The market constraints in Europe for 50-seat regional jets (RJs) are increasingly concentrating this type of aircraft in a single market -- the United States, where demand remains strong. In the past, such an alignment has caused problems for the residual or future values of aircraft.

The consolidation of Swiss has reportedly prompted Embraer [NYSE: ERJ] to assist the carrier in re-marketing 11 ERJ 145s, most of which appear destined for Trans States Airlines. Trans States recently signed a letter of intent to fly 25 50-seat RJs under a code-share with United Express (CRAN, July 21).

Embraer has acknowledged that Europe now represents a difficult market, at least in terms of securing sizeable orders. Nearly 60 percent of ERJ135/ERJ145s are already located in the United States, while Europe accounts for only 25 percent. The absence of wide-scale demand for 50-seat RJs from European carriers stems from the continuing problems associated with operating costs. In Europe, aircraft tend to be of a higher specification in terms of galley provisions and avionics, raising the cost of the aircraft.

The higher indirect operating costs borne by European carriers, such as navigation and landing charges, make it necessary to use larger equipment and avoid major hubs. The operational constraints are nothing new but will limit the ability of the major European carriers to use 50-seat equipment in numbers. The use of larger equipment such as the Fokker 100 and BAe146/Avro RJhave long been seen as more viable, which is fueling enthusiasm for the new generation of larger RJs.

Douglas Abbey, executive director of the Washington, D.C.-based Regional Air Service Initiative (RASI), agrees that as the shift toward larger RJs continues and scope clause limits are eased to allow more pilots to fly them, there will be a move to unload 50-seat RJs.

"I think we'll see a substantial number of 50-seaters become not necessarily redundant, but traded in," Abbey told CRAN. "We have not seen any really measurable amount of used transactions. In other words, all aircraft tend to migrate -- to other countries or to secondary operators. We haven't seen that yet.

"The precedent for this the Fokker100. This is a bit of a unique case because the aircraft is no longer in production so its residual value is less. But you can still get them for fairly inexpensive prices. I think Germania [Express] has paid between $2 million and $3 million. What they're doing is trying to establish a low-cost carrier in Germany using Fokker 100s.

"Eventually the acquisition costs of an [Embraer] ERJ 145 and a [Bombardier] CRJ 100 or 200 are going to come down and we will see a buoyant used market," Abbey said. "I think it will be a more likely business case at that time for start-up regionals to be low-fare carriers."

European-configured 50-seat RJs often include a premium of about $1 million per aircraft. U.S. carriers operating overseas are not likely to want to pay a premium for optional equipment that may go unused or have to be replaced. Conversely, the issue of scope clauses in the United States has been a major reason why the 50-seat RJs are so popular. The concentration of 50-seat RJs in the United States means their residual values will vary if operators switch to larger equipment in the future.

Though the current U.S. market appears to be demonstrating an insatiable appetite for 50-seat RJs, the 1980s saw similar demand for 30-50 seat turboprops. The fall from grace of turboprops over the last decade is well documented, but is essentially a consequence of a concentration of a large number in a single region.

A high concentration of aircraft can make future values vulnerable. When so many aircraft are placed with only a few carriers in a single country, vast price differentials can arise. If a single operator within the country moves toward different equipment, for example, it could flood the market with a surplus, which leads to weaker values. If the aircraft are located in a single country, demand from operators in other countries is not always sufficient to compensate.

The prospect of a one-way flow of used 50-seat RJs from Europe to the United States offers the possibility of a limited re-marketing potential in the event the U.S. market faces a downturn. As scope clauses are relaxed in the United States, and the U.S. majors seek to take advantage of lower operating costs by switching to larger RJs, there could be a surplus of the 50-seat aircraft.

As the product life cycle of the 50-seat RJ stretches beyond 12 to 15 years (the oldest has now been in service about 10 years), there also is a greater potential for them to be replaced with newer aircraft. With limited demand from regions outside the United States, availability may take on greater significance and cause a shift in the residual value of the aircraft.

(Paul Leighton, editor of Aircraft Value News, contributed to this report) >>Contact: Douglas Abbey, RASI, 202-338-1727.<<