October Aircraft Report: the Embraer ERJ-145LR

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Embraer ERJ-145 values have been on a steady decline for the past several years as a relaxation in US scope clauses between airlines and pilot unions and higher fuel prices have prompted operators to prefer larger aircraft on routes previously served by 50-seat regional jets.

This shift to higher capacity aircraft, such as larger regional jets and turboprops, has resulted in more 50-seat regional jets available than the market requires.

According to Flightglobal's Ascend Online database, there are 70 ERJ-145 aircraft in storage, including 46 ERJ-145LRs, 12 ERJ-145EPs, 11 ERJ-145EUs and one ERJ-145ER. Of these, four are scheduled to return to service, four are to be placed with new lessees and one will change owners. A further 13 ERJ-145s, which are currently operated by Chautauqua Airlines, are also scheduled to be parked.

Clouding the horizon is regional carrier Passaredo, which has requested to enter judicial protection - the Brazilian equivalent to the US chapter 11 process. The company operates eight Embraer ERJ-145s, down from 15 units in July.

While the ERJ-145 stored fleet remains "stable", Ascend notes the average stored period is in excess of 21 months, indicating difficulties in placing aircraft in today's market.

And although there have been no aircraft part-outs to date, Ascend believes it is only a matter of time before ERJ-145s start to be dismantled to support the in-service fleet.

ERJ-145 history

The ERJ-145 is the largest member of a turbofan aircraft family, which also includes the 37-seat ERJ-135 and the 44-seat ERJ-140 models. The 50-seat aircraft first flew in August 1995 and was first delivered to ExpressJet Airlines in December 1996.

ERJ-145 deliveries reached their peak in 2000 when 112 aircraft were handed over to customers. However, when demand dried up, the manufacturer was forced to stop production in 2011. Harbin Embraer, the Chinese assembly plaint, delivered the last passenger ERJ-145 to Hainan Airlines in the second half of that year.

Embraer offered the ERJ-145 in several different versions:

- The extended range version, the ERJ-145ER, has Rolls Royce's AE3007A engines with the option of more powerful AE3007A1 engines.

- The long-range ERJ-145LR aircraft is equipped with AE3007A1 engines, which provide 15% more power.

- The extra-long-range ERJ-145XR aircraft is equipped with AE3007A1E engines. The engines provide improved performance in hot and high conditions.

- The ERJ-145EU type for European markets has an increased maximum take off weight of 19,990 kilogrammes.

- The ERJ-145EP with identical fuel capacity as the ERJ-145ER, but with an increased maximum take off weight of 20,990 kilogrammes.

- The ERJ-145LU with identical fuel capacity as the ERJ-145LR, but with an increased maximum take off weight of 21,990 kilogrammes.

There are 406 ERJ-145LR aircraft in operations with 30 operators, according to Ascend, including 358 in commercial service. Another 48 aircraft are stored. Average age is 11 years.

North America represents 304 aircraft in service and 38 units in storage.

American Eagle is the largest operator of the ERJ-145LR model, with 118 aircraft in service. The second largest operator is ExpressJet Airlines with 115 aircraft, while Chautauqua Airlines has 55 aircraft in its fleet. Trans States Airlines operates 15 aircraft.

Latin America and Caribbean carriers operate 34 aircraft, while two ERJ-145s are stored. There are 10 ERJ-145LRs in operation in Europe, five in Africa and another five in Asia Pacific.

Changing hands

Airstream International Group has been one of the most active independent remarketers of ERJ-145s during the past few years.

The company has placed 16 ERJ-145 ex-Flybe aircraft, which it acquired in 2007, with Athens Airways, Andalus Lineas Aereas, Dniproavia, City Airline, Semeyavia, Eastern Airways and bmi Regional.

Airstream also has completed the sale of a further two ERJ-145s to French company Enhance Aero since the beginning of the year. In addition, it sold one ERJ-145 to Brazil's Irmaus Passaura and another to Air Taraba of Nigeria.

A lot of recent market activity has focused on the ERJ-145 aircraft exiting the fleet of US regional carrier Mesa Airlines.

Aerovision Aircraft Services purchased 10 ex-Mesa aircraft under an auction after raising $15 million in financing from JP Morgan Chase Bank. The aircraft were manufactured between 2000 and 2002.

Another 26 ex-Mesa ERJ-145 aircraft, held by Wells Fargo Bank Northwest as owner trustee, were due to be auctioned at the end of October.

The collateral was due to be auctioned in four lots: Lot 1 included the 26 ERJ-145 aircraft with 52 AE3007-A1 engines, and minimum bid of $29.1 million, according to the notice of public sale. Lot 2 included six ERJ-145LR aircraft built between 2000 and 2002. According to Ascend, the first three aircraft are owned by GECAS, the remaining three by Bank of America.

Lot 3 consisted of 10 aircraft and 20 AE3007-A1 engines. The majority of the aircraft were manufactured between 2000 and 2003. Lot 4 comprised 10 airframes and 20 engines each built between 2000 and 2003.

According to the documents, the minimum bid for Lot 2 was $4.8 million, $11.5 million for Lot 3 and $18 million for Lot 4.

Difficult future

With about 75% of the ERJ-145 global fleet in North America and with many of these carrier shifting away from 50-seat flying, market values are likely to come under increasing pressure.

According to Alice Gondry, senior analyst at the International Bureau of Aviation, the future values of ERJ-145s are of "concern" as the market is "plagued by high oversupply and weakened value performance."

"Despite a relatively healthy level of trading activity in the secondary market, IBA's values of the ERJ-145s remain somewhat suppressed," she says.

Gondry says values are "heavily dependent" on aircraft specification and maintenance conditions.

