Turboprop Successes Have Yet to Ignite Values

The year 2005 represented a remarkable turnaround in the fortunes of turboprop manufacturers, and this market adjustment helped to underline the long-held opinion among aviation experts that this aircraft type still has a role to play, albeit a lesser one than it enjoyed during its heyday.

The orders in 2005 were nearly quadruple those secured in 2004. A total of 151 orders were placed, compared with 45 in 2004. By comparison, the number of net orders for regional jets, including those for the new larger units, amounted to only 83. Bombardier [BBD] suffered the cancellation of 69 CRJ200 orders and Embraer [ERJ] the cancellation of seven orders for similar sized aircraft. The combined order total for 50-seat regional jets amount to only 11 units, all for the CRJ440. The 2005 turboprop orders need to be placed into the context of the 2,140 orders secured by Airbus and Boeing [BA] - a mere seven percent of the total - the same market share they had in 2004 when 638 orders were placed for the Airbus and Boeing products compared to 45 turboprops. In 2004, turboprops represented only 17 percent of regional jet orders but this year it rose to 180 percent.

The 151 turboprop orders were, however, clearly focused on the larger examples; 49 were placed for the Dash8Q-400 and 73 for the ATR72. The 151 orders compares to a total of 43 deliveries. Instead of the turboprop manufacturers having to virtually build to order and seek to survive on a meager 10-20 deliveries per year, there is now an opportunity to increase production and once again experience the benefits of economies of scale in higher production rates. ATR has already indicated that production in 2006 will increase to 25 units, rising to 40 per year in 2007 and 2008.

With the expectation that fuel prices will remain high, there is considerable optimism that the appetite for the more fuel-efficient turboprop will persist for a few more years. The turboprop manufacturers are hopeful that the orders in 2005 were the start of a new cycle for this segment of the industry.

The impact on values and lease rentals is less noticeable for the turboprops than it is for the mainstream narrowbody jets. Values of narrowbodies have experienced considerable weakness over the last five years, although the participation of the manufacturers in the used market has helped to maintain values of current variants. The interest in new turboprops is encouraging, particularly in the context of non-U.S. customers. Values of the ATR72-500 and Dash8Q-400 are now expected to exhibit stability, with the manufacturers able to increase the margin on new examples. The limited production rate of new aircraft, combined with the limited potential for product enhancement in the short term, should maintain interest in used examples of the same variants, allowing values to show a similar stability. Lease rates have also shown a measure of stability with a greater number likely being secured at rates toward the higher end of the quoted ranges.

The rise of the low-fare model dictates the use of aircraft with lower unit costs, which outweighs marketing advantages. In the mid 1990s, passenger preference for jets was placed on a pedestal after a series of high publicized incidents involving turboprops. Just as market studies in the mid to late 1980s suggested that 50-seat regional jets could be uneconomical in a low-yield environment, nearly 20 years later, market realities seemed to have validated those conclusions.