Premium 2018.12 – The influential US Regional Jet market

We have previously noted that the US represents roughly 70% of the world regional jet market. This ensures that the US market dictates how the industry moves. Even if China were to grow rapidly, it would possibly be decades before it matches the US influence in this segment. Embraer’s market forecast for the next 20 years indicates that 54% of future deliveries in the 70-90 seat segment will be in the US. The focus on the US also means that the world regional jet market is impacted by the US scope clause limitation, crazy as that may be. Whereas regional airlines outside the US can benefit from next generation aircraft like the E175-E2 or even the MRJ, the market outside the US is just too small for these programs to gain any traction. Embraer has pushed its E175-E2 program back to wait for a possible scope relaxation. The future for the MRJ90 is unclear and the OEM is now apparently building their MRJ70 which will be scope compliant. What does the US regional jet market look like? As we can see the market is a two-horse race. And the two horses are about even. What is not apparent from the table above is the stress these regional airlines are under. They are dependent on the majors for their revenue streams. Whereas these airlines were highly profitable years ago, more so than their major counterparts, the roles have now reversed. These airlines operate under the tightest of margins. On top of this, these airlines see their pilots cherry picked to work for the majors. This means a continuous race to train and hire new pilots. It is arguably the toughest airline operational area to be in. This one chart shows why new aircraft like the MRJ will have a tough time. Even as the fleet in the US has grown over time, despite variances, the fleet age has more than doubled from 2005. In another view of the industry, look at this table. It offers useful snapshots over the period. The names vary as some rise and others disappear. Note especially the Industry numbers at the bottom. Fleet size is up 0.7% but average age is up 144.2%. These numbers are eye popping. To get an idea of how the industry has had to cope with its vagaries, take look at the parked aircraft chart next. As the number of aircraft that were parked rose, they also were older when parked. These aircraft were primarily the 50-seaters. The following table illustrates how the two major OEM fleets that were parked aged over the years. When looking at the 2017 parked fleet we can see most of the Bombardier aircraft were of the early 50-seat generation. The Embraer parked fleet is also mainly from the earlier 50-seat generation, though there are several much newer E-Jets in the group as well. The Embraer fleet offers an opportunity for startups to acquire aircraft and create disruptive services. But as is well known by now, a startup airline is a high-risk venture. Especially in an oligopoly industry. American Airlines, in their recent fleet update from January 2018 noted that the 41 ERJ 140s aren’t available since the airline plans to bring them back to service in 2018, reaching 49 units in service before year-end. But what is clear based on the data we have, the US regionals despite the squeeze they are in, are going to have to renew their fleets within the near future. The focus will likely be on two segments: 60 seats and the 76 seats. There are only players in the race and that is the E175 and the CRJ700/900. Because of the immovable scope clause, the US market cannot use anything else. The MRJ70 is far away still because it hasn’t flown or been certified. Several of the US regional airlines are so large they will not buy form one OEM. Like their major partners, to ensure they get the best pricing they are likely to buy from both OEMs.

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