Forecasts Fail To Assess JetBlue Wild Card

ST. LOUIS, Mo. - Both the airframe manufacturers and the engine makers agree - the pace of production of new regional jets (RJs) will be picking up in the years to come.

Despite the rush into the jet age, the turboprop will continue to play a role with regional airlines in the future.

As ATR, Embraer [ERJ] and GE Aircraft Engines [GE] released their latest market forecasts at the recent Regional Airline Association (RAA) meeting in St. Louis, industry analysts describe a rapidly changing airline environment that may nix the latest crystal ball numbers.

The regional carriers will be driving aircraft orders over the next two years, said Sonjia Murray, a senior consultant at SH&E. "It is just incredible - 200 this year and 200 next year. Over the next four years, the low-cost carriers and the regional carriers are driving the aircraft orders."

In fact, the aggressive ordering of regional jets has cut into two years' of demand for Boeing [BA] and Airbus, said James Higgins, an analyst at Credit Suisse/First Boston. "We forecast [the RJ] growth to continue to outstrip that of larger jet capacity for the legacy carriers for another couple of years," Higgins said. "We expect them to reach nearly 15 percent of the seats and probably 7 percent of the seat miles before growth levels off. To look at it another way, RJs are on their way to displacing about two historically 'average' years of total U.S. airline capacity - in other words to eliminate two years of demand for Boeing and Airbus."

In 2005 and 2006, the regional airline industry "will change dramatically," Murray said as JetBlue [JBLU] begins to fly the 100 Embraer 190s it has ordered. The low-fare carrier plans to aggressively fly the 100-seat planes on point-to-point routes between secondary markets.

Addressing RAA members in St. Louis, Murray said, "JetBlue will give you a run for your money. It is able to stimulate demand, attract demand from other carriers and this carrier can come in and set the fares. You have a window of opportunity to compete in the 70- to 100-passenger niche because no one is there now."

In order to hold off JetBlue in this niche, Murray urged the regional carriers to put pressure on their mainline partners to enable the regional carriers to fly the larger Bombardiers [BBD] or new Embraers. The success of JetBlue, and perhaps other low-fare copycats, its a threat to both the major and regional carriers.

The regional industry often points to the scope clauses in the labor pacts at the network carriers as the major impediment slowing faster utilization of 70-passenger regional jets. Murray said that scope cannot be viewed as an excuse, because market forces will change the landscape. "If the majors don't move, other people will," she noted.

One day after Murray issued her warning, ATA Holdings [ATAH] announced that it is exploring the purchase of smaller jets, either the Embraer 190 or the B717, to meet its future growth plans. "Such an aircraft would give us better balance to our fleet," said CEO George Mikelsons. "It would allow entry into new, smaller markets as well as providing frequencies in existing markets."

ATA has not started negotiations with either airframe manufacturer. Two of its unions have endorse the move, according to company statements. The company's announcement was clear - ATA will be flying the smaller jets, not its regional subsidiary, Chicago Express. The regional carrier flies Saab 340s.

In the market forecasts, only Embraer predicts the largest sales in the next 20 years will be in the 91- to 120-seat class - basically its Embraer 190 and 195 series. Embraer estimates that 2,950 of these largest regional jets will be built. GE sees only 1,800 in this class. Its forecast evenly splits future projects between the 30- to 60-seat class and the 61- to 90-seat class.

Rolls-Royce, which issued its most recent forecast in early March, estimates that the most aircraft that will be sold in the next 20 years will be in the 30- to 60-seat category. However, its estimate of 4,685 new planes in this class includes both turboprops and regional jets.

Bombardier has not released a new market forecast since 2001; although, one is scheduled for release in the next couple of months. Earlier this spring Bombardier began assembling a team to explore building a new regional jet family capable of carrying more than 100 passengers (CRAN, March 8).

Embraer

In its first market forecast, which blended an airline-by-airline survey approach with a macroeconomics study of the world aviation markets, Embraer estimates that 8,450 regional jets will be built by 2023 in sizes ranging from 30 passengers to 120 passengers.

The company expects that airlines will continue to deploy the 30- to 60-seat aircraft in the same strategic role - hub feeders. It expects the airlines will use the slightly larger 61- to 90-seat planes to add capacity in growing markets. These larger jets also will be frequently used to "right size" a market when the Boeing or Airbus airliner is no longer appropriate.

Embraer predicts the 91- to 120-passenger class will also be used on those markets served by older or inefficiently larger mainline aircraft. Although it sold its first 100 Embraer 190s to JetBlue nearly a year ago, the forecast does not project the larger plane being used for point-to-point service.

A larger portion of the new orders will actually be replacement orders. Embraer projects that nearly 2,000 regional jets will be retired over the next 20 years.

While Embraer projects that bulk of the new jets - regardless of the size - will be deployed in the United States and Europe, the Brazilian company estimates that the most significant growth will be in Latin America and China.

ATR

Over the next 20 years, France's ATR expects 975 turboprops - of all sizes - will be sold, said John Moore, president of ATR North America. About 80 percent of those orders will be in the ATR niche - 50 to 70 seats. Moore anticipates that two-thirds of the sales will be the ATR 72 model and the remaining third will be the ATR 42. However, he said, in any given year the customer preferences tend to flip back and forth.

The turboprop remains a much stronger player in Europe than it does in the United States. Last year, he said, 70 percent of the new orders from regional carriers were for turboprops. Business is picking up this year. The company has already sold 11 planes. It expects to announce a five-plane order in the near future to a new customer. The unnamed carrier will purchase one ATR 72 and four ATR 42s.

Bombardier

The Canadian airframe manufacturer reports that it now has 1,171 options on all classes of its regional jets and 91 options on its three models of turboprops.

Barry MacKinnon, vice president of marketing and airline analysis, said that its Q400 turboprop has taken on a new role - replacing jets on certain routes. In fact, 65 percent of the sales of the 70-seat turboprop have been used to replace or supplement regional jets. Another 30 percent were sold to replace older turboprops. On a 200 mile route, the Q400 is the only plane that can profitably provide the service, he said. A carrier would lose money flying either a CRJ 200 or a B737, he noted.

>>Contact: Sonjia Murray, SH&E, (617) 218-3500; James Higgins, Credit Suisse, (212) 538-3456; Embraer, (954) 359-3414; John Moore, ATR, (703) 736-4200; Barry MacKinnon, Bombardier, (416) 375-3937.<<