ERA 2008: BAE makes case for economics of its quiet quad-jets

 - October 8, 2008, 7:14 AM

Seven years after BAE Systems canceled the ill-fated Avro RJX program, closing the hangar door on indigenous UK airliner production, the company’s regional aircraft division believes its BAe 146 and Avro RJ offerings remain competitive. Nevertheless, officials acknowledge that the market for the company’s used regional airliner fleet has become “very difficult,” as operators grapple with the joint effect of high fuel prices and restricted credit availability.

“The last few weeks have been really quiet,” BAE Systems Regional Aircraft market analysis director Rob Morris told AIN early last month. “In April, airlines did not know what the impact of fuel and credit costs would be, and they’re still working with the fuel they bought three months ago.”

Morris declined to forecast the short-term market. “Demand is reflected in inquiries about aircraft availability, [which have] gone down a lot,” he said. That means “a certain number” of aircraft have been parked, while BAE seeks to place available aircraft and any returning from lease. He acknowledged the challenge inherent in placing the BAe 146 or its enhanced Avro RJ variant, despite lower operating costs that offset the higher fuel burn of four engines.

BAE continues to fight the “two engines good, four engines bad, new aircraft good, ‘old’ aircraft bad” market perception. “The reality is that placement is getting tougher,” especially in Europe, said Morris, where airframe age and the influence of low-cost carriers remain strong market factors. As a result, the company is looking toward markets that show less sensitivity to aircraft age, such as Africa and Latin America.

Thankfully for BAE, the 146/Avro RJ continues to offer operators “premium yield” on services to business airports such as London City (LCY), where passengers from London’s principal financial district six miles away will pay for time saved. Morris said this “niche application must be exploited.” In fact, he said that Air France has chosen to replace BAe 146-200s at LCY with Avro RJ85s rather than the Airbus A318.

In Sweden, Malmo Aviation, whose nine-strong RJ100 fleet serves Stockholm’s Bromma city airport, has extended its leases “well into the second half of the next decade.” Fellow Braathens Aviation partner Transwede Airways flies RJ70s and RJ85s into LCY under third-party wet-lease contracts.

Operating Cost Analysis
Morris has compared basic operating economics for the 99-seat Avro RJ85 with those of the 96-seat Embraer E190 to see how the older airplane stacks up against newer models. “Our analysis suggests the RJ85 burns 660 U.S. gallons per hour, while JetBlue’s chief executive [has] reported that the E190 burns 570 U.S. gallons per hour,” said Morris. “The Embraer [uses] around 15 percent less fuel, but IBA’s most recent Lease Rate Digest indicates that [a leased] E190 will cost around $235,000 per month, compared with around $90,000 per month for an RJ85. Running these details through our direct operating cost model at $3.67 per U.S. gallon suggests the E190’s DOC is around 10 percent higher than [that of] the RJ85.

“At typical airline utilization of 2,000 hours per year, the monthly savings delivered by the RJ85 exceed $65,000,” said Morris. “While fuel and other benefits of the E190 total around $97,000 per month, the ownership cost benefits of the RJ85 exceed $164,000 per month, [an] overall benefit of nearly $67,000 per month.” Morris even argued that operation of a similarly sized BAe 146-200, at $56,000 per month lease rates, offers an advantage over new aircraft.

Finally, he offered a further consideration for operators. “The economic benefit from [lower] ownership cost is a certainty,” said Morris. “A lease for typically five or more years, or purchase of the aircraft [financed] over a longer term [commits the customer] to rental/finance every month and capital outlay is fixed. Any economic benefit from fuel burn is less certain [because of fluctuating prices], so any long-term fleet plan built on [such] benefit carries an element of economic uncertainty.”