IBA has a current market value (CMV) for a 1998 ERJ-145LR aircraft with AE3007-A1 engines and a MTOW of 22,000kg of $4.5 million with a lease rate of $50,000 a month. A 2000-build aircraft attracts a CMV of $5.1 million with a monthly lease rate of $53,000.

The appraisal company has a CMV of $5.9 million for a 2002-build aircraft and a CMV of $7.2 million for a 2005-build aircraft. Lease rates for these aircraft are $57,000 and $60,000, respectively.

“The market for the type is currently soft, as it is for 50-seat jets in general. A serious concern for the type is the presence of 118 aircraft at American Eagle, around 28% of the total active fleet," says Avitas’ director of asset valuations, Martin O’Hanrahan.

Parent carrier American Airlines has been in bankruptcy for almost a year and has been restructuring its operations.

“Thus, there exists a possibility of a large number of the type becoming available which would further undermine an already difficult market. Availability is also likely to become an increasing problem over the next several years as large numbers of leases expire,” he says.

Avitas values a 1998-build ERJ-145LR at $4.2 million with a lease rate of $40,000-45,000 per month.A 2000-build ERJ-145LR has a CMV of $5 million with a lease rate of $50,000-$55,000.

A 2002-build aircraft has a CMV of $6 million with a lease rate of $60,000-$65,000, while Avitas has a CMV of $7.9 million for a 2005 aircraft and a lease rate of $80,000-$85,000.

Tom Burke, managing director of valuations at Morten Beyer & Agnew, agrees excess ERJ-145 supply is impacting values.

"It seems there are many of this type coming off lease lately with a shrinking number of places to go," he says.

"The 50-seat market has been in decline for the past few years and all aircraft in this category seem to be suffering lower values. We expect to see the values continuing to decline," he says.

MBA has the second lowest ERJ-145LR values of all four appraisal companies interviewed by Flightglobal, but it maintains the strongest rental rates for the 50-seat regional jet.

The company values the 1998-build aircraft at $3.69 million with a monthly lease rate of $53,900. A 2000-build aircraft has a CMV of $4.31 million with a rental rate of $70,400. MBA's CMV for a 2002-build aircraft is $5.06 million with a lease rate of $78,200. A 2005-build aircraft commands a CMV of $6.38 million with a monthly lease rate of $91,200.

Limited markets

Collateral Verifications' (CV) vice president, Gueric Dechavanne, describes market demand for the ERJ-145 as "soft". The company has seen its values drop for the type by 30% during the past year.

It holds the lowest ERJ-145LR values of all appraisers interviewed by Flightglobal.

A 1998-build ERJ-145LR has a CMV of $3.54 million with a monthly lease rate of $60,000, according to CV. A 2000-build aircraft attracts a CMV of $3.91 million with a monthly lease rate of $64,000.

The company has CMVs for 2002- and 2005-build aircraft at $4.31 million and $5.23 million, respectively. Lease rates are 67,000 and $71,500, respectively.

"When looking at the leasing market, the monthly lease rates have remained fairly stable during the last 12 months with declines of around 10% for newer aircraft," he says.

He notes in the current environment with risk adverse financial institutions, there has been "very little appetite" from buyers to purchase aircraft outright.

CV expects this trend to continue for the foreseeable future with the expectation that values "will maybe stabilise in the short-term, while availability remains somewhat stable".

The long-term expectation, however, is that values and lease rates will "continue to decline during the next decade as more aircraft come off of leverage lease structures and potentially become available to the market."

Manufacturer support

An encouraging sign for ERJ-145 values is Embraer's continued support for the units through its leasing subsidiary, ECC Leasing.

The manufacturer also has offered financial support to Chautauqua Airlines by agreeing to restructure the carrier's ERJ-145 financing agreements after parent company Republic Airways said its needed to cut costs or "move away" from 50-seat operations.

The Brazilian manufacturer has a combination of straight financings and operating leases with Chautauqua Airlines. It expects the modified agreements to be complete by the end of this month.

The regional carrier operates a fleet of 15 ERJ-140s and 55 ERJ-145s, according to Ascend. Only 33 of those aircraft - 11 ERJ-140s and 22 ERJ-145s - are owned.

Aircraft Services leases eight ERJ-145s, GE Capital Aviation Services (GECAS) 15 ERJ-145s, Mitsui seven ERJ-145s, Silvermine River Finance Two four ERJ-140s and two ERJ-145s, and TA Air XVI one ERJ-145 to Chautauqua, according to Ascend.

New roles

Dechavanne anticipates that some ERJ-145s will eventually be parted-out. However, he stresses this will depend "greatly on Rolls Royce's appetite for used parts" as the manufacturer "currently control this market" with its Total Care engine programme.

Should this trend not change in the foreseeable future, Dechavanne believes this may "significantly impact" the residual values of ERJ-145 aircraft.

Difficulties in the business jet market have presented limited opportunities for ERJ-145 conversions to corporate roles. Aircraft looking for new homes have had more luck in developing markets such as Russia, Eastern Europe, Central and South America, and Africa.

According to Dechavanne, operators in these markets are starting to take aircraft in limited numbers as infrastructures further develop.

However, Ascend notes greater movement of ERJ-145s into developing regions will be "limited" by the cost of conversion of aircraft to European Aviation Safety Agency specifications from the US Federal Aviation Administration requirement.

Ascend values a 1998 ERJ-145LR aircraft at $5.25 million with a monthly lease rate of $60,000. A 2000-build aircraft commands a CMV of $5.5 million and a lease rate of $60,000.

A 2002-build aircraft has a CMV of $5.95 million with a lease rate of $65,000. A 2005-build aircraft is valued at $7 million with a monthly rental of $75,000.