Not so long ago, regional aircraft leasing was something of a necessary evil, dominated by manufacturers desperate to shift their products. As the regional jet (RJ)continues to sweep all before it, that has started to change. Already the sector has begun to attract the attentions of the world's leading lessors. In June, GE Capital Aviation Services (GECAS) raised the stakes with a massive order for up to 450 RJs. Others too are showing interest.
There is little doubt about the potential of this once overlooked market. About 2,000 RJs are currently on order or option and jets account for 92% of the order backlog held by manufacturers. One of those, Fairchild Aerospace, estimates that the overall market for regional aircraft in the 30- 110-seat range will be worth $203 billion over the next 20 years. If US pilot unions agree to lift scope clause restrictions, this could even prove to be a conservative estimate.
GECAS is not alone in showing interest, although its unexpected order has taken some of the wind out of the sales of others looking at the sector. Robert Genise, chief executive of US lessor Boullioun, was in discussions with the three leading RJ manufacturers, but has taken a step back after the pre-emptive strike from GECAS. Boullioun, however, has not given up and will continue to monitor the market. "If we can find a niche we'll take a position," says Genise.
Traditional aircraft manufacturers have already begun to see business opportunities opening up in the leasing market. Five years ago BAE Systems (then British Aerospace)was among those forced to firefight to regain control of its wayward leasing book, but has since created a model asset management arm for its portfolio of BAe 146 and Avro RJ. BAE Systems Asset Management (BAEAM) has emerged as a respectable aircraft trading and services business in its own right.
BAEAM's latest enterprise will focus on aircraft re-marketing and trading, finance, lease management and technical services. General manager Paul Stirling believes that this strategy will ensure BAE is ready to respond when the other manufacturers enter the 70-100-seat RJ market. The company also emphasises its ability to offer original equipment manufacturer backing for its aircraft with upgrades to keep them technologically competitive.
The clamour for regional jets has obscured the fact that the turboprop aircraft is still alive. Even if orders for new turboprops are lagging -- Bombardier, ATR and Raytheon are the only manufacturers still active - the second-hand market remains healthy. Despite the determination of many airlines to convert their regional affiliates to jets, the turboprop remains the industry's backbone. And Tulinda Larsen, vice-president of BACK Aviation Solutions, believes it will remain so for the foreseeable future. Larsen surmises that "second-generation turboprops will be needed to meet the growing passenger demand", adding that global parity between jet and turboprop numbers is unlikely to occur within the next 10 years.
Larsen defines a clear distinction between the markets for the two types. She argues that there is a role for both, at least until the end of the service life of the present generation of turboprops or until the operating economics of RJs improve enough to make them obsolete. Until that occurs, turboprops will continue to dominate the traditional short-haul markets of under 500km (310nm). Indeed, it is important to note that fewer than 10% of new RJs are used to replace turboprops.
Even so, the pressures of increasing passenger demand for jets and the industry's desire to provide seamless services between regional and mainline flights could hasten the end of the turboprop, despite the fact that second-generation turboprops offer jet-like passenger comfort and superior operating economics.
Managing turboprops
For almost certain, with the winding down of new aircraft production, the next decade in the life-cycle of the turboprop will focus more on asset management than new sales.
Leading the pack are BAE and Saab, both of which have ceased production but continue to find customers for turboprops. ATR, which saw the market slow to a trickle after it introduced its new generation turboprop in 1995, is beginning to generate sizeable income from leasing transactions and by re-marketing its second-hand models.
BAE and Saab both have capitalised on the fact that they respectively manufactured most 19- to 35-seat turboprops operating in the USA by establishing large leasing operations there. In 1999, BAEAM from its Chantilly, Virginia, office, completed 82 turboprop transactions, including 40 lease extensions, 15 leases to existing customers, 16 leases to new customers and 11 sales. Mike Agnew, vice-president of portfolio management, believes that the number of transactions in 2000 should exceed those in 1999, with the exception of lease extensions.
