Holding Pattern

Makers of regional aircraft await the recovery
but move forward on programs

Unfortunately for manufacturers ofregional aircraft, the downturn in orders did not magically stop at the 100-seat barrier, the traditional—albeit increasingly elastic—demarcation line separating big and small commercial transports. Regional OEMs also experienced a challenging year in which both Bombardier and Embraer announced large workforce reductions and production cutbacks. Interestingly, whereas Airbus and Boeing actually delivered more aircraft in 2009 than in 2008 despite tougher market conditions, this was not always the case for their regional counterparts.

Embraer, for example, delivered 122 units last year, all of them 70/100-seat E-Jets, down from 162 in 2008, a figure that included seven ERJ-145s. Commercial aviation revenues fell 20.5% to $3.37 billion. It booked orders for just 27 commercial jets in 2009, down from 112 in 2008, according to ATW affiliate SpeedNews. At year end the company’s commercial backlog numbered 265 aircraft, all but eight of them E-Jets. Embraer expects to deliver 90 jets worth $2.6 billion in 2010 while new orders are projected to rise year-over-year as the market recovers.

Bombardier booked net orders for 38 regional aircraft (22 CRJs and 16 Q400s) in its fiscal year ended Jan. 31, 2010, down from 114 in the prior year (47 CRJs and 67 Q400s). Adding luster to the 2009 order book was the inclusion of 50 CSeries aircraft, but these are too large to be considered regional jets. The picture brightened considerably on the delivery side as the Canadian plane-maker handed over 121 units, up from 110 in 2008. Annual revenues at Bombardier Aerospace dipped 11.3% to $9.4 billion and total aviation backlog fell 29% to $16.7 billion. Bombardier sees further challenges this fiscal year, with commercial deliveries declining 20% year-to-year.

ATR actually enjoyed a stable 2009, booking orders for 40 aircraft versus 42 in 2008 and delivering 54 against 55 the year before. Revenue rose 8% to $1.4 billion. It expects deliveries to slip to 50 this year while revenue is maintained at the 2009 level. The company is currently in the process of certifying the ATR Series 600. The 42-600 made its first flight in March, following its larger sibling, which began flight testing last July. Both variants are set to enter service in 2011.

The newest player in the market, Mitsubishi Aircraft Corp., meanwhile, gained its first North American customer when Trans States Holdings signed an LOI for 50 firm and 50 option MRJs, with the version to be determined at a later date. Trans States can choose between the 76- and 88-seat versions. Mitsubishi continues to evaluate an “MRJ-100X” that would seat around 100 passengers, according to Kentaro Taki, president of the company’s North American operation.

The Japanese manufacturer is targeting the current lineup of large RJ products offered by Bombardier and Embraer. Both have enjoyed significant sales success, but broader entry into the US market for all three types likely will require further scope clause liberalization, which appears to be unlikely.

On the periphery are SuperJet International, the international sales and support company for the Russian-built Sukhoi Superjet, which has experienced delays in its flight test program, and COMAC’s ARJ-21 regional jet, which also is undergoing a relaxed flight test schedule. Neither aircraft is seen as making significant inroads internationally, at least not for several years, although home market demand could be strong. First delivery of the SSJ to Aeroflot is expected in mid-year.

Diminished Demand

The downturn of 2008-09 caused manufacturers to revisit projected demand levels for new aircraft. For Embraer, this resulted in a 10% reduction in forecast deliveries through 2018, from 2,950 to around 2,700, in the 30/120-seat market, according to VP-Market Intelligence Luiz Chiessi, who spoke at the recent SpeedNewsCommercial Aviation Suppliers Conference. Notwithstanding this, he said the current environment favors smaller aircraft, citing decreasing demand and yields and capacity cuts.

While seeing little near-term apetite for 30/50-seat RJs (fewer than 100 expected deliveries through 2018), the company is more bullish in the 70/100-seat markets where its E-Jets compete, with approximately 2,600 forecast deliveries in the 61/120-seat range. It identifies four “deployment profiles” for such aircraft: Right-sizing (such as Delta Air Lines and US Airways replacing mainline jets with E-Jets operated by codeshare partners on their rival East Coast shuttles), direct replacement for older-generation jets, natural growth and developing new markets. Within the E-Jet family, the E-190/195 has accounted for 535 firm orders, or more than 50% of total orders of 862 at year end. The E-170/175 family has generated 327 orders. Firm backlog at year end numbered 257 aircraft comprising 225 190/195s and 32 170/175s, plus options on another 722.

