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ATR Playing for Position

March 30, 2017

 

Regional aircraft manufacturer ATR continues to dominate the challenging turboprop market, but has nevertheless adopted a more cautious approach as it prepares for the economic environment ahead.

 

 

Africa was on ATR's radar from the very beginning. Air Mauritius received Africa’s first ATR turboprop in the early 1980s, followed by Zambia Airways and Air Botswana. More recently, Royal Air Maroc was a launch customer for the ATR 72-600, and Tanzania-based Precision Air for the 42-600.

ATR’s new CEO, Christian Scherer, took office in October last year. Scherer traces his early days in aviation back to 1984, when he joined Airbus. He will run the company for a four-year term, to ensure stability and continuity as the company continues its growth path.

Scherer sees following in the shoes of former CEO Patrick de Castelbajac (who re-joined Airbus as Company Secretary) as complementary to the company’s strategy, while bringing a fresh approach in terms of management style.

“I think Patrick and I, even though we get along extremely well, are two very different people, so I think you will see a different style. That said, both of us are very close to customers – that is very important to us,” he says.

Despite his focus on customers and sales, Scherer admits that the decisions he made within the first few months in the job were more focussed on production: “I’m stabilising production rate roughly at the levels we achieved last year, which was near record level.” He is reluctant to pump more ATRs into a soft market.

Another decision, which he feels should have been made many years ago, is how material is received from the key suppliers. “We’ve changed the acceptance of the main sections that we get from our two main suppliers and partners: Airbus and Leonardo. We will now accept those sections at the exit of their factory and not at the entry of our factory so that we don’t have remaining work or an unsatisfactory state of the sections coming to Toulouse. We are now the ones getting to decide if the parts are getting shipped to Toulouse or not,” he asserts.

ATR further consolidated its position in 2016. The modern ATR -600s ranked first among all regional aircraft sales for the year, with orders for 36 aircraft (34 ATR 72-600s and two ATR 42-600s). ATR confirmed its leading position in the 50-to-90-seat aircraft segment, with a market share above 35% since 2010.

As it celebrated its 35th anniversary, ATR managed historical levels of turnover and deliveries despite a challenging market environment. In 2016, ATR reached its second-highest turnover ever (US$1.8 billion), and its third-highest year in terms of deliveries (80 aircraft), confirming that there is still a market for modern turboprops. The aircraft manufacturer also secured a healthy backlog, guaranteeing about three years of production.

Looking ahead, Scherer would like to focus on continued improvements: “We have great relationships with our customers; I want to improve those. We have a great cost signature, but I would like to improve it.” There are also a few more innovations that can be done on the current aircraft types, he says.

Scherer, however, notes the unfavourable exchange rate for global customers: “The Dollar was high compared to many countries’ local currency, so it became much cheaper for these airlines to buy the cheap, used airplane that is just standing there rather than a new airplane.”

He adds that fuel prices were low, which also encourages the use of older less economical aircraft. Generally the market was a little bit softer, and there was a considerable demand from the leasing and used aircraft community. ATR managed to work this in their favour. One of the reasons ATR has remained successful and seen increases in its business over the past five years is because it has sold a lot of aircraft to leasing companies.

“The leasing companies are great because they are cash buyers and they buy in bulk. But if you aren’t careful when it comes to replacing those aircraft, you will end up competing directly or indirectly with your own customers. So maybe, and I say maybe very carefully, there was a speculative over supply to the leasing sector. When you combine all those effects you have a very soft market.”

He further stresses that ATR's relative market position has not eroded: “It would be one thing if all of a sudden you had a new airplane out there that competes with our economics but that’s not the case. You have the Q400, which is the most direct competitor, but the Q is positioned to be a longer range airplane, some sort of jet lookalike, so its economic signature really does not compete with the ATR.”