Similarly, Saab Aircraft Leasing completed its second year as a dedicated leasing company at the end of 1999. Once the decision was made to cease production of the 34-seat Saab 340 and the 50-seat Saab 2000 models, the company's focus shifted entirely towards managing and marketing the leased fleet from its Sterling, Virginia, office. President Michael Magnusson noted that over 50% of the 53 used Saab 340s placed in 1999 were obtained for network expansion, with around 30% replacing 19-seat aircraft. Two-thirds of the 340s in Saab's portfolio operate in the USA, where the 30-seater is in big demand for feeding existing hubs and enabling airlines to establish new hubs. Demand is lower in Europe, says Dag Waldenstrom, Saab Leasing's vice-president for sales and marketing, as that market is more scattered, with larger aircraft dominating.
Industry watchers say the traditional keys to the leasing market have been an affordable price structure, flexibility and almost immediate availability of aircraft. But these ingredients are no longer enough to sustain a successful leasing business. Today's customer expects more.
Service and support remain the top of the list, says Steve Doughty, vice-president for sales and marketing at BAEAM, but he stresses the nature of the relationship between the lessor and the customer as being equally important. "We firmly believe," says Doughty, "that our customers need a good relationship (with the lessor) throughout the lease period." He adds that maintaining a post-lease relationship is an area where a manufacturer enjoys a natural advantage over other leasing companies. With the annual regional leasing market estimated to be worth at least $100 million, and average lease periods of 5-10 years for jets and 4-6 years for turboprops, the extra effort makes commercial sense.
With this in mind, most manufacturers have initiated programmes that provide operators with fixed-price maintenance costs and comprehensive pay-by-the-hour spares and power-by-hour engine packages. By year-end, BAE will have full Internet power-by-the-hour in place, ordering capability for its material and component repair and overhaul and Jetspares programmes. Saab's Waldenstrom says that fixed hourly charges provide airlines with a clear picture of expected overall costs.
| Major regional leasing portfolios 2000 | ||
| Manufacturer | Model | Aircraft leased |
| ATR | ATR 42 | 90 |
|
| ATR 72 | 10 |
| BAE | BAe 146 | 73 |
|
| Avro RJ | 31 |
|
| ATP | 40 |
|
| J-31 | 38 |
|
| J-32 | 145 |
|
| J41 | 77 |
| SAAB | 340 | 275 |
|
| 2000 | 25 |
| Source: BACK Aviation Solutions | ||
Making improvements
As important as keeping a tight rein on costs is, airlines also expect even second-hand aircraft to keep up with technology. Honeywell's XRP modifications to the ALF502/LF507 engines, now adopted on 65% of the BAe 146/Avro RJ fleet, have substantially improved reliability. It is also offering a new flight deck upgrade package. Two of the upgrades have been designed to meet flight safety regulations, while others are planned to address equipment reliability and modernisation issues. Many of the upgrades eliminate mechanical and rotating parts to significantly reduce delays, cancellations and repair costs.
The Enhanced Performance package for the Jetstream 32, introduced in 1997, undoubtedly boosted the 19-seater market. Saab is offering the Active Noise Control - standard on late Saab 340Bs and Saab 2000s - as a retrofit for older models. ATR, envisaging a buoyant leasing market for regional cargo aircraft, is proposing two conversion programmes for 2001. One will provide the aircraft with a large cargo door to permit pallet loading, while the other offers an aircraft completely stripped of its passenger amenities and equipped with a new fire detection system. BAE Systems has taken a similar approach with its ATP, joining with Westair Sweden to install a large main deck cargo door that makes the aircraft an 8t freighter.
Most participants agree that new jet and second-hand turboprop leasing will increase slightly over the next two to three years, as more aircraft leave their original operators, before settling down to a balanced market. Used second-generation jets and turboprops have at least 15 years left in them, by which time today's new RJs will begin to find their way onto the used market. But Waldenstrom does not believe that this will spell the end for non-jet regional aircraft: "The inevitable increase in fuel costs may bring the turboprop back."
| Active turboprop fleet | ||
| Status | Number | Proportion |
| Leased | 1,485 | 51% |
| Owned | 1,001 | 34% |
| Sub-leased | 448 | 15% |
| Total | 2,934 | 100% |
| Source: BACK Aviation Solutions | ||
Source: Airline Business
