The value of regional jets have fluctuated over the last several months along with the dramatic fuel costs experienced earlier this year. But, their value may be recovering as fuel prices abate. However, that does not mean the 100+ 50-seaters spun out of fleets will return to major carrier route maps. It just means that airlines may slow their regional fleet renewal plans as long as fuel prices stay low.
In dispatches from Regional Aviation News’ sister publication Aircraft Value News, Editor Paul Leighton suggested in October that operators may need to reassess their fleet plans in the favor of the RJ.
With the fall in the price of oil to around $50 a barrel, the 50-seat regional jets seemed to have been saved from a premature end, said Leighton, who noted, however, airlines have become conscious of the risk associated with operating the type in a high-fuel-cost environment.
Airlines dropping smaller RJs is not unique to the U.S., according to Leighton, who noted that Lufthansa’s Citiline, a long time operator of the 50-seat CRJ 200 intends to reduce its fleet from 22 to only eight by 2010. This also means a 20 percent reduction in the workforce. Citiline cited increasing costs for the withdrawal of 14 aircraft. The carrier already operates a further 20 CRJ 700s as well as 12 CRJ 900s. Lufthansa has increasingly been moving towards larger regional jets which offer better seat mile costs. This disposal of 50 seaters is expected to be followed by other operators in the short term though few can afford replacements in the current climate.
Last week, Leighton said that values of the 50-seat regional jets have experienced a material fall during the course of the last 12- to-18 months as a consequence of volatile fuel prices and declining traffic. The fall in the price of fuel had appeared to offer a respite as operating costs plummeted, allowing operators to continue operations rather than seek replacements. While the slump in values has been halted, this appears to be a temporary phenomenon. The age profile of a large proportion of those in service will also become an issue in the coming years. With production having effectively ceased except for in China, adding to an existing fleet requires the acquisition of used aircraft, not necessarily a desirable course of action for some operators.
The economics of smaller regional jets, those with 50 seats or less, start to falter when the price of fuel increases beyond a certain limit, he pointed out. The first of the modern generation of regional jets, the CRJ100, was introduced in the early 1990s when the price of fuel only approximated 50 cents a gallon, a far cry from the peak of nearly $4 a gallon in August. With yields having failed to keep pace with the rise in the price of fuel, many operators have turned their attention to alternative equipment, notably the larger regional jets and turboprops.
The concentration of 50-seat regional jets in the U.S., which has seen a notable reduction in traffic amid a significant rise in the price of fuel, undiluted by a weakening dollar, has resulted in operators seeking to divest themselves of such uneconomic equipment. While actual availability has remained relatively muted, the intent to seek replacements in the coming years has been sufficiently real to see a marked reduction in values of 50-seat regional jets, a trend that was expected to continue.
But replacing the RJ may be problematic, said Leighton. The very operators that have been anxious to replace 50 seaters are perhaps the airlines that are unable to find cost-effective funding to finance replacements. Some estimates such that the 50-seat regional jets become less economic to operate and retain when oil rises to more than $80 a barrel. With oil prices fallimg below $50 a barrel, the impetus for replacement may have lessened, at least for the moment. Just as nearly $150 a barrel was seen as a spike, so too may prices of below $70 be viewed as temporary. Indeed, the International Air Transport Association is pegging the average fuel price next year at $60 per barrel, closer to historic norms.
OPEC has a greater ability to cut production than it is has to increase production, wrote Leighton. Consequently, the lower oil price will provide some respite for operators but with a change in the structure which sees a demand for longer range, larger regional jets, able to offer point to point services rather than feeder traffic, the problems facing the 50-seat regional jets have far from disappeared.
The smaller regional jets face a double whammy, he said. Relative operating inefficiency, as a consequence of higher fuel pricing, is being exacerbated by increasingly weak economic conditions making even short-haul travel less attractive.
The values of the larger regional jets have remained stable. This sector has traditionally been dependent on manufacturers taking a more significant risk in developing the type and then waiting for larger scale orders to emerge once full production has started. The CSeries may have been launched but there have been few if any launch orders.
As for turboprops, Leighton reported that orders, which have been recovering since 2005, are abating. The turboprop manufacturers may have secured notable new orders during the course of 2007 and even though this year has failed to live up to expectations, values for most turboprops remain undaunted.
The first six months of 2008 saw turboprop orders fall by a considerable proportion. The first half of 2007 saw over 130 orders being placed, with ATR and Bombardier splitting the honors. In terms of production, only 48 turboprop deliveries were made, thus ensuring an extension to the backlog. For the first six months of 2008, the order tally fell below the 46 deliveries, numbering only 38 in total. The majority, 30, were placed for the Q-400. Such a fall in new orders should have had had an impact on the backlog but such has been the previous interest in the ATR 72 and Q400 that ATR has the equivalent of three-year’s production and Bombardier two years. The backlog of turboprop orders has therefore marginally increased.
The situation of the turboprop manufacturers is far removed from that of three years ago when a backlog was something of a luxury and aircraft were virtually being built to order. Production rates, at that time, were on the cusp of being uneconomic.
The seeming lack of orders for the ATR72 and Q400 is owing to a number of factors. Both manufacturers are pursuing a new generation of turboprop in one form or another. Principally, both are seeking a larger version of existing models which will feature seating for 90 instead of the current 70-75. Customers may therefore be waiting to see the designs and timing of such aircraft instead of placing orders for current versions. With the turmoil in the financial markets potential customers may be finding difficulty in securing finance for new aircraft. While operators are still able to fill aircraft, the volatility in the price of fuel is still a consideration and operators continue to impose surcharges which can limit any growth.
Regardless of the negative pressures, values of turboprops have been able to remain stable, contrasting with the mainline jet sector which continues to see weakness. However, in the event that the backlog slips to the equivalent of a year then there may be cause for reassessment, particularly as new products will be that much closer to service entry.