Our industry leader this month is Michael Magnusson, president and CEO, Saab Aircraft Leasing. With aircraft sales, both new and second user, a major talking point at Farnborough, his comments make for interesting reading with regard to the European market.
”Over the last few years, Europe”s regional airlines have taken a somewhat different direction than their US counterparts. This applies both to aircraft categories, as well as commercial arrangements with major airlines.
In Europe the line between regional airlines and ”low fare” airlines has become somewhat fuzzy. In the American market, a regional airline is typically one that flies aircraft with capacity between 30 and a maximum 70 seats. A few exceptions operate BAe 146s (Mesaba & Air Wisconsin). In Europe, many airlines fly both traditional regional aircraft in the 30-70 seat category, but also larger aircraft such as Fokker 70/100s or even A320/B737 and MD80s. Good examples include Regional, Portugalia Express and Swiss.
Ownership trends seem to be similar ” ie the major airline prefers to have some ownership control over its regional partner, whether this is minority share or full ownership. Most of the major European airlines work with this arrangement (ie SAS, Lufthansa, Alitalia, the newly combined Air France ” KLM). Major exceptions include Iberia and British Airways, who come together under the oneworld alliance. In the USA, the major exception is United, which does not have any ownership interests in its regional partners. Some majors seem to be regretting this, as operating costs tend to start ”creeping up” with major airline ownership.
Commercial agreements are another area of difference. In the USA, most regionals now work on a ”fee per departure” basis ” where the major airline takes all the commercial risk and the regional takes all the operating cost and reliability risk. This seems to be working well and most, if not all, regional jets operate under this kind of contract with some variations. In Europe, more regional jet operators have to take their own commercial risk ” which may well explain the other major difference between Europe and USA, in regional jet trends.
USA is still going gangbusters on regional jets, although orders in the last two years have declined for 50-seat aircraft and pretty much dried up for 30-seat regional jets. In Europe the backlog for 30-50 seat regional jets have dried up much quicker, thus most of the current backlog at Embraer and Bombardier these days are from US airlines. There does not seem to be a simple explanation, but perhaps the following factors play into this:
” More commercial risk exposure versus fee per departure structure
” Landing fees are more geared against smaller aircraft and navigational charges, which do not exist in the USA.
” Higher population density, thus it is harder to find ”long thin” routes
” Rapid spread of low fare airlines to secondary airports within driving distance from many small communities traditionally served by regionals
” Little ”turboprop” avoidance factor, thus no ”automatic” revenue increase when turboprop is replaced by regional jet
” Much more developed and efficient train system (and subsidised!)
” At Saab Aircraft Leasing we have carried out analysis using the OAG database, surveying daily departures for regional aircraft between 19-seat and 50-seat capacity between the years 2000 and 2004. It is interesting to note that total daily departures during this period has hovered around 20,000 worldwide and there has clearly been a gradual shift from turboprops to regional jets.
Turboprop worldwide departures have declined from 16,000 per day to just above 10,000, while regional jets have climbed from 2,000 per day to 8,000. The trend has slowed down somewhat. But if one splits this into three geographical areas, namely North America, Europe and ”Rest of the World” there are major differences.
North America has clearly been the RJ-driver and is the biggest area of activity with roughly 60% of worldwide 19-50 seat activity. Daily RJ departures have gone from just 1,000 in year 2000 to 7,000 in 2004, while turboprops have declined from 9,500 to 5,000. In other words, RJs have overtaken turboprops.
Europe, representing about 22% of worldwide activity, shows a very different trend. Turboprops have declined from 3,500 daily departures to 2,500, ie a 30% reduction compared with a 50% reduction in North America. RJs have increased from about 500 daily departures to about 1, 500 but actually declined slightly in 2004. So, turboprops still out-number RJ departures in Europe.
The rest of the World represents the remaining 18% of activity and here turboprops completely dominate, with about 90% of all activity. Turboprops have declined only some 15%.
The European ”RJ decline” has resulted in RJs ”migrating” over to the USA. During 2003 some 15 regional jets migrated from Europe to USA (Chautauqua and Trans-States picking up used Embraer 145s from Switzerland Greece and Austria). Several dedicated RJ operators in Europe have failed such as JetMagic in Ireland, Axon in Greece and most recently, Duo in the UK. Several other RJ operators admit to having too many RJs (Portugalia-Express, Skyways, British Regional, etc). A couple have chosen to remove RJs from their fleet in order to become more profitable (FlyBE and now Maersk in Denmark).
So where are we heading? Clearly, the near-term future will most likely involve the new 70-seat RJs now that the Embraer 170 has been certificated and attracting well-deserved attention. Bombardier is well established with the CRJ700, but this has attracted less positive attention lately with its reliability challenges. Many European and North American RJ operators are now turning their attention to the larger 70 or even 90-seaters.
Europe may be more focused on this owing to the higher operating cost environment, just like it was back in the 1980s when Europe preferred 50-seat turboprops, while the US favoured smaller 30-seat turboprops in order to drive up frequencies. Some industry observers are predicting a ”bonanza” in the 70-seat market replicating the 50-seat RJ success; others are warning this may not be the case. The 30-seat RJ has had a very limited success. Just because you ”stick two jet engines” on the aircraft, does not always mean it will sell. In the ”old” days of Fokker F28/F70s and BAE-146s, the 70-90 seat market only had limited success, but perhaps it had not matured? We shall see".
Michael Magnusson, president and CEO, Saab Aircraft Leasing.