BAE pitches solutions to tight money markets

 - January 9, 2008, 4:49 AM

With no full-blown recovery in air transport demand predicted before 2005, regional airlines will be looking for low-cost fleet development solutions for the next couple of years, according to BAE Systems Regional Aircraft senior v-p of asset management Paul Stirling. BAE, which ditched its own Avro RJX development in late 2001, now expects remaining regional jet manufacturers Embraer and Bombardier to face ever-tougher trading conditions as the capital markets tighten money supply for new aircraft.

Stirling told a December 13 press briefing in London that as air-transport demand shows little or no sign of lifting in the short term, “the financial community is increasingly concerned about asset values of aircraft.” He argued that with banks now turning off the cash taps to airlines, manufacturers and their associated export credit agencies will have to make up the capital shortfall to keep the new sales coming. In his view, manufacturers’ shareholders will not tolerate the resulting negative effect on the bottom line, forcing airframers to pass on unprofitable deals done purely to shore up market share.

The BAE executive argued that the post-Enron trading environment of increased balance-sheet scrutiny and disclosure will put further pressure on manufacturers not to “hide” next-to-no-yield deals on their books. He maintained, for instance, that Bombardier Capital is now unloading existing assets to take regional aircraft into its lease portfolio. BAE understands first-hand the perils of assuming excessive liability for aircraft sales after its own regional aircraft lease portfolio almost drove the whole group into bankruptcy back in 1992.

BAE bets that this will build the case for the so-called do-nothing or low-risk option in which airlines choose to keep existing aircraft or to lease or buy further used aircraft to tentatively extend capacity with minimal capital outlay.

According to Stirling, by 2020 around $100 billion of new regional aircraft deliveries need funding (on existing market projections). He argued that since manufacturers can’t afford to do this, “expectations will have to change” and that this will see demand for new-generation regional jets shifting toward used models.

Embraer and Bombardier sales teams are increasingly being confronted by prospective customers asking why they should invest in new models when existing equipment such as the BAE 146/Avro RJ family and Fokker 70s and 100s are available for much lower capital outlay, said Stirling. According to BAE, for instance, its 146-300 and -200 models have trip costs that run 50- to 60 percent less than those of the Embraer 170.

“Capital costs are now the biggest influence on direct operating costs,” said Stirling. “Operating leases on used aircraft will alleviate the credit crunch.”

Stirling told the press that Lufthansa executives have spent much of the past year “shuttling between São Paulo and Toronto (respectively the headquarters of Embraer and Bombardier)” and have still not resolved to go with either company’s RJ as an alternative to the 728JETs it had ordered from now-bankrupt Fairchild Dornier. He predicted that, faced with continued market uncertainty, the German flag carrier will likely stick with its existing 146/Avro RJ fleet.

Underscoring his contention that the used aircraft market is the right place for regional airlines today, Stirling predicted that lease rates will continue to languish as long as current over-supply conditions continue. He also said that the so-called “one size fits all” fleet policy of the burgeoning low-cost carriers (dominated by Boeing 737-class jets) will be increasingly redefined, with regional aircraft playing a bigger role.

BAE Systems Regional Aircraft’s latest  deals include a lease extension for a 146-100 to National Jet Systems of Adelaide, Australia, as well as Avro RJ lease extensions for Turkish Airlines and Ireland’s CityJet. The company has also just won a $29 million support contract from the UK’s Flybe under its JetSpares program.