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Monday, May 23, 2005

High Fuel Prices Driving Carriers Back To Turboprops

CINCINNATI, Ohio - Maybe Mark Twain should have written the "obituary" for turboprops: "The report of their death has been greatly exaggerated."

Despite the proverbial "writing on the wall" for this aircraft type only a year ago, the death notice has proven to be premature.

With rising fuel prices, the two remaining turboprop builders report that the demand for new aircraft has already exceeded 2004 sales. Furthermore, used turboprops are also a hot item - regardless of the size.

Much to the surprise of many at the Regional Airline Association annual convention here last week, the interest in new turboprops is alive again. Many had written them off as carriers increasingly turned to regional jets (RJs). However, the interest in turboprops continues to command more attention in Europe than in the United States.

"Turboprops will make somewhat of a comeback," said Fred Buttrell, president of Comair, the first regional carrier to fly RJs. "Turboprops will have a superior economic model on a 300-mile route with fuel consumption 30 to 40 percent less. Fuel prices will not abate."

"The turboprop is making a comeback," said John Moore, senior vice president of ATR. So far this year, ATR has recorded firm orders for 31 planes and delivered four. Moore anticipates another 20 firm orders, which will be announced at the Paris Air Show in June. Saying little about the 20 pending orders, Moore noted that the purchasing carriers are both existing ATR operators and new clients.

Last year, ATR delivered 13 planes and took 12 firm orders.

Moore said that 30 percent of the 2005 orders are for the 42-seat ATR-42 and 70 percent are for the larger ATR-72.

This year, Bombardier [BBD] anticipates building 75 turboprops. A year ago, Bombardier sold 35 turboprops, mostly its 70-seat Q400 and 50-seat Q300.

If it were not for supply chain issues, Bombardier could be building more than the 75 turboprops that it projects for this year, said Steve Ridolfi, president of Bombardier Regional Aircraft.

The primary sales point for turboprops is the high cost of fuel. On routes of less than 300 miles, a turboprop is more cost-efficient than an RJ.

Ridolfi attempted to drive this point home with a comparison between a 70-seat CRJ 700 and a 70-seat Q400. The Q400 is 36 percent more efficient to operate, he said. It takes eight fewer paying passengers to break even on the Q400 than on the CRJ 700.

Or, as Moore noted, an ATR-72 costs $500,000 less to operate over a year at current fuel prices than a 70-seat RJ.

The rebound of the turboprop coincides with diminishing interest in the 50-seat RJ.

The 50-seat RJ made its debut more than a decade ago when crude oil was at $20 a barrel. Production of small RJs by both Bombardier and Embraer [ERJ] has fallen from 210 units last year to a projected 125 this year. The number of used 50-seat RJs on the market skyrocketed by 500 percent in the last year, Moore said.

While acknowledging the declining interest in the CRJ 200 model, Ridolfi said the 50-seat RJ will always have a niche role to play in providing feeder routes too small to warrant a larger plane.

Both Bombardier and ATR noted that the buyers of the latest turboprops remain outside of the United States. It is a perception problem, Ridolfi said, based on false impressions.

U.S. airlines believe that the public does not want to fly on turboprops for a variety of reasons, however, Ridolfi said that Bombardier's research consistently finds that there isn't any hard data to support those impressions.

Horizon Air, a unit of Alaska Air Group [ALK], is the only recent customer of Bombardier's Q400 line in North America. During the RAA meeting, Island Air announced that it struck a deal to lease three Q400s from Bombardier. The first will be delivered in November.

Not only is the market hot for new turboprops, but the market is also hot for used aircraft.

The supply of used ATR aircraft on the market now matches the level of demand for the used aircraft. "This is good for price stability," Moore said.

The cargo market is a relatively new niche for the older ATRs. More than 40 ATRs, mostly ATR-42s, have been converted into freighters, Moore said. By the end of the year, 65 should be flying as freighters, he said. Older ATR-72s also are entering the freighter market, he said.

FedEx [FDX] has been replacing Fokker aircraft with ATRs. FedEx this year plans to convert ATR-72s into freighters, Moore added. The demand is so great that FedEx has been absorbing most of the older ATRs, he said.

Last year, ATR monitored 62 deals for used aircraft: 43 ATR-42s and 19 ATR-72s.

So far this year, Saab Aircraft Leasing has handled 16 transactions involving both Saab 340s and Saab 2000s. In addition, 31 other Saabs traded hands this year independent of Saab Leasing's efforts, said Michael Magnusson, president of U.S.-based Saab Leasing.

Saab's most prominent deal in the United States, he said, has been Colgan Air's contract to fly for Continental Express out of Houston. Colgan will be flying 10 Saab 340Bs.

A larger turboprop - the Saab 2000 - might be in both Colgan's and Continental's future, however. Magnusson said Saab has had discussions with the carrier about introducing the Saab 2000 on some of the more heavily traveled Texas routes. Colgan has not flown anything larger than a Saab 340.

After working to crack the cargo market, Magnusson said Saab has now placed five Saab 340s converted for freighter use. Four of the sales took place this year.

Interest has also picked up for Raytheon's Beechcraft 99s and 1900s, said Michael Scheidt, president of Raytheon Airline Aviation Services. In 2004, the company placed 46 airplanes that had been in its portfolio. The company's inventory is now at the lowest levels since the company was formed in 2002, Scheidt said. Most of the deals involve one or two aircraft in Europe, Canada or Africa, he said. The U.S. fleet continues to decline and 68 percent of the U.S. fleet is now involved in Essential Air Service flying.

Scheidt said more of the 1900s are being reused as corporate shuttles, seating 14 to 18 passengers.

>>Contacts: Fred Buttrell, Comair, (859) 767-2525; John Moore, ATR, 33 (0) 5 62 21 60 61; Steven Ridolfi, Bombardier, (416) 375-4027; Michael Magnusson, Saab, (703) 406-7220; Mike Scheidt, Raytheon, (316) 676-8674.<<


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