By Philippe Poutissou
Special to Leeham News and Comment
Dec. 15, 2014: The market for turboprop aircraft has been strong for nearly a decade, yet there has been limited new product development in the segment. This has some regional airlines getting nervous about their future, in particular those who specialize in serving smaller markets with 30- to 50- seat turboprops built in the 1980s and 1990s. Which aircraft will replace the robust, but not indestructible, Bombardier DHC-8, Saab 340 and Embraer Brasilias?
Setting aside the technical challenges of developing and certifying a new aircraft type (of which there is ample evidence), the market challenge for smaller turboprops comes down to a question of limited revenue potential. Due to overall pressure on aircraft prices and demand that is highly fragmented, the business case for an aircraft OEM becomes risky and difficult to justify.
Propelled by the rise in fuel prices in the second half of last decade, demand for new turboprops has been steady in recent years with annual order totals typically surpassing 100 units and matching the demand for regional jets. As backlog and production rates for Bombardier and ATR turboprops increased, both OEMs tweaked performance and introduced new cabin and cockpit upgrades to keep their product lines fresh. However, the focus of development has been the 70+ seat market (or up to 86-seats in the case of the Bombardier Q400). AVIC of China is now joining the competition by launching the 70-seat MA700 planned for delivery in 2019. New turboprop aircraft and engines studies have primarily targeted the potential for even larger turboprops in the 90- to 100-seat range.
However, at this time, no OEM has proposed any new programs for smaller turboprop in the 30- to 50- seat range. Since the 1980s, more than 2,600 aircraft were delivered in this category, of which roughly half remain in service (see table). But of the nine types brought to market, only ATR still offers new production 50-seaters with the ATR42-600.
A bottom-up market survey would likely uncover several requirements for a small turboprop replacement aircraft. The business model for airlines such as Wideroe of Norway, flying DHC-8-100s into short airfields on coastal fjords, or REX of Australia, flying to smaller communities in the outback with a fleet of Saab 340s, depend on the operating costs and performance characteristics of small turboprops. In addition to regional airlines, there are also many operators around the world supporting resource operations ferrying passengers and cargo to remote airfields. Surely there have been sufficient improvements in manufacturing, materials and systems since the 1980s to develop a significantly better aircraft. Why then is no OEM working on one?
Changing fare structure a barrier
Regional airlines have historically commanded higher RASM (revenue per available seat-mile) on the short-haul routes flown by smaller aircraft since these markets have been isolated from direct competition. However, fares in thin markets can no longer diverge from the prevailing trend to lower yields that exist in larger markets.
As large low-cost airlines seek continued growth opportunities, some lucrative regional routes have become targets. For example, in Canada, low fare carrier WestJet established a subsidiary WestJet Encore operating a fleet of 78-seat Bombardier Q400s to cherry-pick short-haul markets where the incumbent airline historically enjoyed higher than average yields.
In other markets, passengers are willing to travel by surface to a nearby airport in search of lower fares. New roads, rail links, bridges and tunnels all nibble away at markets for small turboprops, especially where these bring alternative Low Cost Carrier service into close proximity.
Furthermore, there are fewer and fewer airports globally where challenging runways are the preserve of small turboprops with good short-field performance. Runway improvements as well as the development of better performing aircraft have allowed operators to swap out small turboprops for larger, more profitable aircraft. For example, at London City Airport, an airport specifically developed for STOL (Short Take-Off and Landing) turboprops, the 30- and 50-seaters have largely been replaced by newer more capable 70- to 100-seaters.
In emerging markets, where many new airline routes are being developed as economies grow, demand for air travel is highly elastic and traffic growth has largely been driven by availability of air travel at accessible fares.
Across the globe, the days of the “protected” high-yield regional routes are numbered and the market potential for smaller turboprop orders is therefore primarily for fleet replacement in regions where these routes remain. Since the alternative to the small turboprop is more often than not a larger jet aircraft, the cost to operate a small turboprop must also improve in proportion to the savings being achieved by large regional jet and single-aisle operators. The challenge is that on a per-seat basis, most regional operators have fewer opportunities to reduce costs such as: crew salaries, training costs, airport landing and handling fees, and overheads.
The typical small turboprop operator has fewer than 10 aircraft in its fleet and as a result significantly less leverage on costs than the single aisle operators who generally have dozens if not hundreds of aircraft of a single type.
Ability to pay capital cost is capped
This reality leads to the conclusion that the regional operator’s ability to pay the acquisition cost of a new aircraft is capped. Fifteen years ago, when 50-seat regional jets were selling like hotcakes, their customers were planning to achieve higher yields and were willing to pay higher prices, on a per seat basis, than for a larger jets. These market conditions no longer exist. And the challenge for the OEM is to convince airlines to invest in an aircraft with less than 50-seats for more than a third of the price of a single-aisle or half the price of a 100-seat jet.
Regardless of the quality of market intelligence available, the back-of-the-napkin-conclusion is that a new 30-seat or 50-seat turboprop will need a market price in the low- to mid-teens (in $ M US). Considering that development costs for any new aircraft program these days is likely in the $US Billions, the limited potential for pricing upside requires high production rates in order for a new program to be profitable.
As described earlier, the market for 30- to 50- seat turboprops is primarily a replacement market. With a few exceptions, the order opportunities are with many small operators, around the globe, with business models covering a wide spectrum from the traditional regional airline, through to charter, cargo and special mission operators. While a widely distributed fleet is generally considered a sign of strong asset value and liquidity which attracts investors, this fragmentation makes the effort required to launch a new aircraft type even more difficult. Large volume deals are important to help launch programs as they allow OEM’s to concentrate Sales and Product Support resources initially and establish a footprint and critical mass. In this respect, unless an OEM has a well-established Sales and Support network, or is backed by a few large customers, the barriers to market entry will be significant.
The lower-end market is shrinking
Bottom-line is the 30- to 50- seat turboprop market is shrinking, highly fragmented and has limited ability to pay price premiums. Given those conditions, it is unlikely that an all-new 30-seat or 50-seat turboprop will be developed for airline markets in the near-future. In order to reduce risk to the OEM, potential scenarios include: the re-start of production for an existing design, as was the case when Viking Air acquired the type certificate for the DHC-6 Twin Otter; or for a large government customer to fund development of a multi-purpose platform thereby ensuring some minimum level of production. This approach was attempted in the past with the CASA/IPTN CN-235. But the commercial version of the CN-235 did not prove successful for airline operations because of the availability of several more efficient alternatives at the time. Since today, the only choices are the ATR42-600 or to refurbish and extend the life of existing airframes, perhaps the outcome could be different.
Philippe Poutissou is former Vice President Marketing, Bombardier Commercial Aircraft.