Regionals struggle to secure financing for new deliveries

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Regional airlines and manufacturers are having a tough time financing new deliveries, throwing into question the viability of the rapid regional jet expansion plans at US Airways Express carriers.

 

Embraer senior vice president of airline markets Frederico Curado says the regional industry is the most impacted by the depressed markets for debt, equity and leverage leases because its airlines tend to have poorer credit ratings than major carriers.

 

“It’s been very hard to arrange for financing these days,” Curado says. “It’s been very difficult to find debt and equity support, especially for airlines with less credit. Investors always favor better credit airlines.”

 

For example, Curado acknowledges Embraer has so far failed in its attempts to arrange for financing for the ten EMB-140s ordered by Trans States Airlines last year. Trans States has not yet firmed up its letter of intent to buy these aircraft and none of them are now in production although the deliveries were initially scheduled to begin several months ago. A Trans States spokesman acknowledges financing has been difficult to arrange since the 11 September terrorist attacks.

 

Trans States is one of four carriers in line to add regional jets as a result of the scope relief recently secured by US Airways. But Curado says the other three carriers – Chautauqua Airlines, Mesa Airlines and US Airways itself – also have relatively low credit compared with other larger US carriers. Chautauqua chief executive Bryan Bedford says financing could make it difficult for US Airways to acquire regional jets on its own, but the prospect of hiring furloughed pilots from US Airways poses the biggest barrier to Chautauqua’s hopes for expanding its US Airways Express operation.

 

Mesa chief executive Jonathan Ornstein claims Mesa has an advantage in expanding its US Airways Express operation because it could acquire used Bombardier CRJs that already are financed. “Embraer is having significant amount of difficulties right now just financing aircraft,” Ornstein says.

 

He further claims Chautauqua and Trans States are at a disadvantage because they only operate ERJs and financing for these aircraft types are especially difficult right now in light of changes to Brazil’s program for subsidizing Embraer aircraft. Curado acknowledges revisions to the ProEx program has made financing more difficult and points out that Bombardier also has access to its in-house capital firm, while Embraer does not finance any aircraft directly. But he denies that Embraer is at any kind of a disadvantage in arranging for new aircraft financing.

 

“They have problems too,” Curado says, referring to Bombardier. “We are both struggling to deliver what is manufactured. It’s a legitimate difficulty being faced by every player, even Boeing and Airbus. But the investors always look to the 777s first, leaving the regionals for last.”

 

Ornstein says the changes in the Brazilian subsidy system have changed the debt portion of the financing equation, exacerbating the current lack of interest from the investment community to provide the necessary equity. He says leverage leases are also more difficult to arrange while operating leases are not as cost-effective.

 

“Bombardier is also facing similar challenges,” Ornstein says. “The difference now is that Canadair has a number of used aircraft on the market that already have financing.”

 

A Bombardier spokesman declines to comment on the role of Bombardier Capital, but says: “We are not having any difficulty structuring financing for customers.”

 

SkyWest Airlines, for example, has been able to secure long-term permanent financing for new CRJ deliveries and have not been forced to seek short-term bridge financing. SkyWest chief financial officer Brad Rich says the carrier has added 27 Bombardier CRJs since last September, with 24 financed through leverage leases and three through debt financing.

 

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