The Dynamic Regional Jet Market April 2011 Contents Background ................................................................................................................................ 3 What is a Regional Jet? .......................................................................................................... 3 Segment Dimensions ............................................................................................................. 4 History & Perspective ............................................................................................................. 5 Fuel and Labor .................................................................................................................... 6 Looking Forward ........................................................................................................................ 7 Growth Opportunities .......................................................................................................... 8 Existing fleet ....................................................................................................................... 9 Emerging Technologies ............................................................................................................10 Going Green ..........................................................................................................................10 Biofuels .................................................................................................................................10 Engines .................................................................................................................................12 Pratt & Whitney ..................................................................................................................12 General Electric .................................................................................................................13 PowerJet ............................................................................................................................14 Avionics .................................................................................................................................14 New Players ..............................................................................................................................15 Airlines ..................................................................................................................................15 Emerging OEMs ....................................................................................................................16 Rekkof ...............................................................................................................................16 Current OEMs .......................................................................................................................17 Bombardier ........................................................................................................................17 Embraer .............................................................................................................................19 COMAC .............................................................................................................................22 Mitsubishi ...........................................................................................................................23 UAC (Antonov) ...................................................................................................................24 2 Background What is a Regional Jet? The definition of a regional jet would typically include the fact that it is a twin turbofan engined airliner with a maximum of 100 seats. Interestingly the generally accepted first regional jet is thought to be the Yak-40, which was introduced in the Soviet Union, flying for Aeroflot in 1968. It is rather interesting that the Soviets were significantly ahead of the west in developing this category of aircraft. But there were other important aircraft of slightly larger size such as the Sud Aviation Caravelle and the Fokker F-28. This segment has been something of a tough area for aerospace companies. Teal Group’s Richard Aboulafia1 has termed this segment as a graveyard for airliners. The purpose of the regional jet was to replace turboprops serving small communities and connecting these communities to larger hubs, as well as offer city to city service, bypassing hubs. When fuel costs were low these aircraft were attractive. With airline deregulation in the United States, airlines were frantic to find any capacity to drive traffic through hubs and connect communities. These small jets offered capacity that could be deployed quickly. The regional jet segment really exploded in 1989 when Bombardier in Canada stretched its Challenger business jet into a small airliner seating 50, known then as the CRJ100. Bombardier followed up with the CRJ200 which also seated 50, but had more efficient engines. Bombardier sold 1,054 of these regional jets. Bombardier did not have this market to itself for long. Brazil’s Embraer saw the opportunity and developed its ERJ135 (37 sets) and ERJ145 (50 seats); the latter proving to be the more popular of the two. The ERJ was launched in 1989 and to date Embraer has sold over 990 ERJs. Today the 50-seaters have grown unpopular because of higher fuel costs. The regional jet segment is better defined at between 75 and 100 seats. This is the new “sweet spot”. We will enlarge on this idea below. 1Telephone interview 3 The following table lays out the regional jet fleet in the United States and the relative seating capacity. OEM Model Aircraft Seats Capacity Seats Share Bombardier CRJ 100/200 672 50 33,600 31% 59% CRJ 700/705 252 70 17,640 17% CRJ 900 139 86 11,954 11% Embraer ERJ 135/140 101 37 3,737 3% 40% ERJ 145 519 50 25,950 24% E-170/175 166 70 11,620 11% E-190/195 22 106 2,332 2% 1,871 106,833 Segment Dimensions The regional jet segment consists of at least 2,000 aircraft. The rapid ascent of Bombardier and Embraer form the lower end and the success of Airbus’ A319 at the upper end led to demise of Fokker. Fokker is often thought to be the first Western regional jet builder. Bombardier decided not to buy the company, which may have been a hasty decision given the success of Embraer’s even larger E-jets. To get an idea of the dimensions of the regional jet market, we decided to cite data from the United States Regional Airline Association (RAA). The RAA has 62 member airlines. They fly 160 million passengers per year with aircraft averaging 55 seats and typically fly 457 mile legs. This means that, in the United States, regional airlines fly 25% of all air passengers and, crucially, 75% of United States communities rely on regional airline service for their only scheduled air service. The table below provides a summary of key data defining the extent of the RAA’s member airlines. 1980 1985 1990 1995 2000 2005 2009 Carriers 247 190 153 123 91 75 62 Enplanements 14.69 26.99 41.49 58.31 82.49 152.55 159.45 RPM 1.89 4.7 8.03 12.64 24.38 67.4 72.91 ASM 4.01 10.07 15.04 25.48 42.81 95.58 97.61 LF 47.2% 46.6% 53.4% 49.6% 57.0% 70.5% 74.7% Departures 2.26 3.23 4.12 4.89 4.55 5.43 4.81 Avg Trip 129 174 194 217 296 442 457 Avg Capacity 16 26 24 30 37 50 55 Fleet flying hrs 1,474 2,118 3,386 3,817 5,943 5,714 5,146 The table shows that there are far fewer airlines than in 1980. But as traffic has risen, these airlines have dropped 19-seaters, then dropped 35-seaters and moved up to larger airplanes. Yet as major airlines have kept moving traffic on to regionals, load factors have remained strong. Regionals have progressively flown ever longer sectors and flying hours have risen in concert. 4 To further underscore the impact regional jets and the airlines that operate them are having, RAA provides this interesting chart. As the chart shows the only real growth among airline fleets in the United States is in the regional jet segment. It would seem the data highlights a trend to smaller aircraft, even as regional jet fleets have grown in numbers and capacity while major airlines are moving to fewer single aisle jets. The trend underscores what regional jet OEMs have been saying - smaller jets offer great economics and better flexibility than mainline airliners. History & Perspective As the chart illustrates, regional airlines have grown rapidly in importance within the United States. As mainline airlines have cut back fleets and costs, their regional partners have become relatively more important. In an earlier AirInsight study we described what we see as a renaissance in the turboprop airliner market; the regional jet market is also seeing changes. If turboprops are getting bigger - as we expect - and starting to approach the 75 seat segment, regional jets will grow in size to the 100 seat segment. Traditionally this segment was known as the Trunkliner and an early pioneer of this capacity was the legendary McDonnell Douglas DC-9. 5 Fuel and Labor Airlines are run in a way similar to supermarkets. Customers pay for services in advance, while the airline pays its vendors anywhere around 120 days after the flight. This means an airline sits on a cash pile for some three months. Cash management is a key activity and is one example of how complex managing an airline is. The airline sells a seat for a fixed price with future delivery but its costs vary, and when volatility increases a projected profit quickly can become a loss. Two big cost inputs for airlines