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ATR Extends Market Leadership And Pushes For New Product

posted Jul 8, 2013, 11:49 PM by Michael Adams

Turboprop manufacturer ATR has rebounded remarkably after its near-demise more than a decade ago. Now it is keen to take the next step and build a 90-seat turboprop aircraft, but one of its shareholders is balking.

Launching the proposed 90-seater is of “fundamental importance” to ATR, CEO Filippo Bagnato says. “We have been able to sell more than 300 aircraft since the launch of the [upgraded ATR 42 and 72] -600 versions. The market pays attention to manufacturers that renew their aircraft.”

Technical details and a business plan for the 90-seat turboprop were developed and submitted to ATR shareholders Finmeccanica and EADS (50/50 stakeholders in the joint venture) at the end of last year. Now ATR is waiting for approval of what it estimates to be a $2 billion project. Finmeccanica is in favor of ATR's plans, in spite of its own woes. “If EADS is not interested in developing the aircraft with us, we will find alternatives,” Guiseppe Giordo, CEO of Finmeccanica's civil aircraft subsidiary Alenia Aermacchi, says. “There is a huge market potential for a turboprop larger than the ATR 72.”

It is not that EADS doubts the market potential for such an aircraft or has reservations about it competing against existing aircraft in its portfolio. But even if the financing seems feasible, engineering resources could cause a problem. Airbus CEO Fabrice Bregier has made clear internally that he cannot devote hundreds of aerospace engineers to the regional affiliate at this time.

Because it has not developed a totally new aircraft in almost 30 years, ATR would have to rely on external engineering resources to a large extent for what would likely be a multi-year development cycle. External in this case means drawing on Airbus and Alenia engineering know-how.

And that is where things become difficult: Airbus does not want to be distracted from its higher-strategic-value projects, namely the stretched A350-1000 and the A320NEO. These aircraft are arguably derivatives of platforms that already exist. But in light of a painful experience, Bregier has followed a culture of caution at Airbus that emphasizes fully clearing one set of milestones before tackling the next. This was the approach of his predecessor, Tom Enders, who postponed the launch of the NEO until he was sure Airbus would have enough engineers to deal with the work. He agreed to launch the aircraft only after he was convinced this was so.

However, EADS's official position does not sound totally negative. “Airbus is, together with its partners, studying the developments in the regional market,” says Kiran Rao, ATR chairman and Airbus executive vice president of strategy and marketing. “The most likely outcome will be a new generation of turboprops with increased size, greater comfort and significant improvement in efficiency.”

However, Giordo has made clear that Alenia and Finmeccanica do not want to waste too much time waiting for Airbus and EADS to move. He is pushing for a decision to go ahead with the project by the end of the year.

The turboprop manufacturer argues there is a market of up to 1,300 units for the proposed aircraft. The demand will partly come from airlines eliminating some jets from their fleets in favor of turboprops, ATR believes. “The jet manufacturers are moving toward 100 seats. To break even, they need to fly in regional markets with larger aircraft.” That could open up a niche that can be filled with a newly designed turboprop. Bagnato also believes that its existing customers will switch to bigger aircraft.

Unlike ATR, Bombardier has no plans for a turboprop larger than its Q400. It notes its customers have not indicated interest in a larger version.

But as always, the two turboprop rivals' positions have to be weighed. Bombardier is struggling to keep its new large CSeries jet on track. It has just pushed out first flight by another month—until the end of July—and the relatively small company cannot afford any major program delays; these have caused fiscal pain to other manufacturers. It can also not afford to run another multibillion-dollar development program concurrently. The Canada-based manufacturer is struggling to sell its Q400. The backlog is a mere 48 aircraft.

ATR, by contrast, sees a key strategic advantage in launching a new turboprop. Not only would it provide customers the opportunity for more capacity at low unit costs, it would also gel the manufacturer's competitive position as the dominant builder of regional 50-90-seat turboprops. A broadened ATR portfolio, and what would likely be a much-lower-unit-cost larger turboprop, would make it even tougher for Bombardier to sell the Q400 in significant quantities.

The ranks of ATR's competition have swelled, though. China has proposed to build an aircraft of similar size in the next five years and South Korea has hinted about building a new turboprop, too. From a strategy and commercial point of view, ATR would be wise to be able to offer its product ahead of the new competitors'.

As for the incumbents—Boeing and Airbus—although the behemoth manufacturers would never openly admit it, the launch of Bombardier's CSeries with Lufthansa played a role in the decision to launch the 737 MAX and the NEO. Their market success seems to demonstrate that timing is not always crucial (the CSeries is planned to enter service next year, NEO is due in late 2015, and MAX is slated for 2017).

While ATR has briefed its shareholders about the proposed aircraft, little is publicly known. The 90-seater is understood to be a new aircraft, not a derivative of the -72. It is to be equipped with new engines, avionics and wings. And while it is reported to be a little faster than the current ATR models, the company does not want to compromise efficiency for speed, which is one of the problems Bombardier is facing with its much faster Q400.

ATR recorded 173 orders and commitments so far this year, 83 of which are firm. A big part of the airframer's success is due to the fact that it made inroads in the leasing market. Nordic Aviation Capital placed orders for up to 91 aircraft (36 firm) and Air Lease Corp. bought five ATR 72-600s at last month's Paris air show.

The manufacturer's firm backlog now stands at 270 aircraft, significantly more than the 223 units recorded two years ago. As sales increase, so does market coverage. Danish regional operator Jettime will fly an initial fleet of six aircraft in Sweden, a country where ATRs have so far not been operated. Last month, Avianca took delivery of its first ATR 72 and the airframer is following up with more support infrastructure in Latin America. ATR is opening a training center in Bogota, Colombia, in cooperation with Avianca.

The focus on Latin America is underlined by the decision to move the North American activities to Miami “to be closer to our Latin American customers,” as Bagnato explains.

The ATR fleet in the Asia-Pacific area has doubled since 2005 and is expected to triple by 2016. The manufacturer claims a market share, as measured in new sales, of 66%