Market for 50-seat jets spirals into a tailspin

 - November 1, 2006, 9:51 AM

Industry developments have conspired to depress the 50-seat jet market to its weakest position since the late 1990s. Backlogs have shrunk to their lowest levels in years, and the latest deal struck by Independence Air to return another 24 CRJs to their lessors hasn’t helped matters. Although the move hasn’t exactly crippled the market–not a huge number of used 50-seaters sits idle–it certainly didn’t raise hopes that they might soon find a use outside their traditional niche, and perhaps regain some sales momentum.

“Independence provides a pretty good cautionary tale,” Teal Group vice president Richard Aboulafia told AIN. “Not every regional hub-and-spoke feeder can reinvent itself as a point-to-point [carrier]. So to a certain extent that’s kind of an endorsement of business as usual.”

Although some would rightly argue that Independence Air’s need to shed its 50-seaters stems more from its decision to pursue a low-fare strategy than any inherent deficiency in the airplanes, no one can deny the numbers. Sales of 50-seat jets have plummeted, and the market shows no sign of a rebound.

Most agree that more emphasis on point-to-point service and fewer opportunities for hub-and-spoke development have both contributed to the shrinking backlogs. But Embraer commercial vice president Fred Curado attributes most of the trend to an old nemesis.

“There is one answer that will answer 90-percent of the question, and that is scope clauses,” said Curado. “If you asked anybody 10 years ago what would be the market size nobody would have ever foreseen 2,000 jets. The growth of the ’90s and early 2000s was very much driven by the scope clause restrictions. Now just about everyone can fly 70-seaters. In some cases–US Airways, for example–carriers are going to fly 76-seaters and try to push it even farther to 90 seats.”

Curado didn’t discount the role of shifting network structures, however. “The hub-and-spoke system clearly grew so dramatically it has reached a saturation point,” he said. “I am not one of those guys who believe the model is dead; I think hub and spoke will always be there in our lifetime, but maybe not with the same power as before. Today you already are seeing several applications of 50-seaters in routes of two hours, two-and-a-half hours, which is a clear indication that there is a movement toward point-to-point flying. Is that a panacea? No. It’s moving toward a better balance.”

Meanwhile, as oil prices again top $50 a barrel, the practice of using RJs to fly such short segments simply to match equipment flown by hub-raiding competitors looks even more untenable. Alas, the era of unbridled growth of the small RJ market appears to have run its course, and, depending on what happens to the likes of Delta and United, things could turn from bad to worse.

“A Delta bankruptcy certainly would have been very bad, and still might be very bad,” said Aboulafia. “The problem is [the airline that moves into its territory] might be a point-to-point carrier. I mean, Delta was decent at fending off the predations of JetBlue and whatever, but if it was bankrupt its ability to do that might be curtailed.”

Although the past few years have seen a progressive decline in enthusiasm for 50-seat jets, the downward spiral really caught the attention of the industry when American Eagle canceled deliveries on 18 Embraer ERJ145s last year, a move generally considered a reflection of a wider trend. Until it announced that its Chinese joint venture, Harbin-Embraer Aircraft, signed a firm order for five airplanes in late March, Embraer hadn’t announced the sale of a single airplane from its line of 37- to 50-seat jets since Trans States Airlines converted an option for seven and Luxair signed a “commercial proposal” for a pair of ERJ135s last July. Including 11 airplanes placed by the Harbin-Embraer partnership, Embraer has inked firm orders for 83 ERJ-line jets since the start of 2002.

Embraer’s competitor from Canada has fared somewhat better recently in the 50-seat arena, landing firm orders for about 175 CRJ200s over the same 27-month period. Over the past year, however, Bombardier’s order books show the addition f just 51 airplanes in the firm-order column. Together, the two manufacturers carry
backlogs totaling about 200 airplanes in the 37- to 50-seat jet category.

Both companies appear to have accepted the reality of the situation, cutting production rates and delivery forecasts considerably. Only two-and-a-half years ago Embraer projected a 10-year market for 1,745 airplanes in the 30- to 60-seat jet category. In its most recent forecast, published last November, Embraer predicted sales over the next 10 years of only 650 airplanes for the entire industry–just a little more than half of the Teal Group’s projection. Of course, neither company will concede a complete collapse, but rather a period of “more orderly growth” until the next generation of 50-seat jets hits the market.

In a report published in December, Aboulafia wrote that Bombardier might replace the 50-seat CRJ200 with a shrunken version of the CRJ700, offering better range and commonality but at a higher price. But the report cited unfavorable reaction from customers, and gave the proposal only a 30-percent chance of ever materializing. Embraer, too, has talked of building a new 50-seater to replace the ERJ145 sometime around the turn of the decade. Embraer market intelligence director Orlando Neto said that fuel-burn considerations would not allow for much more cabin volume, however, one of the biggest drawbacks of both the ERJ and CRJ product lines.

Of course, the timing will depend on how long operators choose to keep the 50-seaters they fly today. After 9/11 Boeing and Airbus kept the market for new mainline jets afloat by offering financing at costs too low to pass up. Under those conditions, it made little sense to keep old airplanes flying. In the case of regional airlines, whether or not they choose to replace their aging 50-seaters could depend largely on the Brazilian and Canadian governments. Brazil’s BNDES has already expressed concern about its growing financing exposure, while the Canadian agencies continue to dole out guarantees as Bombardier masterfully orchestrated a competition between Canada and several U.S. states for the site of a new factory.

Introduced in 1992, the early Bombardier models are reaching the point where they will require D Checks and engine overhauls. Parts of the CRJ airframes have periodically shown a tendency to crack, raising questions in Aboulafia’s mind about their long-term ability to withstand the stress of high-cycle regional airline duty.

“Frankly, it might be that the care and feeding of these [airplanes] are a bit more than anticipated,” said Aboulafia. “It could be these airplanes just weren’t designed to take more than a dozen years of life. We don’t know for sure with either [the Bombardier or Embraer jets], but we’ll find out.”