By Rebecca Rayko
Associate Editor

It's been just over one year since Saab Aircraft withdrew from regional aircraft manufacturing and decided to focus more closely on its leasing business.

Though popular and widely respected, the Saab turboprop lines were loss-makers for the privately held Swedish manufacturer. But Saab found opportunity in the form of its newly dedicated leasing company, putting the efforts of the aircraft sales force behind the leasing portfolio. After a full year's work, Saab Aircraft Leasing has had great success in placing mainly used Saab 340s and Saab 2000s into the regional market, SAL president Lars Flodman told AWN.

Saab Aircraft Leasing topped $100 million in new contracts in 1998 placing 14 Saab 340s and 10 Saab 2000s. Most were placed with carriers for route expansion, some were to replace other 30-seaters, and others were for 19-seat turboprop replacements.

"We felt we could place between 20-25 aircraft a year as a leasing entity, so we met our goal," says Michael Magnusson, president of SAL's North America division.

There was significant activity in the turboprop market last year, and Flodman expects to place the same number of aircraft in 1999.

"There will be many movements of 340A and B models this year," says Flodman. "We're in discussions now with our airlines to help them meet their aircraft objectives."

Currently around 40 airlines worldwide fly the 30-seater Saab 340. Over the last five years, the Saab 340 has become a market leader in its seat category with orders for 454 aircraft - a 33% share of the worldwide market, says Saab.

The market: what downturn?

Despite the much-hyped industry downturn and its impending arrival, Saab leaders say they are very well positioned for such an event.

"We have good products and long leases in place," Flodman says. The average lease term for aircraft deals completed in 1998 is five years. "But anything can happen," he adds. "We monitor our airlines very well."

Magnusson adds that predictions of doom and gloom have been somewhat exaggerated.

"There's been so much talk of a downturn, but we haven't seen any hard numbers to prove it," he says. "Most airlines are doing well financially and have already trimmed capacity."

In fact, there has only been a slight softening of the market, Magnusson says.

"Asia has really been hit the worst, but our main business is in the US and Europe," says Magnusson. "It's a fairly robust market for us now."

Industry projections seem to back the assessment that the regional market will continue its growth trend. The regional codesharing/feeder airline sector will grow 15%-20% over the next three to five years, says Jim Parker of The Robinson-Humphrey Co in Atlanta.

However, much of this projected growth is based on the introduction of the regional jet, Parker adds. The allure of the regional jet is twofold: it extends market coverage dramatically with longer range capabilities; and passengers have a strong preference for jet travel over turboprops because of perceived, although not substantiated, safety concerns.

"We anticipate that the historic growth in 31- to 40-seat turboprops (Saab 340s and Dash 8-100/200s) will shift to a decline as industry average aircraft size grows and as many of the routes now served by these aircraft are replaced by the jet aircraft already on order and option," says a study completed by Douglas Abbey of AvStat Associates and Gerald Bernstein of Stanford Transportation Group.

The introduction of smaller regional jets beginning this year in the 32- to 37-seat category will bring jet service to markets that were previously served by 29- to 45-seat turboprops. The cost for these respective aircraft are $11 million for the jet versus $8 million for the similarly sized turboprop.

Turboprop deliveries will continue, but at lower levels than during the past decade. Based on forecast delivery trends, it isn't inconceivable that the US regional airline fleet will soon be comprised mostly of jet aircraft, say Abbey and Bernstein.

But Flodman says that regional jets have not replaced turboprops to the extent that everyone believes, particularly on shorter routes (less than 300 statute miles).

"The shorter routes the 340s work today are not in competition with the regional jets" because the economics are simply better with turboprops, he says. Many airlines will continue to choose turboprops as their feeder aircraft of choice. What's more, Saab contends that the used 30-seat turboprop will continue to be the equipment of choice to displace aging 19- and 50-seat turboprops.

The fact that manufacturers, like Saab, are producing fewer aircraft in the 20- to 40-seat category bodes well for Saab Aircraft Leasing, as regional carriers seeking these models will rely heavily on the used aircraft market.

End of the line

The last of the new Saab 340s and Saab 2000s will be delivered in mid-1999.

While it's true the production lines for the Saab 340 and 2000 will close, Saab clearly plans for its aircraft to be around for awhile. It's highly touted new ad campaign shows Saab 340s flying through the futuristic airspace of 2018. And who better to manage the placement of these aircraft than Saab Aircraft Leasing.

SAL currently manages a portfolio of 316 aircraft placed with 26 airlines in 16 countries. SAL's balance sheet last fall was approximately $1.4 billion with an equity base of $200 million. Some 80% of their portfolio is secured with 11 bluechip customers, such as American Airlines, Northwest Airlines, Crossair, SAS, Air New Zealand and Ansett Australia Airlines.

There was talk once of a possible buyer of the Saab 340 and 2000 production lines, but Flodman dismisses this.

"There are many interested in buying the 340 production line but nothing serious. I don't envision this taking place," he says. "We are the type certificate holders for the 340 and 2000. It would have to be a really good deal."

Besides, any new owner would face the same economic problems faced by Saab itself. Prices are too low, financing pressure remains on the manufacturer, and there is too much capacity, Magnusson says.

What's next?

Flodman says that expanding the existing relationship with British Aerospace, which took a 30% stake in Saab last year, is "always on the table," but they're still trying to figure out exactly what shape their relationship will take.

British Aerospace has its own jet and turboprop leasing company, but neither party is willing to invest in the other's portfolio.

Meanwhile Saab Aircraft Leasing will continue to focus on what it sees as the future of the turboprop industry.

"The used turboprop business is very strong," Flodman says. "We did well last year and are cautiously optimistic for next year."