Kroll Bond Rating Agency (KBRA) releases a 2019 Regional Aircraft Market Update.
KBRA expects continued growth in the regional aircraft market globally, supported by strong demand in the emerging economies of Asia-Pacific (particularly China), Latin America, CIS (Commonwealth of Independent States), and the Middle East, which will require new regional routes as global connectivity continues to expand. Demand is further underpinned by U.S. and European airlines seeking to maximize capacity utilization. Importantly, in 2018, the two largest original equipment manufacturers (OEMs), Boeing and Airbus, have taken steps to establish dominant positions in regional jet production through acquisitions in Embraer and Bombardier’s C-Series. This has been a significant event for the industry with positive long-term benefits coming from economies of scale. At the same time, new market entrants from Asia and Russia have made strides, with the promise of more competition in the long term.
Global new delivery demand for jets up to 150 seats is estimated at 8,230 and turboprops at 2,320 over the next 20 years, according to Embraer’s latest market forecast. This compares with Bombardier’s total new delivery projection of 12,550 aircraft in the 60-150 seat segment (valued at $820 billion) over the same period. The estimates reflect expected strong regional traffic growth due to increasing connectivity between midsize cities and fragmentation of historically dominant business hubs. In addition, turboprop demand is expected from emerging markets where this option provides the most viable solution for connecting people and goods transportation.
As seen in the broad commercial aircraft market, the global regional fleet continues to shift from its historically western focus toward Asia-Pacific (APAC), mainly driven by China. The International Air Transport Association (IATA) forecasts that routes to, from and within APAC will see an extra two billion annual passengers by 2037, for an overall market size of around 3.5 billion, with an annual average growth rate of 4.6%. The impact of this growth can already be seen in new regional aircraft orders. As of December 2018, North America held 38% market share of the global in-service regional fleet and 36% of aircraft orders, while APAC held 21% market share of the global in-service fleet and 39% of aircraft orders.
Regional operators and lessors face some challenges, including managing aging fleets and corresponding maintenance costs, and the impact of volatile fuel prices. In the largest market, the United States, airlines must contend with scope clause restrictions and pilot shortages. While smaller regional airlines and aircraft lessors exposed to emerging markets could be more prone to market-specific economic or geopolitical risks, KBRA generally believes that positive market trends will prevail. That said, KBRA notes that newer regional jets with limited in-service time have untested liquidity in the secondary markets unlike most narrow-body jets. Therefore, KBRA remains cautious as to their value in distressed markets, as well as for secondary and tertiary leases.
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