmental measures including taxes could mean that taxes will surpass the actual cost of fuel, which is now at a new norm of $2.00.
Having recently launched the $30 million CRJ1000 program, Bombardier has turned its attention back to the turboprop market, announcing at the convention in Memphis that it is now actively making the business and marketing case for the Q400X. The 90-seat, 1000-nautical-mile range Q400X, it said, was prompted by enthusiastic requests from current Q400 operators including Flybe. The program joins the C-Series – 110- to 149-seat mainline aircraft – it is also considering.
Worldwide, said Bombardier, regionals will grow from its current 23 percent market share to one third with mainline airlines capturing 40 percent and low-cost airlines garnering 30 percent. The regional airline industry fleet is now at 5,200 new aircraft, 3,500 of which are in the 20- to 50-seat seat size. By 2025, the fleet will be 7,900 aircraft when the smaller size will constitute only 19 percent. In addition, turboprops will constitute 36 percent of the fleet to the RJ’s 64 percent. Indeed, Ridolfi reported that three quarters of the applications for newly delivered jets replaces jets such as the F28, BAe 146 and other RJs.