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Flying Into Howling Headwinds


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FLYING INTO HOWLING HEADWINDS

Regional planemakers--the manufacturers of those puddle-jumpers so useful for getting to small cities--are beginning to see a surge of orders, after one of their worst slumps ever. But executives at such companies as British Aerospace, Embraer, Fokker, Saab-Scania, and ATR are hardly rejoicing. Instead, they face an industrywide crunch of their own making: a rapidly developing glut of new models. Says Laurence Price, vice-president at aviation consultant SH&E in London: "There may be too many [regional aircraft], even though the market has been growing very strongly."

The regionals thought they could avoid the problems that have beset Airbus Industrie, Boeing, and McDonnell Douglas, which have watched orders dwindle. Their strategy was to offer new aircraft, as U.S. carriers began replacing half-empty Boeing 737s and McDonnell Douglas DC-9s with turboprops. The smaller, more efficient planes would make it possible for carriers to turn a profit on short-haul routes where they were posting losses. And new, small airlines were supposed to serve cities the loss-plagued majors decided to drop from their schedules.

To meet the expected demand, makers spent millions developing new models, especially in the $800 million market for 45- to 70-seat craft, which airlines increasingly will use to replace big jets. U.S. carriers such as Atlantic Coast Airlines have placed orders.

Yet the surge in new products threatens to outstrip any rise in demand. Already, battles for customers are driving manufacturers to offer cheap financing and spiffy new features such as noise-cancellation technology for quieter cabins. British Aerospace PLC is offering cash--dressed up as "integration support"--to lure orders. "It's a buyer's market," says Mike Ambrose, director general of the European Regional Airlines Assn. Pressure to offer faster, quieter, and more sophisticated planes--at affordable prices--is pushing manufacturers' margins toward zero. Saab, one of the most successful at snaring new orders, is losing money on some models, says Chief Executive Lars V. Kylberg.

STRANGLED? The new-product glut is not all that threatens manufacturers. Executives worry that the anticipated growth in orders will be disappointing. Many companies expected a boom in European travel. But growth is well below the levels predicted last year, when the European Community said it would gradually deregulate its airlines. Executives say a shortage of slots, or airport-access rights, could strangle growth in Europe. And in the U.S., some observers think major airlines could prove less eager to give away routes to regional carriers than anticipated--especially if they find a way to trim labor costs to make such routes profitable.

The shakeout leaves manufacturers pressed for capital and facing a squeeze. "Consolidation will be key," says analyst Cameron Burr of aviation financial adviser First Equity Development Inc. Germany's Deutsche Aerospace has bought a controlling interest in Dutch maker Fokker. At Saab, the world leader in the 20- to 39-seat market, Kylberg says he has been in talks with ATR, BAe, and Deutsche Aerospace. He expects Bombardier Inc.'s de Havilland Inc. and BAe, which announced plans for new 30- to 72-seat planes, to invite others into their programs.

ATR, a French-Italian joint venture, commands 25% of the regional-craft market. Even with such a hefty share, says Alenia Marketing Director Giovanni Mandolese, the company is talking to Saab, Construcciones Aeronauticas, and BAe about collaborating. One possibility is a jet version of its ATR 72, which would cost $100 million to develop.

In this dogfight, experts say, the spoils will go to those that can remain active. They must be able to rely on a stable of existing planes but cannot ignore technical developments, such as the futuristic cockpit controls on Dornier's 328. And besides exploring links with established makers, they need to court developing partners such as Russia, China, and Indonesia, which have cheap labor and captive markets. Also important are advances in engines and materials to make aircraft cheaper to operate. All this will cost plenty, with the payoff years away. It looks as if the regional planemakers will have to keep running just to keep flying.Andrea Rothman in New York, Patrick Oster in Brussels, and Gabrielle Saveri in Rome


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