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Monday, June 5, 2006

Regional Divide Now Set at 100 Seats

As scope clauses liberalize and economic pressures increase, the dividing line between regional and mainline services has increased to 100 seats, based on forecasts outlined at manufacturer briefings during the recent Regional Airline Association (RAA) convention in Dallas. Unions are stubbornly resisting allowing regionals to fly much above 76 seats. Only one carrier scope clause is more liberal -- USAirways -- but even that caps out at 86 seats. Even so, both Embraer (ERJ) and Bombardier (BBD) clearly had their sights on the 61- to 100-seat market that Embraer calls the gap between capacity and demand.

In other RAA news, Sukhoi Civil Aircraft Company (SCAC) made its first visit to the show to talk about its regional jet, which will log its inaugural flight September 2007, with Russian certification to follow in 2008. In addition, Bombardier, Saab Aircraft Leasing and ATR gave turboprop briefings, indicating that the record sales pace of last year continues so far this year.

Burgeoning aircraft size underscores a trend already underway in regional airline service that has only accelerated since 9/11. But the price may be to put more small communities at risk of losing Essential Air Service (EAS), as expensive jets are redeployed and turboprops continue to leave the fleet. Regional Airline Partners has already noted that airlines are filing to leave EAS markets owing to increasing fuel prices, citing Scenic Airlines' bid to leave Merced and Visalia, Calif., and Ely, Nev. That said, the trend also creates more opportunities for entrepreneurial airlines like Plattsburgh, NY-based Commutair to replace larger regionals whose jets are being redeployed.

"About 41 percent of [Embraer] E-Jets in North America were deployed to right-size markets previously served by aircraft that were either too large or too small," said Mark Hale, vice-president, marketing and sales - USA, Canada and Caribbean, Airline Market. "In the first three quarters of 2002, 27 percent of flights departed with loads appropriate for a 70- to 80-seat aircraft, with an additional 40 percent departing with loads appropriate for 100- to 110-seat aircraft. Today, the gap is narrowing. With 50-seat aircraft at a load factor of 81-95 percent, you are turning people away. At the mainline level, there is an overcapacity problem seen with 41-60 percent load factors. Addressing this with 70- to 100-seat jets results in a market potential for up to 200 aircraft and 400,000 flights."

Hale noted that he's impressed by the ability of airplanes to supplement mainline narrowbody schedules. Airlines have operated their E-Jets between new city pairs that, in some cases, have exceeded five hours flight time. There are 99 Embraer 170/190 family jets in service in North America with JetBlue; Air Canada; and with Republic Airways, for its United Express, US Airways Express and Delta Connection operations. In the fourth quarter 2005, these aircraft were deployed to accommodate natural growth (45 percent), right-size existing routes (41 percent) and open new routes (14 percent).

"The longest route thus far, for the Embraer fleet, is New York's JFK to Calgary at five hours and 10 minutes, while the average sector length is 556 nautical miles," Hale said. For the CRJ, the longest sector is four and a half hours between Edmonton to Los Angeles at 955 miles. Both manufacturers indicated that neither are major markets but could be lucrative with the right size aircraft.

In the meantime, airlines at all levels continue to struggle to reduce costs, according to Trung Ngo, vice president of marketing and communications at Bombardier, who outlined efforts airlines are taking to mitigate rising fuel costs. "Airline programs to lower fuel consumption include operational savings through direct routing, lower cruise speeds, installation of winglets and one-engine taxiing," he said. "In addition, they are instituting fuel surcharges, increasing fares and fuel hedging. They have also brought down labor costs to levels that are more competitive with low-cost carriers."

Even so, he indicated that efficiency levels have yet to be achieved. "The gap between low-cost carriers and majors is narrowing but regionals retain a significant cost advantage," he said, adding that 50-seat jets are still very much a part of the mainline networks with little sign of major withdrawals worldwide. Both RJ manufacturers agreed that any 50-seat RJs that are now available will quickly find their way back into service. Nevertheless, it is clear that regional services, with larger jets driving down operating costs, will outpace mainline growth in all world regions.

Not surprisingly, the largest growth markets are China and India. However, China lags behind India by a decade in infrastructure development for air transportation. Only now is the Chinese government turning its attention to these matters. Ngo cited the lack of pilots as an additional barrier in both regions. Regionals are serving more and more of the world's markets. Forty two percent of markets are exclusively served by regionals in Europe and the Middle East, 55 percent in the Asia Pacific region, and 63 percent in the Americas.

