Lease rentals of regional jets (RJs) have continued to ease as lessees seek better deals. However, there appears to be an improvement in orders, according to an analysis by the Aircraft Value Analysis Company.

After a comparatively dismal year for new orders in 2002, RJ manufacturers have seen an improvement in 2003. The large number of 50-seat RJ deliveries this year (more than 1,500) ensures that a shortage of supply is no longer the issue it once was. Rentals have in the past been partly buoyed by the absence of short-term delivery slots, but both primary manufacturers, Embraer [NYSE: ERJ] and Bombardier [Toronto: BBDb], may be more flexible on delivery schedules. Though backlogs are still reasonable, the supply and demand equation as it relates to newer equipment is no longer so weighted in favor of new sales.

The age profile of the 50-seat RJ now goes back more than a decade. With the CRJ-100ER no longer in production, the pressure on rentals of older RJs has become more evident, particularly in an environment where rentals of new equipment are virtually stagnating due in part to low interest rates. Extended production of the RJs is likely to increase the opportunity for smaller operating lessors to emerge, thereby increasing competition.

The major lessors have been reluctant to participate in the 50-seat market partly because of the uncertainty surrounding the operating lease, but also because the management time required to administer an RJ lease is likely to be the same as for a larger aircraft, and the larger plane offers a greater return. Over the past year, there have been a number of finance leases and sale and lease-backs completed, which has resulted in rentals that are higher than normal operating lease rates.

The pressure on rentals is likely to continue as the larger RJs take hold. The concentration of 50-seat RJs in North America is likely to offer both opportunities and threats to rentals. The limitations of scope clauses will perpetuate the demand for 50-seaters in the region. Other regions may have greater enthusiasm for the larger RJs, limiting re- marketing potential. Embraer has already indicated that it no longer envisages significant new orders emerging from European carriers. Lease rentals of U.S.-based RJs traditionally also have been lower than those elsewhere, partly because of tax issues.

Availability remains at low levels for the newer RJs, those still in production. A number of sources indicate that fewer than 10 CRJ-100/CRJ-200s are either in storage or being advertised for sale or lease. Similarly, there are few ERJ-145s on the market. For the RJs no longer in production, the market is far less buoyant, with many in storage and/or advertised for sale or lease.

The manufacturers can get involved in the placement of used units and will be able to offer attractive rates with a wider support package, forcing the independents to compete on price. Inevitably, lease rentals also will be affected by interest rates. The European market remains the more attractive option for the leasing of aircraft due to smaller quantities, advanced specifications and a more fluid market. Lease rates in the chart below were provided courtesy of the Aircraft Value Analysis Co.

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