Regional aircraft manufacturers: an uncertain future? May 1998

Regional aircraft manufacturers have had a tough time recently. Here Richard Aboulafia from the US–based Teal Group takes a close look at the state of the industry and considers its prospects.

Historically, the regional aircraft manufacturing market has been a gruesome battleground with too much competition and a lot of government intervention. If the economics of the commercial jet business were twisted, the economics of regional aircraft were completely sprained. Given the number of producers, there was little hope that any of them could make a profit. To the manufacturers, market share was more important than profit anyway.

Efforts at rationalisation were problematic. Bombardier bought Shorts to prevent a competitor to the CRJ, but it didn’t prevent Brazil and Indonesia from developing their own regional aircraft. There were few barriers to entering the market.

On the other hand, the past three years have seen companies more willing to merge their regional aircraft operations and to kill money–losing programmes. British Aerospace joined ATR to form AIR, pooling marketing, sales and aircraft support resources. This move, finalised in early 1996, got rid of the disastrous ATP/J61 programme. The money–losing Jetstream followed it last year. However, AIR itself was dissolved in late April, following the partners’ disagreement on whether to proceed with a 70–seat jet (ATR was for the project, BAe strongly against).

In early 1996, DASA got rid of Fokker and its $2.5bn debt, killing the F50 — another failed follow–on. DASA is also looking to dispose of Dornier. In April 1997 Fokker delivered its last few aircraft, including the hopeless F50 and the promising F70. CASA, hoping to concentrate on its military transports, abandoned its ludicrous 3000 proposal. And in a sure sign that things are changing, Saab decided in 1997 to exit the market by the end of the century.

Countries around the world are privatising their state–owned companies, or heading in that direction. And, private businesses throughout the world have decided to follow the Anglo–American model and put profitability ahead of volume and market share. Regional aircraft production is mightily unprofitable. The rational and modern thing to do is abandon new production and turn attention to more profitable after–market support activities plus jetliners, fighters and business jets.

This situation makes alliances problematic. Without a willingness to fund the AIR Jet, AIR became little better than a loose collection of programmes with mixed futures. ATR, Embraer and CASA could join forces, but this would mean exactly nothing unless all the partners wanted to spend their own money on new product development. And these days a regional aircraft division is very unlikely to get several hundred million from a profit–minded corporate parent.

Any new players?

The old way of doing things still prevails in some places. Despite the Asian economic catastrophe, some governments still believe they can confidently direct their nation’s economies by command. And the phrase "national aircraft programme" still has a lot of charm.

The countries that avoided disaster in Asia, most notably Taiwan, had the least interest in national transport aircraft. There’s a strong lesson here. On the other hand, if IPTN had to rely on private funding it would close up shop overnight.

So, few new players look set to enter the market. After IPTN, the only potential new entrants are India and Turkey, which have vague (and probably doomed) plans to build turboprops. Most of the Asian aerospace wannabes are looking to start with something bigger, usually a 100–seat jet. And they're doomed too.

Given the relatively low level of US government involvement and support in the aerospace industry, it isn’t surprising that very few regional aircraft are produced in the US. Boeing lost money on each plane built by DHC, even when the subsidiary had a full order book. DHC was only viable after Bombardier acquired it, with a lot of Canadian government support.

This left Fairchild and Raytheon (Beech) as the only US regional aircraft manufacturers. Fairchild is only able to stay alive with indirect subsidies, such as US military aircraft purchases, and DASA paying them to take the old Dornier programmes. Beech keeps the 1900 alive due to commonality with its successful King Air business aircraft line (and more US military aircraft purchases).

However, if Fairchild succeeds in making Dornier’s 328/428JET programmes profitable, the US will have an important regional family. And if this succeeds, Raytheon could take heart and develop a family of regional jets from 30–80 seats, using composite fuselage technology developed for the Premier One business jet. The next century could therefore see a very different regional aircraft industry in the US.

Any new aircraft?

A new aircraft may not be seen for a very long time; it costs a lot to build a new jet. Fairchild’s $560m figure for 728JET development is an amusing fantasy — compare it with AIR’s far more reasonable $1.2bn figure for the AIRJet. Both would have new wings and fuselage and are in the same class.

