ANALYSIS: Airframers bet on big orders from US regionals

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Bombardier and Embraer have identified the struggling US regional airline sector as a surprise market that is expected to sign at least five deals by the end of the year, placing orders for a total of more than 400 70- to 80-seat jets.

The sector faces a starkly uncertain future, with American Eagle and Pinnacle Airlines in bankruptcy protection and Republic Airways Holdings' Chautauqua subsidiary undergoing restructuring.

But the ageing of 50-seat jet fleets and rising fuel expenses are driving carriers to impose relief from union scope clauses that limit the size of regional fleets above 50-seat aircraft, clearing the way for buying aircraft with 50% more seats.

"This is the busiest year we've had in the last 14 to 15 years," says Charlie Hillis, vice-president of sales and marketing for Embraer's North America office. "Over 400 airplanes will be up for grabs. We have around five different deals going on right now."

Pierre Beaudoin, Bombardier chief executive, agrees that the US carriers will sign orders for new regional jets in the "near future".

The anticipated wave of new orders by carriers including SkyWest, American Eagle and Republic Airways will begin the replacement of 40- to 50-seat aircraft delivered during the regional jet boom of the late-1990s, with owners approaching the end of 15-year finance terms.

Both regional jet makers also need the deals to revive once-booming US sales and balance reduced prospects for new orders elsewhere in the world this year.

To estimate the size of the potential US order tally this year, Beaudoin told analysts on a 10 May earnings webcast to count the 50-seat jets approaching 15 years of service life.

Nine US airlines operate 508 40- to 50-seat jets made by either Bombardier or Embraer, according to Flightglobal's Ascend Online database. The fleet is almost evenly split between both airframers, with Embraer leading with 54% of the existing inventory.

SkyWest, which owns ExpressJet and SkyWest Airlines, has by far the largest need, with a combined fleet over 10 years old of 132 CRJ200s, 117 ERJ-145s, and four CRJ100s. SkyWest confirmed it is "actively" considering new aircraft, but declined to provide details.

American Eagle also has a significant fleet over 10 years old, with 21 ERJ-135s and 82 ERJ-145s, the database shows. For American Eagle parent AMR Corp, one of its key restructuring goals is to replace its oldest 50-seaters with larger aircraft, allowing the carrier to be more competitive against United-Continental's network.

Hillis expects at least two or three carriers to await the outcome of the AMR restructuring. Complicating the outlook is a possible takeover attempt by US Airways, which has persuaded AMR's largest unions to endorse its plan. AMR management also has agreed under heavy pressure from a committee of creditors to consider consolidation options.

But not all of the regional airlines can wait for AMR's situation to resolve before placing orders.

"I only know of one deal that will happen before the American situation gets sorted out," Hillis says, declining to elaborate.

Besides SkyWest, however, Hillis named two more carriers with major 50-seat replacement needs. Republic's subsidiary Chautauqua has 43 ERJ-145s over 10 years old, while Trans States has 12 ERJ-145s above the same threshold. Both are potential order targets this year for Embraer.

Any orders would come during a pivotal moment for the US regional airlines sector. Once considered a steady source of profits, their unique stability in a turbulent industry has been overwhelmed by the consolidation and bankruptcy-imposed cost reductions implemented by the US mainline carriers since 2005.

Any 70-seat jets placed on order this year could be delivered to a very different industry in a few years.

Regionals depend on the 50-seat routes to feed the trunk carriers at hub airports, but fuel costs have made those jets uneconomical. Larger aircraft may increasingly be used on point-to-point routes with fewer frequencies to secure profitability, in turn reshaping the whole industry.

But Hillis still thinks the 70-seater can fill a unique role alongside a diminishing fleet of 50-seat jets. "We think it will adjust at the end of the day," Hillis says. "There's a need for 50-seaters."