The US regional jet “replacement wave”

At this week's RAA Mitsubishi provided a forecast (Mitsubishi Market Outlook - RAA-(Sep 24 2018)_FNL) of how they see the US regional market facing a replacement wave between 2022-2027. We decided to take our own look at this idea. The Mitsubishi premise revolves around this chart. As you will see by looking through their presentation, the very next chart in their deck states "Future of Scope Difficult to Predict". Actually, it is not difficult at all. Everyone agrees that that scope will not move any time soon. And by "soon" that means not before 2025. There is a pilot shortage that is growing worse. As long as the pilot unions maintain their hold on this supply shortage there will be discussion around easing scope. All the talk about the single pilot or non-pilot operations is being made by the OEMs on a very quiet basis to selected audiences. Nobody is ready to break the news to the flying public that they may be seeing a single pilot fly them anywhere soon. Even less likely is the sharing of the concept of passengers being on drones. The world isn't ready, even if there are forward-looking minds exploring this now. What does our data show? When we look at how the US regional jet fleet behaves over time, we note that the fleet is aging and retirement seems to be around 15 years. The data isn't clear because there has been a significant shift from 50-seaters to 76-seaters. The big swings between 2000 and 2005 are long gone and the industry now operates within tight guidelines. What we can see though is the retirements are in the 50-seater segment. What about that wave? Our numbers don't match those of Mitsubishi because our source is different. But we can see a potential wave. There are 518 active regional jets in the market that are well outside the retirement age. There are 595 aircraft that should be retired soon. Out of the total 1,796 active regional jets in the US market, one third are of retirement age. Over the next five years, another 683 38% will move into that category. That is a wave - 71% of the current fleet needs replacing over the next 10 years. But that replacement will not be one for one. A 50-seater will be replaced by an ~80-seater, therefore for every 1.6 50-seater retired we might see one larger regional jet. The wave is closer to 852 than 1,278. Even though the wave may be one third smaller, it is a big wave. The challenge here for Mitsubishi is that its MRJ90 is outside scope making it a hard sell and therefore they want to see scope eased. Their MRJ70 is scope compliant but will face tough economics given capital costs and LOPA demands by the major airlines. In other words, the MRJ70 as a three-class aircraft will probably struggle. Mitsubishi isn't alone here. Embraer's E175-E2 faces the same scope hurdle. But Embraer has the highly successful E175 in hand to serve the US market. When looking at the world regional jet market, the OEMs all face the inevitable issue of the US scope clause. It governs over 70% of the global regional jet market demand. That means if you are an OEM getting into the regional jet business, your offering has to work for the US industry. For now, only Embraer and Bombardier are inside that scope with a working platform. In conclusion, Mitsubishi is right about the wave. But it may not have a viable product for the US market.

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