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Second coming

The regional fleet creates opportunities to boost feeder traffic and link smaller cities with major hubs. Keith Mwanalushi examines how the secondary market for these aircraft is shaping up
 

The regional aircraft landscape has seen some sweeping changes recently, perhaps the most dramatic being the sale of the Dash 8 programme from Bombardier to Viking Air Limited.

 

Experts expect continued growth in the regional aircraft market globally, supported by strong demands in emerging economies.

In terms of the used regional aircraft market, Juliet Hewitt, Marketing Director at Skyworld Aviation says such types are moving into new territories, primarily to Africa and Asia, and especially those countries without age restrictions on importation.

 

“Latin and South America is largely untapped by the used regional market, but is identified as a growth area and is slowly emerging as a potential market,” Hewitt observes.

The number of in-service aircraft has shrunk in every region worldwide except for Africa, Hewitt reports: “Both the European and US markets have shrunk by a third each. With the disposal of the Harbin fleet of ERJ aircraft in China, the Asian market has also reduced, giving rise to Chinese aircraft coming onto the market.”

One Chinese production ERJ has already undergone a work package to meet European standards and is now flying in Europe paving the way for more, and there are already several in Africa.

 

Regional One and Aerovision have also recently been responsible for reactivating many ERJ’s that have been in long term storage in the US, generating new markets with relatively new or smaller carriers in new territories. “As a consequence, the market is starting to tighten and is seeing an uplift in pricing. The African ERJ market is particularly interesting. The over-supply of ERJ’s in the US a couple of years ago has activated the African market significantly. 60 aircraft are now operated across 27 operators in Africa despite none originally delivered from the production line to this region. The market is still expanding,” Hewitt says.

 

Richard Jacobs, Chief Commercial Officer at TrueNoord, the specialist regional aircraft lessor, maintains that the largest regional aircraft market remains North America : “Here there is a static situation as average seating cannot grow further because scope clauses are not expected to move in the foreseeable future.” He says this rigidity of scope does however, mean that in order to provide sufficient capacity in the strong North American market: “some carriers have reactivated previously stored 50 seat regional jet capacity, but we do not expect this to become a longer-term trend since both increased fuel costs and the maintenance relating to ageing aircraft are likely curtail any continued growth in that segment.”

 

By contrast the European market is changing through the growth of contract flying, and the associated consolidation of the carriers providing that capacity, states Jacobs. He says a decreasing number of regional scheduled operators are selling their own tickets and they are flying for mainline carriers instead. While not yet as extensive as the long-term capacity purchase agreements prevalent in North America, where independent regional carriers typically provide capacity to majors, the European market is clearly evolving in that direction, he observes. “In order to supply the substantial capacity requirements needed by Europe’s mainline carriers most of these regional carriers need to build scale, and this has begun to lead to greater consolidation among existing incumbents. Inevitably, these consolidated regional carriers will absorb more capacity both new and used.”

 

In Asia, TrueNoord’s Jacobs sees that growth has been strong over the last decade with turboprops (+ATR in particular) the main beneficiaries to date. “Cost-efficient turboprops have become popular in connecting remote regions and islands with limited surface transport alternatives to both major conurbations and each other. As such, island nations such as Indonesia and the Philippines have seen strong growth. Similarly, large densely populated countries including India are experiencing regional airline growth partly because of government measures to encourage connectivity. It is also likely that strong opportunities for regional aircraft in China will emerge in the thinly populated western half where a substantial number of new airports have been built or are under construction. This market is very different to Eastern China, which is dominated by larger aircraft and high-speed rail investment,” he tells.

 

A very mature regional airline sector in North America is currently generating only limited opportunities for growth, but it seems the regional sectors in Europe and especially Asia are showing considerable dynamism according to industry observers.

 

Angus von Schoenberg, Industry Officer at TrueNoord, says contrary to popular belief, the US and EU has traditionally been the home for older aircraft. “This is combined with Australia and other remote area FIFO (Fly-in-fly-out) transport operations for natural resources. The EU PSO (Public Service Obligation) and US Essential Air Services are low utilisation operations that require low capital costs and thus older aircraft,” he notes.

“These operations will continue and as the current generation of older end of life aircraft are retired, newer used aircraft are likely to be deployed instead. As these are not typically operations that are likely to be replaced by alternative transport modes, the demand for this type of service will mirror local economic factors and, for FIFO, the fortunes of the industries they serve.