Given the market, a new jet would have to sell for around $20m per plane. If anyone can build them for that (slightly less, actually), it would still take a 500–unit production run to amortise development costs. This assumes some benign government or corporation provides seed money. These numbers reinforce our pessimism. Regional aircraft programmes are very lucky indeed to sell 500 aircraft.

This is why the regional jets out there are not all–new. The CRJ is an elaboration of the Challenger bizjet. The Emb–145 uses the Emb–120 fuselage. The Avro RJ was designed decades ago as the HS 146, for largely military requirements and with UK government funding.

That leaves simple stretches — the 428JET, for example, is quite doable, and has been accounted for in the 328JET numbers below. As a result of these trends, there’s good and bad news. The good news: we are headed in a more rational (and therefore sustainable) direction. No more Saab 2000 total market disasters. The bad news: fewer cool new planes. No more Saab 2000s.

The only exception is the Boeing 717, Boeing’s misguided attempt to revive Douglas’s MD–95 has been accompanied by talk of downsized 70–80 seat versions. This product is largely off–the–shelf, so we have no problems with it reaching the market. But Boeing would have to sell it at a loss–making price, with cost guarantees that compensate for the high operating costs of downsized 122–seat jets. And the airlines would have serious trouble with their unions, which would not accept a DC–9 version flown by low–pay regional subsidiary pilots. So we don’t see a regional 717 version either.

Will turboprops survive?

The regional jet menace first reared its threatening head in the late 1980s, when Canadair’s RJ programme began. Pundits began to see a regional transport industry transformed by the arrival of 40–80 seat jets. However, in the early 1990s the RJ order book collapsed, the programme lost steam, and several competing programmes fell by the wayside. The jet menace evaporated and smiley faces prevailed at ATR, DHC and other turboprop makers.

But the jet menace came back. The CRJ has become very successful. And while some of the competing programmes stayed dead, Embraer managed to snatch defeat from the jaws of victory and in late 1996 delivered its Emb–145 to Continental Express.

There are over 340 regional jets on backlog, and they aren’t just 50–seat designs. Canadair has launched its CRJ–700, a 74–78 seat RJ stretch. Embraer has launched its Emb–135, a 35–seat version of the -145. Fairchild Dornier is desperately trying to reinvent its 33–seat 328 as the imaginatively–named 328JET.

Is this the end for the turboprop? The market is over–reacting: on some routes, turboprops will always have an advantage, and at present relatively little is known about the economics of flying regional jets. Right now, a few carriers are buying smaller jets because they want to promote themselves as an all–jet airline.

Will passengers and operators pay more for a 30–40 seat plane with turbofans, even if it flies only 250 mile routes (the average US regional airline trip length is around 230 miles)?

Also, regional carriers may find their enthusiasm for jets dampened if the majors stop giving them new routes, or if unions keep their scope clauses in place.

Finally, the turboprop numbers are far from grim. There were 54 ATR42/72 and 43 DHC–8 orders in 1997. That’s not bad. The only turboprops in trouble are the big ones: Saab’s dying 2000, DHC’s misguided Dash 8–400 and ATR’s 72 have been hit hard by jets, although the latter plane has never tried to go directly up against the jets, and looks set to pull through. The other dead and dying turbofans — Saab’s 340, AIR’s Jetstream 41 and Fokker’s F50 — were never profitable and are the victims of rational corporate decisions.

State of the market

If you ignore their finances (as everyone does), 1997 was good for regional aircraft manufacturers. According to the Teal Group, total turboprop orders in 1997 came to a surprisingly respectable 204 aircraft (slightly more than Aviation Strategy’s estimate of sales — see March issue). But jets really took off, with orders for 326 planes, including 32 Avro RJs, 156 CRJs, 121 ERJs (as the Embraer jets are now called) and 17 328JETs.

Some historical comparisons: orders in 1996 came to 216 turboprops, plus 150 regional jets. That was comparable with 1995, an equally good year, when 341 regional aircraft were ordered, and 1994, with 337 regional orders. By contrast: only 92 turboprops and 40 jets were ordered in 1993.

Regional aircraft deliveries in 1997 continued at a healthy level, with 201 turboprops and 119 jets, including 31 ERJs, 61 CRJs and 22 Avro RJs.

Looking into the future, the Teal Group is forecasting that the regional aircraft industry will produce 1,324 jets and 1,553 turboprops worth a total of $40.37bn between 1998 and 2007