Asian regional jet market remains on slow simmer

 - September 21, 2006, 6:33 AM

Slower-than-anticipated growth of regional air transport markets in Asia has apparently reached the consciousness of market prognosticators at Embraer, whose latest 20-year forecast for deliveries of small commercial jets reflects a less optimistic outlook for both China and the rest of the Asia-Pacific region.

Since the company published its last world market forecast for jets that seat between 30 and 120 passengers in November 2004, relatively anemic sales, particularly for the 50-seat ERJ 145s built by the Harbin-Embraer Aircraft joint venture in China, have prompted a modest but unambiguous reassessment of the market. In its latest outlook, released during the Asian Aerospace exhibition in Singapore in late February, Embraer now projects a 20-year demand for 1,000 jets in the region, compared with the 1,100 it predicted only a little over a year ago.

Nevertheless, Embraer continues to sound an upbeat tone and insists all the conditions for a regional aircraft renaissance remain in place. It still believes that well over half of its projected 20-year demand in the 30- to 120-seat range will come from China, where by the start of last month the Brazilian airframer and its partners had delivered only 18 jets. “[China’s regional air transport system] has indeed developed over the last few years with less intensity than expected…,” conceded Embraer executive vice president Fred Curado. However, he added that “the fundamentals are still there,” and he wouldn’t admit to any second thoughts about the company’s investment in the partnership.

“It is of public domain that the Chinese government remains firm in its strategic vision about fostering regional air service as an important means for the growth and integration of the country,” said Curado. “There are studies under way on how to further incentivate [sic] regional air travel, which clearly reassures [us of] their seriousness about this matter…We plan our presence in the country [with] a long-term perspective and will keep working hard to solidify it.”

Of course, so will Embraer’s competitors, as Bombardier has demonstrated with its spares depot in Beijing, a customer support organization in Shanghai and a CRJ training center in Qindao. Meanwhile, Shenyang and Xian Aircraft make landing-gear doors for both the CRJ and Q Series and, according to Bombardier Aerospace vice president of marketing and communications Trung Ngo, the Canadian company “certainly [has] the intent to see if we could look at additional work.”

Most recently, Bombardier appointed Taikoo (Shandong) Aircraft Engineering (STAECO) of Jinan, China, as its first recognized heavy maintenance service facility in the Asia-Pacific region, allowing the Chinese company to perform C checks, modifications and upgrades on CRJs.

As seems the case with Embraer, however, Bombardier hasn’t yet seen its investments yield the level of returns it envisioned a few years back. All told, Bombardier’s seven Chinese airline customers together fly just 36 CRJ-series regional jets and a pair of Q400 turboprops, while CR Airways of Hong Kong flies a pair each of CRJ200s and CRJ700s it recently bought used.

Capacity Restrictions

Given all the hype China’s meteoric economic growth has generated, one might expect to see more regional jets flying the country’s burgeoning middle class between secondary cities and bustling business centers. Unfortunately for Embraer and Bombardier, airports in big cities such as Beijing, Kunming and Shanghai simply don’t have the capacity to lift restrictions on commuter operations, and network development planned for central and western population centers remains slow to materialize.

Only the Chinese know exactly why, but Trung suspects the comparatively slow progress has more to do with preoccupation with more immediate priorities than any shift in policy. The Civil Aviation Administration of China (CAAC) has acknowledged that the explosive growth in mainline networks has resulted in a shortage of pilots and other technical personnel along with “inadequate management and control.” Before it shifts its attention to developing regional networks with 50- and 70-seat jets, perhaps China’s air transport authorities want to first address the structural deficiencies of the network already in existence.

“It’s a very valid question and we ourselves are struggling with it,” said Trung. “We are certainly of the view that with the [projected demand] numbers being as big as they are, clearly there is opportunity for imports as well as locally built [airplanes.]”

Meanwhile, at the southern epicenter of Asia’s air transport boom, India faces similar infrastructure challenges. However, its growing cadre of private airlines has no choice at this point but to focus on domestic services because the government still restricts international flying to state-owned Air-India and Indian Airlines. As a result, the likes of Kingfisher Airlines and Air Deccan have vigorously pursued regional network development, while they wait for the government to open international services to competition.

To the delight of that circumstance’s chief beneficiary, the so-called turboprop avoidance factor does not compute in India, as last year’s sales performance by Franco-Italian airframe builder ATR demonstrated so plainly. Just last month Kingfisher took delivery of the first of 35 ATR 72-500s on firm order, marking its induction into a growing club of Indian ATR operators that includes Air Deccan, Jet Airways and Alliance Airlines. Bangalore’s Air Deccan, which as of late February flew 18 ATR 42s and 72s, early last year ordered 30 new ATR 72-500s, launching a banner sales year that saw ATR sell 90 airplanes–its best performance since 1989.

Meanwhile, regional jet makers have seen more modest success on the subcontinent, where so far only seven 50-seat Bombardier CRJ200s fly with domestic carrier Air Sahara and a pair of 70-seat Embraer 170s fly with Coimbatore-based startup Paramount Airways. However, Paramount has also signed a lease deal for three Embraer 175s with GE Commercial Aviation Services and soon plans to order a mix of 15 Embraer 175s and 195s from the manufacturer.

Elsewhere in the Asia-Pacific region, markets such as Australia and Japan have generated a steady trickle of sales activity, mainly for Bombardier, which early this year delivered to Qantas the first of seven Q400s and just last month sold three Q300s to Australia’s Coastwatch. Bombardier recently reinforced its market-leading position in Japan as well, signing Japan Airlines to a single 50-seat CRJ200, Kagoshima’s Japan Air Commuter to a 70-seat Q400 and Ryukyu Air Commuter of Okinawa to a Q300.

For its part, Embraer so far this year has managed to wrest a single order for five Harbin-built ERJ 145s from China Eastern subsidiary Wuhan Airlines. Capable of building 24 airplanes a year, the Harbin-Embraer assembly line had nearly cleared its entire backlog by the time of the order, however, as China Eastern Jiangsu awaited delivery of its last pair of ERJ 145s. Apart from the 15 Embraer airplanes operating in mainland China, including a single Legacy business jet, three Embraer 170s fly with Hong Kong Express from Chek Lap Kok Airport.