 

“With their higher utilisation and the prevalence of aircraft age limits in certain countries, the Asia Pacific market will absorb both new and younger aircraft,” von Schoenberg continues.

 

There have been several regional aircraft transactions in recent months. Earlier this year, Chorus Aviation acquired a portfolio of six aircraft with leases attached.  The portfolio consisted of two ATR72-600s on lease to Azul of Brazil, and four Q400s on lease to two other existing customers of Chorus Aviation Capital.  With these acquisitions, Chorus’ suite of leased regional aircraft has reached 40 aircraft, comprising 28 turboprops and 12 regional jets valued at approximately $850 million.

 

GKN Fokker Services also announced that 24 Fokker aircraft were placed in 2018. GKN say currently, approximately 400 Fokker aircraft are operational worldwide.

 

Skyworld too has seen some transactions on its books, more recently the sale of an ERJ 170 and associated spares to new operator of the type Air Botswana, lease placements of ERJ 145’s into Madagasikara Airways, and the sale of a Dash 8 Q400 to Magellan Aviation Services Limited. Skyworld also continues to manage a lease portfolio of aircraft. 

 

Skyworld too has seen some transactions on its books, including assisting in the sale of an ERJ 170 and associated spares to new operator of the type Air Botswana. Also, the sale of a Dash 8 Q400 to Magellan Aviation Services Limited. Skyworld was exclusively mandated to market the aircraft after its return from lease with LAM Mozambique.

 

Speaking of the Q400, Hewitt says Skyworld is observing the market for the type closely as the number of aircraft operating in Europe and the US depletes during the next couple of years: “Aircraft are likely to find their way into Africa where there is already an established Dash 8 presence, and given SpiceJet’s allegiance to the Q400, the Asian market for this aircraft is expected to grow.”

 

Hewitt says there are currently no active Q400’s in Latin and South America: “this creates a large opportunity for the Q400 if the asset cost is right.”

With a wider spread of build dates, a good supply of later builds, and a large lessor portfolio, Hewitt observes that ATR’s are also finding their way into new territories, particularly Asia and South America.

 

Regional operators and lessors face some challenges, including managing ageing fleets and corresponding maintenance costs, and the impact of volatile fuel prices. Hewitt says financing on new aircraft is inherently riskier in the regional market, but since lessors make up approximately 17% of current new order backlog across regional types, this is an accessible source of new aircraft for regional carriers, particularly the larger established operators.

 

Jacobs feels the market will have its limits. He says the current new technology aircraft are mostly at the larger end of the size spectrum and many are referred to as small narrowbodies. “This may hasten the complete displacement of the few remaining older generation larger regional jets such as the Fokker 100 and Avro RJs and have some limited impact on larger used E-jets or CRJs. As the global fleet ages, the former would most likely have been retired as engine life limits are reached. However, it is very hard to beat the economics of a (cheaper to own) secondary market aircraft, even though the new generation represents a step change in fuel efficiency.”

 

Hewitt reminds that smaller, younger carriers logically operate older fleets since they have a lower asset cost and their access to financing is limited. She says ageing fleets have triggered new markets due to low asset cost, which offsets increased maintenance costs with not so fuel-efficient aircraft.

“This has also triggered a new breed of niche lessors and lenders in the market willing to offer older aircraft on leases and finance arrangements with technical support.”

 

Hewitt feels one of the major issues that small carriers face in some territories however is the age restrictions placed on imported aircraft. “This is a significant hurdle for start-ups as well as smaller carriers who have little access to financing but are forced to buy newer aircraft. That said, over-supply of aircraft in lessor driven markets has triggered a more flexible approach to leasing and new markets are emerging.”

 

“With respect to the sub 90 seat segment, new technology aircraft are currently more limited until the E175 E2 and the MRJ come to market,” Jacobs sees. “In the turboprop segment the greater concern is the lack of new technology,” he observes.  “Large turboprops are already highly efficient, and no OEM is currently able to offer a step change in engine technology. Meanwhile, the fleet continues to age particularly below 70 seats where, apart from the ATR42-600, no OEM can offer either a current or future generation aircraft.”

 

While larger airframe OEMs and their engine suppliers have to date focused on significant incremental improvements, it seems likely that the smaller market will be the first to benefit from electric or hybrid technology.

 

“In the short-term this may even be holding back future technology as OEMs hesitate to launch a conventional new technology regional aircraft that may be obsolete within 10-15 years unless it can fill a proven niche,” Jacobs concludes.


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