Embraer has taken a wait-and-see approach to moving into markets for larger aircraft, but that may be changing. At the end of March the company named Executive VP-Airline Markets Mauro Kern to the newly created position of executive VP-new programs-airline market, leading to speculation that the manufacturer is eyeing a new commercial aircraft program. Earlier this year, Kern told ATWthat the E-195 has limited stretch capability but he also said that the company is “not close to a launch decision” on any such program.

Bombardier already made that decision with the CSeries, an aircraft that is in the same size category as the 737-600/-700 and A318/A319 (ATW,9/09, p. 62) and that recently captured a major order from Republic Airways Holdings for up to 80. But it also is keeping active in the regional sector, with certification and EIS of the 100-seat CRJ1000 expected in the second half of this year, according to VP-Programs Benjamin Boehm. Backlog for the variant is 49 aircraft. Launch customer is Air Nostrum of Spain.

As of Jan. 31, Bombardier had delivered 1,554 CRJs with a backlog of 108 aircraft: 41 CRJ701s, 18 CRJ900s and the aforementioned CRJ1000s. Turning to turboprops, 959 Q Series aircraft had been delivered at fiscal year end, leaving a backlog of 75, all of them Q400s. It is also the most popular family member, with total orders of 363. In early 2009, Commercial Airplanes President Gary Scott revealed that Bombardier would move forward with a larger version of the Q400 with delivery possible in a 2013-14 timeframe, but the company has said little since.

Like Embraer, Bombardier sees little opportunity in the 20/59-seat market, with only 300 new deliveries and 2,600 retirements between 2008 and 2028. It projects that the market will shrink from 3,800 aircraft at the end of 2008 to 1,500 in 2028. In the 60/99-seat market it predicts 5,800 deliveries and 1,000 retirements, with the fleet more than tripling in size from 2,100 units to 6,900 units over 20 years.

The 50-Seat Conundrum

With the backlog for 50-seat RJs down to a handful of ERJ-145s and neither manufacturer anticipating a revival in orders, the question arises as to what the future holds for such aircraft. The answer is not simple. Bombardier and Embraer delivered more than 2,000 35/50-seat RJs and they continue to do yeoman service, especially in the US domestic market, where an estimated 1,200-1,300 are in operation. As has been discussed widely, a combination of factors, including rising fuel prices, falling yields and the narrowing gap between mainline and regional pay rates, have rendered these aircraft less economically attractive than at the beginning of the decade and majors are taking advantage of expiring capacity purchase agreements to remove them from the fleets of their regional codeshare partners.

Yet, “The reality is that the regional industry will still need such a jet or at least a viable alternative,” according to a recent study by the Oliver Wyman consultancy.

“The conventional wisdom is that the 50-seat jet has seen its day . . . However, the kind of ‘a ha!’ moment for us and our clients was when we asked, ‘Well, what are we going to do when these planes start to get kind of old in a couple of years?’” says Andrew Watterson, a partner in Oliver Wyman’s Aviation, Aerospace and Defense Practice and co-author of the study. He agrees that “there have not been a lot of new contracts awarded for 50-seat flying,” but he points out that “this is the bulk of what is allowed under scope clause agreements and what is right for these markets.”

There is another problem: Aging airframes. Watterson notes that the earliest RJs are now into their second decade of service and “are approaching the end of their design lives. To extend the lives . . . and to get certification from the manufacturers and the regulatory bodies would require additional modifications.” The process would be costly and likely would make the aircraft heavier, affecting fuel burn, and the airframes would require additional continuing inspections, increasing the maintenance burden. These factors “would make [them] a lot less attractive aircraft,” he says. Oliver Wyman estimates that more than 25% of the current 50-seat fleet—more than 500 aircraft—“will become eligible for replacement between now and 2014.”

Associate Partner Max Kownatzki, another of the report’s co-authors, notes that the industry is in unexplored territory when it comes to understanding the costs of keeping elderly RJs flying: “The oldest 50-seat jets out there are between 12 and 15 years old, so there is really no empirical data on how costs go up.”

Potential solutions exist but none of them are very attractive, say the analysts. Turboprops can work as substitutes in shorter markets but the economic advantages deteriorate over longer stage lengths that RJs routinely fly. OEMs could revive 50-seat production, but absent new technology the jets will continue to be economically challenged and OEMs may not want to cannibalize their other product offerings. An all-new 50-seat jet seems unlikely: Who would build it? Airlines could replace 50-seat CRJs with 70-seat aircraft configured for 50 seats but there is a unit cost penalty.

“The heyday of the 50-seater is behind us. But it’s not dead and that’s the problem. All the actors have been behaving as if it is dead, whereas in reality we are in need of a replacement solution,” Watterson concludes. But for the present, OEMs are looking up, not down.