Thank you to everyone who joined us on Thursday 28th May for the last in IBA’s series of webinars ‘What are my aviation assets worth’? Our senior ISTAT appraiser team reviewed the impact from Covid-19 on future asset performance for specific Regional and Turboprop aircraft.
The panel shared their opinion on likely market performance in the near and long term, identified which asset types are more vulnerable and flagged those that are more resilient to current conditions.
Session highlights included reviewing market supply and demand, fleet plans, scope clauses plus values and lease rate guidance for aircraft and engines.
The session also allowed for 20 minutes of Q&A, enabling our audience to put their burning questions to the panel.
The webinar recording can be viewed on our YouTube Channel and the slide deck is available to download here. If you have further questions please contact: Mike.Yeomans@iba.aero or David.Archer@iba.aero.
Webinar Synopsis – Covid-19 – Regional and Turboprop Aircraft Values and Lease Rates: What are my aviation assets worth?
In today’s session, IBA shares its opinion of the regional jet and turboprop markets globally and analyses Covid-19’s impact on market values and lease rates. After identifying which aircraft fall within the scope of our study, we consider:
- Expected supply and demand behaviours
- Predicted lease end activity
- Market value and lease rate forecasts
- The Scope Clause and its implications
- Anticipated engine market movement
Broadly, our regional jet focus is on Embraer and Bombardier aircraft with 50 + seats and we’re concerned with ATR and De Havilland turboprops with a minimum of 40 seats. We include the Sukhoi Superjet SSJ 100 and the Mitsubishi Spacejet M90/M100, even though the latter is still in development, and also refer to the Airbus A220 because, despite being a narrowbody, it has been identified as an apt replacement for some of the jet aircraft we are scrutinising. Increasingly, there is a blurring of the distinct lines separating regional jets and smaller narrowbodies, new generation aircraft such as the E195 – E2 obscuring the differences yet further.
Supply and Demand
We foresee limited supply from the regional jet OEMs over the next two years.
- Bombardier has scaled down its commercial aircraft production. The C series, having been sold to Airbus, is now the A220 and the Dash 8 programme has gone to De Havilland. Its sole model in backlog is therefore the CRJ with 24 units and since that programme is in the process of being sold to Mitsubishi, Bombardier’s focus will in future be on supporting the SpaceJet
- COMAC has the strongest backlog but since it is exclusively for China-based customers and COMAC’s rate of delivery has recently been low, we don’t see the 500 aircraft orderbook clearing quickly
- Embraer’s orderbook is the strongest apart from COMAC’s at 300 but we are aware of significant customer deferrals, most until next year or 2022 but some even further. Azul has deferred until 2024 and is a key customer with around 20% of the current backlog
- Mitsubishi has endured serious delays to the entry into service and certification of the SpaceJet. With US test facilities closed and staff being made redundant, we do not envisage production restarting soon
- Sukhoi’s market has largely retrenched into Russia and the CIS and despite expansion into CityJet and Mexico’s Interjet, poor AOG and customer support have weakened their market
Dominated by ATR and De Havilland of Canada, the turboprop market had suffered oversupply since 2014/2015 due to aircraft being oversold to the lessor market. 2019 saw some recovery and deliveries moderated to around the 68 mark from a previous 80 – 90 in previous years. At 220, ATR’s backlog far outweighs De Havilland’s <50 and we expect deliveries for both OEMS to fall near-term.
Regional Jet Fleet Plans and Activity
The E190 features prominently in withdrawal plans. Both Air Canada and American Airlines recently announced plans to accelerate retirement of their E190 fleets and replace them with A220s. They have 14 and 20 E190s respectively and American is also bringing forward retirement of 19 CRJ-200s as well as other widebodies and narrowbodies.
Similarly, Delta is not renewing flying contracts on 55 of its CRJ-200s. As already mentioned, Azul have deferred delivery of its E195-E2s until 2024 and are expected to return some E1 aircraft to lessors.
Jet Blue has been undergoing a fleet replacement programme and presented an optimistic outlook, with a healthy orderbook and a commitment to agreed delivery timescales. Their E190s will be switched to A220s.
Both BA and Aero Mexico’s E190 fleet renewal campaigns have been paused for now. KLM Cityhopper placed an order for E195-E2s last year as part of its fleet renewal.