Adjusting the production rate to the current sale numbers represents a solid base, Scherer reckons: “We have been getting kudos from the financial, investor and leasing community for having done so. It’s not a pleasant decision to trim production rates, but it introduces some stability in the market place, and that’s good for everybody who is a stakeholder in the asset value of airplanes.”

Having just recently concluded a review of the various sales opportunities and global demand, Scherer has begun meeting various customers: “I can see that there is demand out there in Asia, Latin America and Europe. There is continued appetite in the financial community, which is a very healthy sign. Africa is a big frustration for us at the moment, but I plan to change that. There is money that is available and hungry for investment in these kind of airplanes, so the indicators are not bad.”

Financing solutions are not part of the business model at ATR. Instead their business model revolves around services. Scherer reports a very healthy growth in services, such as the total care package called GMA (Global Maintenance Agreement) where ATR handles all the after care services required. “That business has seen a very healthy double digit growth and it is quite profitable. We subcontract to MROs and we work directly with airlines to provide a power by the hour service, or it can be tailored to include certain equipment: airframe only, engine … basically everything from toe to tail of the airplane,” says Scherer. Services represents about 15% of the business.

Despite the current push for the new -600 series, Scherer says that there is still plenty of life in the previous -500 type that is still flying widely in all corners of the world, including Africa: “Yes the -500 market is quite vibrant, the advantage of the -500 is that it is a very efficient airplane.” It may not have a glass cockpit, but Scherer still praises its popularity, and because it’s now in the secondary market, its capital costs are much more affordable than a new aircraft.

“I think it is our duty, and it’s my intent, to have a better visibility on the used aircraft market. There is no point pumping new airplanes into a market that has a lot of used aircraft available. That just drags the pricing down,” says Scherer.

At time of writing, the backlog was for around 227 ATRs – all -600s, and the majority in favour of the larger ATR-72. Scherer believes the industry might still see a resurgence in the -42 as it is more economical than the other smaller turboprops, such as the Saab 2000s, as well as some of the 50-seat jets. “I think we might see a little bit of demand coming back. I can see a lot more demand for the -42 than has been the case in the last several years,” 'says Scherer.

The -42’s performance also allows it to fly into airfields that the bigger aircraft cannot, and that really is the essence of regional aviation. “It’s a pathfinder. These airplanes open new routes. One of the things that amazed me is that ATRs create 100 new destinations every year. We have a little over 1,000 planes flying around the world, and 10% of those get deployed on new destinations. This means that, all of a sudden, you could be flying to some island that has never been flown to before, or an airstrip that has never seen a passenger airplane. For that, the -42 is very good,” he says.

Going forward, ATR is proposing the ATR 42 STOL (Short Take-off and Landing): “We feel a resurgence in the market, so we have decided to propose a short haul takeoff version of the ATR 42.” ATR is currently testing the market on the STOL project and reports some good traction, but it will be a significant investment. Scherer says the main change will be the rudder: “You will need more rudder control to take evasive action in some small airfields with obstacles, for instance where you have a mountain on one side. If you need to do an engine out manoeuvre in that situation, you need to be able to turn against the good engine – so you need a lot rudder control.”

Another modification is carbon brakes. These are currently installed on the 72-600 but not on the -42, “but that is any easy thing to do. More power will also be needed.”

To justify the significant investment, the shareholders will need to be convinced that ATR can sell enough quantities and break even. “We are testing the market and we are trying to secure one or two deals that will allow us to have a market validation. Although the -42 has more wind in its sails, I wouldn’t say it’s the main thrust of our marketing – this remains the -72,” Scherer says.

In the meantime, ATR turboprops have proved to be an ideal match for African airlines, due to their fuel-efficiency and low operating cost on shorter routes. On a typical regional route of about 500 km, for example Dar es Salam-Arusha in Tanzania, operated by Precision Air Services, an ATR 72-600 burns up to 35% less fuel than other regional turboprops, and up to 50% less than regional jets of the same size.

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