"Eastern" Regional Jets Have Potential to Upset Residuals

SSJ Roll-Out & First Non-Chinese ARJ21 Order Place Pressure on West

The imminent roll-out of the Russian Sukhoi Superjet 100 and the development of the ACAC ARJ21 have the potential to place considerable pressure on existing products such as the Bombardier CRJ900 and Embraer 190/195 should the new "Eastern" aircraft gain the Western credibility that they crave.

The Sukhoi Superjet 100, previously known as the Russian Regional Jet, has finally been built and rollout is due in a few weeks time. The first flight is due by year end with certification following by October next year. The Superjet 100 is available as either the 100-75 75 seater or the 100-95, 95 seater. A 60-seat version was originally considered but has since been cancelled. A larger capacity example is being considered but anything more than 110 seats would then compete with one of the projects major supporters, Boeing. Both the 75- and 95-seat variants are offered with long range options. Boeing provides such services as market planning, certification, customer support and project management. The Superjet is powered by the all new SNECMA SaM146 engine which is due for certification in some six months. The engine is scheduled to remain on the wing for 16,000 hours before first removal, a far cry from the days of Soviet engine building which saw engines being scrapped after only a few thousand hours. The airframe has a design life of 70,000 hours and 70,000 cycles which compares very favorably with Western competition. Four aircraft are scheduled to take part in the flight development program.

The Superjet 100 clearly views the Bombardier CRJ700/CRJ900 and Embraer ERJ170/190 as its competitors although the 70 seat Antonov 124 is also considered a target. While Russian plans to compete on an equal footing with Western aircraft have come and gone, the Superjet 100 has the potential to at last become a viable player, offering a third alternative for operators seeking a larger regional jet. Funding has come from the Eurasian Development Bank and the European Bank for Reconstruction and Development. The Superjet has been designed not only to offer lower operating costs than the Embraer or Bombardier offerings but also to gain Western certification. European EASA certification is due in October 2008. The aircraft is also designed to meet FAR-25 requirements and fully complies with the Chapter 4 standards that came into force in October 2006.

To date the Superjet has secured 71 orders. Ten orders were secured from ItAli Airlines of Italy for the 95-seat version earlier this year indicating that the aircraft is already set to become a feature in the West. The aircraft is also reportedly of interest for service by SAS and Malev as well as two Western leasing companies. An Indian airline is also expressing interest in the aircraft. Such orders would normally have been secured by Bombardier and Embraer. However, S7 Airlines recently cancelled an order for 50 SSJ 100 aircraft. The production of the Superjet 100 is scheduled to increase to 35 as of 2009 with perhaps as many as 70 per annum in the years thereafter. The anticipated market for the SSJ 100 is projected to be 1000 over 20 years. As with other regional aircraft programs, operators in this sector prefer to wait for the aircraft to become a reality before placing orders. Sukhoi expects production of 300 to breakeven.

While the performance of the Superjet 100 aims to surpass that of the Bombardier and Embraer offerings, the pricing of the Russian aircraft is also of crucial consideration. The list price of the Superjet 100-95 is quoted as being just under $28 million. This represents a considerable saving compared to the list price of nearly $35 million for the Embraer 190 and a similar amount for the Bombardier CRJ900. The 70-seat Antonov AN-148 has an even more attractive price of around $20 million. While Embraer and Bombardier are offering modest discounts, the Superjet list price of $28 million is likely to be heavily discounted such that a price of $20-24 million is possible depending on order quantity and the nature of financing. The discounting is no longer a function of poor quality and lack luster interior equipment. Instead, the ability to offer a lower price is a function of lower labor costs. Discounting should produce a lease rate of perhaps $170-190,000 per month which compares extremely well against the $240-260,000 being paid for a new ERJ 190. With possibly better operating costs than the competition albeit with only a burgeoning support infrastructure, the SSJ 100 would still seem to represent a viable competitor to the Embraer and Bombardier products.

The residual values of the Embraer and Bombardier regional jets are largely based on the expectation that they will remain the leading protagonists for the medium to long term. Projections that extend for 10, 15 and 20 years will have to possess a greater appreciation that competent and even superior products are emerging to challenge and upset the status quo. Once the SSJ enters service, and support is proven, then residual values of existing products such as the ERJ170/190 and Bombardier CRJ700/900 need to be reassessed.

The expansion of regional jet products is not confined to Russia. Although the Japanese MRJ90 is scheduled to enter service in 2012, the AVIC I Commercial Aircraft (ACAC) ARJ21 is much more advanced with flight testing due to begin within six months and certification in the latter part of 2009. The ARJ21, however, makes use of the jigs used for the Chinese built MD90 program and therefore the structure, in terms of fuselage diameter and other features, has similarity to the U.S. product. The ARJ21 is again powered by Western engines in the form of the CF34-10A that are used on the ERJ 170/190. The ARJ21 has the type of performance that will make it a viable competitor in other regions. The ARJ21 has just received its first order from a non-Chinese customer. The order from Lao Airlines for two ARJ21-700 should see delivery in 2010. While further orders from non-Chinese customers will be needed to validate the relevance of the type outside of China, the ARJ21 has considerable merit. The list price of the ARJ21 is reportedly $30.5 million, compared with the $35 million for Western products. However, the company is offering substantive discounts which again suggests that the selling price will be less than $25 million. Initial production rates of 11 are projected rising to 50 within a few years.