Excluding leases whose extensions are being negotiated and ignoring finance leases, operating leases due to end over the next five years feature the E190 heavily due to its popularity as a leased asset. Also vulnerable are the CRJ-100/200 and the E195. The CRJ-700/900s and the E175 are more US-centric and therefore less exposed due to the lower levels of leasing.
Turboprop Fleet Plans and Activity
Activity is headlined by Flybe’s failure which released 54 DHC8 aircraft onto the market, creating oversupply. LGW’s insolvency freed another 15 and Air Baltic’s programme involves replacement of a further 12. The DHC8 therefore features most prominently in the supply picture whilst ATR’s fortunes appear more robust. There are high numbers of ATRs in storage, but many are understood to have leases agreed or are subject to letters of intent so should come back to the market. If they do not this could negatively affect the supply demand dynamic.
Market Values and Lease Rates
Prices having been agreed pre-Covid, these aircraft such be less susceptible to adjustments in their values. We’ve seen only 13 regional jets and turboprops delivered to date in 2020 and we forecast far fewer deliveries this year due to deferrals.
Their young age should ensure continued inclusion in operators’ fleet plans, so we do not expect great pressure on values and negative movement is likely to be limited. The E175 will be the most robust. Oversupply will result in discounted trading values for the DHC8 and the CRJ-1000 is not projected to perform well as its operator base is small and it lacks a presence in the US fleet.
Greatest pressure will be felt here and with older aircraft, the DHC8 being particularly vulnerable due to oversupply. The data points we have witnessed recently for the E170 suggest notable post-Covid discounts are required. We anticipate the softening of larger jet values we saw before this pandemic will continue and predict that aircraft locked into the US regional carriers have a more positive outlook.
The DHC8-400 will face the most dramatic reductions and we have already seen very low rates being offered. We foresee discounts being granted to generate interest and expect to see shorter term leases at reduced rates to stimulate demand. There was pre-Covid softening of the E190 which we expect to continue but the stronger E175 will be less affected.
The US is crucial for the regional jet market, with more than half of regional jet aircraft placed within US regional fleets. Exclusive to the US airline industry, the Scope Clause was instituted by pilot unions to protect the US Major carriers’ mainline pilots’ jobs. It limits the number and size of aircraft that may be flown by the airline’s regional airline affiliate where pilots are paid much lower rates. The limits imposed are based on seat count and weight: American, Delta and United are all subject to a 76-seat limit and a maximum take-off weight of 86,000 lb for their regional feeder carriers. Their individual clauses differ in accordance with the terms agreed with unions:
- American is restricted to 75% of its total mainline fleet split between smaller jets and large 76-seaters
- Delta can offer up to 450 split between smaller and larger aircraft
- United can fly up to 90% of its single aisle fleet as 50-seat aircraft and up to 255 as larger jets
American Airlines has recently voiced its fleet exit plans and we foresee 100+ of its regional jet aircraft being vulnerable. Delta has already hit its 450 limit whilst United has most flexibility with scope for more 50-seat aircraft. The current situation may open up an opportunity to renegotiate the terms of the Scope Clause, a previously impossible prospect.
Historically, engines have shown more resilience than airframes and we expect a quicker recovery, in relative terms, in the regional aircraft space as domestic markets become re-established. So far this year we have observed little trading activity and the limited trading has been based on terms agreed pre-Covid so it has not been particularly useful in informing a post-Covid view on values.
A heavily US-focused engine which was coming to the end of a period of strong performance pre-Covid and has displayed some positive signs since. Having no direct threat from replacements, we foresee values dropping by 5-7%
Again, a strong player in the US fleet so its fate is helped by the Scope Clause. Its performance before the pandemic was robust and though a small number of trades have completed, they have largely matched what we have seen historically. A 5-7% reduction is likely
The higher costs of ownership result in a far softer market here, so a 7-10% (maybe even 12%) slump could occur. Faces threats from the A220, E2 and planned retirements by American and Air Canada are concerning
- PW100 family
Values are largely expected to hold stable as they’re driven more by OEM/MRO costs than market rates. We see values dropping around 5%
The outlook is comparatively positive for the regional market since their return to service will come before any widebody and narrowbody recovery. Further airline failures will necessitate a review of our opinions concerning value movements with some aircraft we have studied facing greater oversupply concerns. Any value revisions we process will be short-term however and we do not anticipate base vales being affected for most regional aircraft types.