ANALYSIS: Turboprops defy the cycle

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Olga Razzhivina, a senior ISTAT appraiser with Flightglobal advisory service, discusses the recent trends in turboprop values

Turboprop aircraft are often overshadowed by the focus on jets, but they have largely defied the industry cycle that has negatively affected the values of even the most popular jet types. Market values of popular in- and out-of-production turboprops have been on the rise, with only a few exceptions. Such exceptional resilience has sparked the attention of lessors who, until recently, had limited interest in the sector.

ATR and Bombardier are the two principal turboprop manufacturers that still have production lines running. The Xian-built MA60 is only manufactured in small numbers and struggles to find acceptance with commercial operators outside of China, although a new MA700 is to be launched. The 19-seat Twin Otter rekindled by Viking is attracting some airline interest, even with a big price differential compared with the used versions.

Fifty- and 70-seater types are the core of the regional turboprop fleet.

As shown above, the values of the ATR 42 and Bombardier Dash 8 Q300 have been stable or improving for most of the past 10 years. Even though Q300 production stopped in 2009, the values have only experienced a temporary dip. The ATR 42 values have also been stable, although its larger ATR 72 sister has stolen the popularity crown. This strong value performance is supported by the fleet dynamics, which is likely to continue and support the types' popularity in the future.

The fortunes of the Fokker 50, however, are quite a different story. Although close in size and performance to the ATR 42 and Q300, its values have been on a downward trend ever since the late 1990s, stabilising in the early 2000s at about the $2 million mark. Fokker's exit from new aircraft production appears to have dealt an irreparable blow to the type's values, despite continuing after-market support and continuing popularity in some markets.

The 70-seater values were affected slightly during the downturn in 2008, but rebounded quickly and have been growing since. For Dash 8 Q400s, there has been a recent dip in values due to increased availability as carriers such as Flybe downsized their fleet. However, with lower production levels, this is unlikely to be a long-term trend.

A remarkable aspect of the in-production turboprop value performance is that, in addition to the new aircraft, five-, 10- and even 15-year-old vintages also show positive trends. In contrast, the most popular investment jet types - the Airbus A320 and Boeing 737-800 - display marked differences in the performance of their new and used aircraft values. The remarkable value stability of the ATR and Q-Series families is underpinned by strong fleet dynamics fundamentals, as shown below.

The narrowbody commercial in-service fleet has been growing steadily since 2001, passing the 12,000 mark in 2013. The number of turboprops, on the contrary, fell between 2000 and 2004 and has remained relatively stable at approximately 4,200 through to 2013.

Turboprops were in danger of disappearing from production lines altogether during the downturn in the 2001-03 period. With the combined backlog dwindling to only 25 aircraft, many were predicting the type's new-build extinction. The onslaught of the 50- and 70-seater regional jets and the irrevocable change in passengers' perceptions were cited as main causes, though the latter was more US-centric.

However, the steady growth of oil prices from $40 to $80 and later to $100 - with a near-$200 "hump" - brought the advantages of turboprop economics on the short sectors to the fore. Growth in emerging markets such as Asia and Latin America also spurred the growth in orders.

Turboprops also have a smaller backlog ratio of only 6% of the total fleet, while narrowbodies stack up to over 50% of the fleet. Such comparatively low levels are explained by the shorter planning horizon that is typical for regional operators.

Near-term availability is a double-edged sword when considering the type's attractiveness to lessors. The ability to receive aircraft within months of the order, thus avoiding price escalation, is a plus point in the thin-margin new aircraft market. By the same token, it also places lessors into close competition with manufacturers when marketing new aircraft. Nonetheless, Air Lease, GECAS, Avation and Nordic Aviation Capital, which is the largest specialised market player in the sector, have placed orders for almost 60 aircraft between them in the last two years.

Controlled supply is essential for strong value retention in the long term. While Airbus and Boeing are both moving their narrowbody production to 42 aircraft per month, ATR and Bombardier still see their annual production rates to be in double figures. Even though ATR is increasing its annual production rate in 2013 to 80, with further growth planned for 2014, the demand is strong enough to absorb this rise.

The number of turboprop deliveries is still relatively small, when compared with the total fleet, taking up no more than 2%. Therefore, there is always a strong used market, especially in the 30-seater size, where there is no in-production type.

Lack of engine choice and technological change are also among the factors that are keeping turboprop values stable. Despite evolving variant designations, the changes introduced over the past 20 years are more likely to be classified as "continuing upgrades" rather than game-changing improvements. This status quo is likely to continue in the immediate future. There are plans by ATR to launch a new 90-plus-seater later in the decade, but that is subject to the availability of a new engine.

Turboprops offer better operating economics than jets on short regional routes. There are also comparatively low numbers of new deliveries, which result in stronger values. These qualities are now recognised not only by the established specialised market players, but also by the wider number of investors, bringing turboprops into the limelight. The strong fleet dynamics and slow technology pace will likely ensure the type's continued strong value performance into the future.