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Monday, January 14, 2008

Teal Report Suggests Flat RJ Market

Despite the possibility of three new entrant regional jet programs from Japan, China and Russia, the Teal Group indicated that the growth of the regional jet marketplace has flattened and will remain so unless some catalyst changes regional/network dynamics as it did in the 1990s and early 2000s.
“Although the market has stopped shrinking, the most likely forecast scenario offers a flat market, a far cry from the great days of 1997-2001, when the industry went from $4.5 billion in deliveries to $7.7 billion in deliveries,” said Teal Group Vice President-Analysis Richard Aboulafia. “The arrival of Embraer’s ERJ 190 helped stabilized the market at a plateau of around $7 billion in annual deliveries (with a possible up-side if the 100-seat market finally takes off, or if prop demand returns in the North America market). We also expect Bombardier to upgrade its CRJ700/900 family, following on to its launched CRJ 1000 growth derivative. This will help maintain demand for Bombardier’s RJ products as Embraer’s new family grows in popularity.”
World Military & Civil Aircraft Briefing, suggests that new entrant aircraft – the AVIC I ARJ 21, Japan Aircraft Development Corporation's (JADC) 80/110-seat YS-X regional jet, and the Sukhoi SuperJet 100 – would be far better off tapping into the lucrative aircraft support, subcontract and maintenance markets because they are entering an already competitive regional aircraft market that is no longer growing. In addition, World Trade Organization agreements now require that governments allow their airlines to choose their aircraft without regard to aircraft nationality. He pointed out only one new manufacturer – Embraer – has achieved success aircraft manufacturing sector in over 40 years.
“The regional market is set to remain a near-duopoly, with Bombardier and Embraer as the only major players,” said Aboulafia. “ATR as the only definite minor player, and several new entrant hopefuls have mixed prospects.”
Changing dynamics could include major carrier operation of larger ERJs, something Embraer has been attempting for several years, only making headway with JetBlue and USAirways. Aboulafia indicated, however, the Embraer and Bombardier jets have higher seat-mile costs than Boeing and Airbus products, compounding scope restrictions.
He suggested JetBlue and USAirways are anomalies, given the fact that erosion of the hub-and-spoke system has a long way to go, and USAirways scope freedom, which gave it carte blanche to move routes to regionals as it sees fit. USAirways enlisted its regional partner Republic Airways Holdings to fly its new, larger Embraer jets.
“Regionals have been stymied by the perseverance of scope clauses,” he said. “While pilots have allowed basically unlimited use of 50-seat jets, and increasingly unhindered use of 70-seat jets, the line has been drawn at 90-seats. However, there could be scores of new thin routes to be developed using efficient new jets. But the jury is still out on this experiment, and [JetBlue’s] first two quarters were not particularly promising.”
“The only evidence we have is Air Canada, which has ordered 45 ERJ 190s (plus 15 ERJ 175s),” he said. “This too looks like a unique set of circumstances, based on extreme airline weakness and an unusual market situation (a European-style flag carrier with international route dominance and US-like domestic feeder route geography). Without the stimulant of new equipment, the large regional jet market is hostage to existing market dynamics, and the market is peaking.”
Aboulafia suggested that it all depends on the 100-seat market, even as he doubted Bombardier would launch its proposed 110- to 130-seat CSeries. Otherwise, all historical precedent – the Fokker 100 and BAe 146 – provided dismal lessons.

Impressive increases in large RJ deliveries over the past three years isn’t enough to compensate for a deflating small RJ market, according to Teal Group. 2005 was the first year since 1995 that these larger regional jets (70-100 seats) constituted a larger market than 30- to 50-seat jets. In 2005, the small RJ market saw deliveries of 116 jets worth $2.3 billion; their larger cousins comprised 137 deliveries worth $3.4 billion.

Teal noted the turboprop comeback. “ATR, with its 42/72 and Bombardier, with its Dash 8, booked more than 400 orders,” said Aboulafia, adding that deliveries will rise above $1.6 billion this year, with about $1.8 billion planned for 2008, the highest level since 1997. “By comparison, the prop market was typically worth about $3.5 billion in annual deliveries before 1992 translated to 2007 dollars,” he said. “While 50 percent of the market’s peak sounds low, a few years back there were serious doubts that both of the surviving prop manufacturers would be around by 2008.”
Much depends on fuel prices to sustain the turboprop boon, making future prospects uncertain, given the fact that the majority of orders have come from emerging markets in India, China and Africa. He pointed out, in North America, only a handful of airlines, albeit large airlines such as American Eagle, operate ATRs and Horizon and Pinnacle operating the Q400 on behalf of Alaska and Continental, respectively.
“Turboprop competitiveness could be further enhanced by stretched versions of the current models,” he said. “Bombardier has been exploring a larger Dash 8, which would be particularly attractive from a seat-mile-cost standpoint, especially if fuel stays expensive. Manufacturers have embarked upon ambitious cost-cutting strategies, with extensive outsourcing plans. ATR is moving airframe work to Romania and China. Bombardier is also focused on moving Dash 8 work to China, with Shenyang Aircraft tapped in July to build Dash 8 Q400series fuselages.
For a copy of the Teal Group’s World Military & Civil Aircraft Briefing click here.
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