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Turboprop Values Steady but Embraer Ambitions Could Impact Residuals

October 2, 2017

The market for turboprops remains stable with aircraft being leased with relative ease and at higher lease rate factors than enjoyed by the most popular of jets.

Nordic Aviation Capital – one of the major lessors if not the largest turboprop lessor of modern turboprops – has placed a number of aircraft including used ATR72-500s which are now in plentiful supply. The Transasia aircraft are moving with Yeti Airlines leasing an example and Aeronova has also leased a -500. Regional Jet Ou has leased a used -600, a variant that has been in service for some years and is therefore coming onto the market though in limited numbers.

There has been considerable stability in values and lease rentals of turboprops in recent years. This is the result of a stable product line, limited competition, the need for the replacement of aircraft built in the 1980s, as well as an operator base that sometimes has limited financial capacity to acquire new aircraft. With no real competition, a profitable product line, and no wish to invest billions in a new product, the status quo has been preserved for far longer than in the jet segment. Even the incursion of Russian and Chinese offerings has not discernible impact on the existing products.

The turboprop manufacturers – ie Bombardier and ATR – have been discussing a replacement for what are ageing products for many years. The number of seats has been increased and the engines upgraded, but neither has gone beyond a stretch to the basic design. Bombardier is inevitably focused on the CSeries and has little appetite or capacity to seek a replacement for the current offering even if production rates are low. ATR – Airbus and Leonardo owned – has ambitions but its owners are less than enthused about such a commitment given the size of the existing orderbook, a stable production rate, and the cost of other programs. The business case for a replacement has not yet been established.

Yet there are rumblings that Embraer may be seeking to re-enter the market with a clean sheet turboprop design that would offer considerable efficiency improvements over existing types – a feat that would be easy to achieve in view of structures and powerplants that can be traced back to the 1980s (though the B737MAX is derived from a 1960s design). Embraer has stated intentions to be the market leader in the sub 150 seat segment now that Airbus and Boeing have effectively moved to larger equipment though this has not prevented Boeing from seeking to overturn the Delta order for CSeries aircraft.

As Embraer has the major share of the regional market and Bombardier will have no appetite for developing a CRJ replacement, the Brazilian manufacturer is considering producing turboprops once more. The largest turboprop that Embraer produced was the 30 seat Embraer 120 Brasilia. This means that Embraer will have something of a learning curve to produce a 70-90 seat aircraft. Embraer will also have the issue of selling the aircraft to operators that currently fly competitive equipment and starting afresh will not be easy. Customers in this segment typically order in small batches and when the aircraft is in service so securing a sizeable backlog before any new aircraft enters service will be difficult. Embraer has perhaps been buoyed by the relative trouble free development of the E2 series of regional jets, limited movement in U.S. scope clauses, the moribund state of the business jet segment and the ability of ATR to sell hundreds of turboprops.

The effect of Embraer entering the turboprop market will be to shake up residual value forecasts that for so long have been predicated on only modest improvements to an existing demand. The ATR72-600 and Dash8-400NG residuals will be faced not only with a new market entrant but also the possibility that ATR at the very least will be forced to respond with a major upgrade or even a replacement. A new engine will be required at the very least. Embraer has previously been able to move relatively quickly in terms of decision making, note how far Embraer has developed its business jets in only a decade. With considerable groundwork already likely to have been undertaken in proving the business case then a design may be revealed at next years Farnborough Air Show. Compared to developing a range of regional and business jets, the costs associated with a new turboprop may be viewed as a relatively cost effective means of ensuring that the company can offer a range of products below 150 seats largely, thereby impacting residual values of existing products.

 

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