Regional airlines face a difficult operating environment that has the potential to limit their future business opportunities and, consequently, their demand for new aircraft. This is especially the case in North America, due largely to consolidation among U.S. major airlines. North American regionals largely earn their bread and butter by providing feeder services into the networks of the majors. In less than 10 years, mergers and acquisitions have reduced the Big Six U.S. majors to only three in number. During roughly the same time period, Europe's major airlines have also been the subject of consolidation activity. This has been on a less wide-ranging scale than in North America, but the process is ongoing in the region. This impacts regional carriers because the newly consolidated majors start to rationalize and streamline their route networks in order to eliminate redundancies and improve operating efficiencies. Thus, hubs have become fewer in number, while operations at several remaining hubs have been scaled back. At the same time, the majors have become more skilled and disciplined at controlling capacity growth. All of these factors translate into fewer opportunities for regional airlines to pick up feeder work into the majors' networks. And, with the regionals now chasing a smaller number of capacity purchase contracts, bargaining power and leverage have shifted decisively to the majors. North America is the largest geographic market for regional aircraft, but growth in this market is hampered by another obstacle as well. This is the existence of scope clauses in pilot contracts at the major U.S. carriers. Under these clauses, the maximum size of an aircraft that can be operated by regional partners of the three legacy U.S. airlines is 76 seats (except for one "grandfathered" exemption). In addition, the scope clauses place an 86,000-pound limit on the takeoff weight of these aircraft. Often overlooked by industry observers, the weight limit is actually a more critical factor than is the seating restriction. New jets such as the E175-E2 and MRJ90 exceed the 86,000-pound weight limit, even though they can be configured and flown with 76-passenger seating layouts. Thus, upward movement on the weight restriction would have a positive impact on aircraft demand, even should the 76-seat limit stay in place. Pilot contracts at the three U.S. majors become amendable in the 2019-2020 timeframe. At present, very few signs (if any) are evident that scope clause liberalization will be in the cards during this upcoming round of contract negotiations. Scope clause relief may have to wait until the next round of negotiations, which would likely occur sometime in the 2021-2023 timeframe. Even without the removal or liberalization of scope clause limits, though, regional jets that exceed these limits will still be ordered by regional airlines that are unencumbered by scope clauses. They will also be ordered by low-fare airlines, mainline carriers, and leasing firms. Meanwhile, sales of turboprop airliners have rebounded spectacularly well in the first half of 2017, after a slow sales year in 2016. Nevertheless, the persistence of relatively low fuel prices casts a shadow over the turboprop market. Much depends on the future direction of oil prices. Our forecast is based on oil prices gradually rising from the current level of around $50 per barrel to approximately $60-$65 per barrel by 2020. In the past couple of years, the regional aircraft market has stabilized somewhat after several years of erratic swings in annual production. Our forecast indicates that annual production will be relatively flat from 2017 through 2019, staying within a range of 330-339 units. Some minor growth in output can be expected in 2020 as certain new models enter service. More sustainable growth, though, is expected to get underway in 2023. The challenge for manufacturers of regional aircraft is to respond to this changing marketplace with a product line well-suited to meet the current and future requirements of the operating community.
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