The Turboprop Surge

Hidden amidst the first flights for CSeries and A350, and launches of 787-10 and 777-X, the turboprop market has quietly been gaining strength in the second half of 2013, and appears to be well positioned for success in 2014.  We’ve seen orders and LOIs for 189 turboprops in the second half of 2013 (thru December 10th), with both ATR and Bombardier having market success.

Reviewing how the turboprop market has evolved over the past decade, we can see that just like in other commercial aircraft segments, larger turboprop aircraft have grown more popular because of seat-mile operating economics.  The 19, 30 and 50 seat markets have been replaced by the 70-90 seat market.  The following chart illustrates the fleet of active turboprops by size over the last two decades.

Along with this significant change, we have seen the slow demise of famous aircraft brands. Today we are seeing a turboprop duopoly; again very similar to the larger market. We can expect to see this duopoly grow a lot faster as older aircraft are retired.

For ATR and Bombardier, approximately 40% of their active fleets are less than five years old. This means as the remainder of the turboprop market undergoes updating or growth, only these two firms have the aircraft to supply the market.  Moreover, airlines replacing existing ATR and Bombardier fleets are likely to remain with their OEMs because of the costs of pilot training and transition.

Even if replacement is not on a one for one basis, there are 487 older turboprops that need replacement – sooner or later. Bear in mind that turboprops fly shorter hauls and consequently perform many more cycles than most jets.  This means turboprops are build tougher and we can see many of the active aircraft are over 20 years old. But they do wear out and almost certainly maintenance costs catch up with economics.

In terms of the replacement market one example from each of the two major OEMs suffices to demonstrate the need. Even though both airlines have added to their fleets regularly 18% of the UTAir fleet dates from 1990 or earlier and 67% of the Jazz fleet dates from 1990 or earlier.

Since the Paris Air Show, both ATR and Bombardier have been busy, with a notable turnaround at Bombardier after the Q400 backlog had dwindled to significantly lower levels. With the new orders, its backlog has been restored to levels that ensure production will continue at its current rate, stabilizing a program that went through a stretch with limited demand.

We expect both manufacturers to get even busier, as Pratt & Whitney Canada is expected to introduce a new engine, currently called the Next Generation Regional Turboprop to replace its current PW100 series.  That engine will include a new compressor, a scaled-version of PW’s Talon burner, and an 8 bladed propeller to provide a 20% improvement in fuel burn. That magnitude of an improvement is enough of a difference for customers to mandate adoption of the new technology engines on existing or new development programs – much like the GTF forced re-engining programs for A320 (neo) and Embraer EJets (E2).  Re-engined models should appear in the 2018 time frame, given typical lead times.

Let’s look at some of the activity in the last six months:

ATR cleaned up at Paris, with an order from Danish leasing company Nordic Aviation Capital (NAC) for up to 90 aircraft, with 35 firm orders.  Leasing firm HGI Aviation Division, part of HGI Capital, contracted for 10+10 ATR-72-600s for Passaredo Linhas Aéreas.  Air Lease Corporation ordered 5 additional aircraft, and the totals at Paris were 83 firm orders and 90 options.  Since Paris, NAC has increased its order for an additional 15+25 aircraft after a deal placing 35 aircraft with Garuda in October.

Bombardier, by contrast, had a quiet Paris, with Alaska Airlines ordering 3+7, and Arik Air ordering four Q400 aircraft.  But since then, activity has picked up.  In August, at the MAKS AirShow in Moscow, Bombardier and Rosteknologii signed an agreement for up to 100 Q400s to be built in a joint venture in Russia, and Ilyushin Finance placed a letter of intent for 50 of those aircraft.

In October, Luxair ordered 1+1 Q400, and in November, at the Dubai Air Show, announced a series of orders, including 2+2 for Air Côte d’Ivorie, Palma Holdings (a leasing company) for 4+4, Nok Air for 2+2+4, and Abu Dhabi Aviation for 2.  Nok Air will also be the launch customer for the extended seating option, bringing the capacity of the Q400 to 86 passengers.
In December, Nantong Tongzhou Bay Aviation Industry Co. signed for 30 Q400 aircraft, providing Bombardier additional presence in China.  Momentum for the Q400 program has changed dramatically in the last six months, with a series of new customers, new customers and maintenance capabilities in Africa, and strong penetration of both the Russian and Chinese markets, that offer significant potential.

The turboprop market benefits, like the jet market, from lessor interest. OEMs see a steady flow of orders from lessors as they replace older aircraft, and provide equipment for growth or help get new airlines started.  ATR has clearly benefited from its NAC relationship. We expect to see the same occur for Bombardier with Ilyushin Finance. Garuda was able to place its ATRs into service quickly because NAC provided the market with the necessary liquidity.

For the second half of the year, through December 13th, ATR totaled 98 firm orders plus 115 options, and Bombardier 91 plus 63 options.  What does this resurgence mean, and how long will it last?

The answer is that regional operations remain sensitive to fuel prices, and turboprops, which are more efficient than jets for short-haul operations, remain a logical choice for this sector.  With markets in Russia, India, and China emerging with new requirements, the turboprop manufacturers are well positioned to provide both replacement and growth lift in those markets, which we expect to drive growth over the next five years.

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