Sukhoi Makes a Splash

In its debut at RAA, Sukhoi touted its family of regional jets that range from 75 to 98 passengers. It had earlier proposed a 60-seat version but scrapped those plans in favor of a larger, 110-seat version that it envisions entering service in 2010. However, it has yet to make a final launch decision on the largest of the family of aircraft. Sukhoi Civil Aircraft Deputy General Director/Commercial Director Svetlana Issaeva indicated the company expects to resolve the matter by the fall.

The company also announced that it will shortly sign an agreement with Alenia for the Italian manufacturer to take a 25 percent stake in the Russian company. Completing the deal was disrupted by the Italian elections, according to Issaeva. Boeing has been a consultant on the project, which began five years ago, working on market research, product development and customer support. The first flight of the 98-seat RRJ95 is slated for September 2007, with construction of its four test aircraft now underway.

Engines are being supplied by risk-sharing partner PowerJet which is producing the 14,000 to 17,500 thrust SaM 146. Powerplant certification is expected in 2008 from the European Aviation Safety Agency (EASA) and Avia Register. Created in 2004, PowerJet is a partnership between Snecma and NPO Saturn of Russia.

Sukhoi and its partners recently hosted its fifth airline advisory board, which Issaeva indicated was focused primarily on after-sales support. However, the next meeting, scheduled for the fall, will focus on aircraft production. Issaeva has sought either counsel from or active participation of such western carriers as Air France, Iberia, SAS, and Northwest. SCAC already has 40 firm orders for the aircraft, 30 of which come from Aeroflot and another 10 to Russian Financial Lease Company.

Turboprops

Turboprop sales for Bombardier with its Q-400 and ATR, with the ATR-42/72, jumped 200 percent during 2005, said Bombardier's Ngo, who pointed out that 61 percent of its sales between 2002 and 2005 derived from the replacement of jets or supplementing of mainline service. He also indicated that 18 percent of sold aircraft are earmarked for turboprop replacement and supplemental service, while another 21 percent will serve new markets

ATR Senior Vice President John Moore sees a market potential of up to 500 aircraft over the next five to 10 years for replacing current turboprops now in service. Noting that the ATR fleet alone is 13 years old, he also sees a potential for replacing RJs, noting that about 600 city-pair connections under 400 nm in the U.S. could be more profitably operated with turboprops. He called turboprops a natural hedge against fuel price hikes.

Moore also pointed out that the main factors behind robust turboprop demand, besides higher fuel prices, include regional traffic growth; new airline standards; the lack of profitability for RJs on short-haul routes; and a new wave of low-cost carriers using turboprops in the European and Asian markets. Indeed, nearly half of turboprop sales are in the Asia/Pacific market. Another factor, he said, was the renewed interest in larger turboprops for both passenger and cargo operations. In fact, Moore said the more economical operating costs of turboprops may mean significant cost savings for 50-seat regional jet operators. "For a lower cost than a 50-seat regional jet, operators could have a larger ATR 72 and be able to sell 20 more seats," he said. "A 70-seat turboprop would save $1.28 million in fuel costs annually over a similarly sized regional jet."

ATR sees a market for more than 1,000 new turboprop units worldwide and an average annual delivery of 100 aircraft in the next decade, for a total of $22 billion in sales.

Saab Sells Out

Meanwhile, Saab is out of S2000 aircraft, according to Saab Aircraft Leasing President and CEO Michael Magnusson. "All 58 Saab 2000s have customers or have been placed," he said, adding applications range from passenger service to the corporate shuttle mission for the NASCAR teams, including four to Hendrick and one to Joe Gibb. Saab 340s are doing government work around the world with an additional 13 in cargo service. During RAA, Saab announced its latest placement, the first Saab 340 cargo version in Mexico where Saint-Ex will be putting it in service on behalf of DHL. Fledgling carriers in Ghana, Mongolia, Argentina, Poland and Bahamas are also in the process of acquiring used 340s and S2000s for passenger service.

Magnusson noted the dip in the number of RJ departures both worldwide and in North America, while the number of 50-seat turboprop departures halted its decline in 2003 and has held steady ever since. Used aircraft availability is also on the decline, stabilizing or even driving up prices.

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