Optimism amid change

Nigel Pittaway analyses Embraer’s latest commercial aircraft market forecast

All images Embraer

EMBRAER RELEASED its commercial market forecast in late May, in the lead-up to the 2019 Paris Air Show, and the company remains upbeat, despite the upcoming carve-out of its commercial business to the Boeing Brasil Commercial joint venture, which will see Boeing take an 80% stake in the new company.

The Brazilian aircraft manufacturer reported a record year of sales in the market segment of up to 150 seats in 2018, with a book-to-bill ratio of 2:3 and 29% of the market share, which it says is higher than any other manufacturer in the segment. Around 2,000 of Embraer’s commercial products are currently in service with more than 120 operators around the world.

Embraer Commercial Aviation’s Vice-President of Marketing, Rodrigo Souza e Silva said the market forecast from 2019 to 2038 is for 10,550 aircraft in the segment up to 150 seats, split between replacement aircraft and new growth in a 45:55 ratio.

He said: “The replacement forecast is not only for aircraft in the segment we play in today, but also in adjacent segments such as 50-seat jets and turboprops. We see a good market for replacement aircraft, but also opportunities for growth, with the development of regional aviation in countries such as China, Latin America and Africa.”

Some of the future market opportunities Embraer identifies is what Souza e Silva calls right-sizing, particularly with the introduction of the E-Jets E2 family of aircraft.

Souza e Silva added: “Rightsizing of the first generation of aircraft was defined as flying routes previously flown by larger aircraft with low load factors. Nowadays it’s hard to find low load factors in the market; everyone is flying with their aircraft full. However, to fill an aircraft that’s not appropriate for a given market you have to compromise profitability. You have to reduce ticket price, reduce your yields and therefore end up with a lower margin. With the E2, we see it as right-sizing in terms of profit, optimising return on investment for airlines.”

E2 entry into service

Embraer achieved triple typecertification from Brazil (Agência Nacional de Aviação Civil), the United States (Federal Aviation Administration) and the European Aviation Safety Agency for the initial member of the E2 family, the 97-114 seat E190-E2, in February 2018.

Deliveries to launch customer Widerøe Airlines of Norway followed in April 2018 and as at May 14, 2019, six aircraft were in service (with Widerøe and the second customer, Air Astana) and had accrued 7,300 flight hours, with a reported schedule reliability in the order of 99.3%.

The second member of the family, the 120-146 seat E195-E2, achieved triple type certification in April 2019 and deliveries to launch customer Azul Airlines of Brazil, which has at least 51 aircraft on order, are expected to begin in the second half of 2019.

Rodrigo Souza e Silva said: “Our efforts are now to prepare for entry into service for Azul and the next two operators, Helvetic and Air Kiribati, to make sure in will be smooth and as successful as the E190-E2 was for Widerøe and Air Astana.”

The E195-E2 flight test campaign has revealed the aircraft is performing better than its targets, with a 25.4% reduction in fuel burn over the E190-E1 (target 24%) and an external noise footprint of 20 EPNdB, five EPNdB better than forecast. Embraer also claims maintenance interval targets and conversion training times are both better than originally expected.

The final member of the family is the 80–90-seat E175-E2 and the first prototype is currently undergoing assembly at Embraer’s commercial aviation facility in São José dos Campos. The first flight is expected to occur before the end of 2019 and a total of four prototypes will be involved in the flight testing and type certification campaign, with an entry into service in the 2020–2021 timeframe.

Embraer refers to the E2 family as ‘Profit Hunters’ and has previously painted its prototype E190 and E195-E2s in special liveries, each depicting a predator in the animal kingdom (eagle, tiger and shark). The company unveiled the latest in this series, the ‘High Technology Lion’ on an E195-E2 in May and was due to display the aircraft at the Paris Air Show as AIR International closed for press.

Current customers for the E2 family include Air Astana (E190-E2), Air Kiribati (E190-E2), Air Peace (E195-E2), Azul (E195-E2), Binter Canarias (E195-E2), Fuzhou (E190-E2), Helvetic (E190-E2) and Widerøe (E190-E2).

Market outlook – Europe & CIS

Embraer’s President and CEO of commercial aviation John Slattery said that the market forecast for Europe and the Commonwealth of Independent States (CIS) is for 2,820 aircraft in the segment up to 150 seats between 2019 and 2038. This region alone represents 27% of the total market outlook of 10,550 aircraft.

Slattery said: “Europe is one of our strongest markets, it’s right up there with the United States, but in some ways it’s more interesting, because it has a much more diversified operator base. If you lift out the operators we have in our footprint today, it’s a marquee list: Air France, Alitalia, British Airways, KLM, LOT, Lufthansa and then marquee names like S7, as you get into CIS and Russia …As these airlines now look in earnest to running the ruler over their fleets – particularly their smallerjet fleets, the first generation E-Jets and CRJ700s and CRJ900s they brought into their fleets over 10 years ago – they are looking meaningfully for the next aircraft which can serve them as they go forward.”

Slattery thinks this may involve a little up-gauging, where operators of the current 70–76-seat jets may be in the market for 100-seat replacements.

He continued: “So, I think as these airlines look now to replacing their incumbent regional jet fleets, the flexibility that the E2 family offers really puts us in a unique place. There’s a huge market in western continental Europe and now I perceive huge opportunities in the CIS and Russia over the course of the next 10 years.

“I would be surprised if we don’t see one or two of those big names now come over the line – maybe later this year – with certification of the E195-E2 now in the bag. I can’t overestimate how important it was to achieve certification of the aircraft in April; it changes the dynamic of the commercial conversations you are having with airlines.”

Slattery considers the number of operators and flag carriers in Europe provides a number of opportunities, particularly when compared with the United States, where consolidation has resulted in three major airlines – American, Delta and United. He also thinks the E195-E2 will figure more predominantly than the earlier version, with an extra 600 nautical miles (1,111km) of range and between 14 and 22 additional seats, providing airlines with enhanced revenue potential.

He explained: “In matured markets you will see up-gauging, regardless of the competitive dynamic, or the GDP and passenger demand. Even in those markets where infrastructure is already in place, new airport infrastructure is hard to add to and therefore, as demand increases, up-gauging will be a feature in those markets – and I think we have the perfect aircraft for the continental European markets with the E2.”

North America

North America is another example of a mature market in which Embraer sees continued growthover the outlook period, with a projected requirement for 2,700 aircraft, or 26% of the total.

Once again, Slattery sees up-gauging of airline fleets as a significant factor, with the gap between the current 70–76-seat regional aircraft and the smallest aircraft in the mainline fleet becoming larger.

As a result, he sees the E175-E2 in particular as the right aircraft to fill the widening gap, optimising capability without compromising profitability. The current US Scope Clauses, which limit regional aircraft to between 70 and 76 seats (depending upon the numbers of aircraft operated by affliated regional operators), will also play a significant role in the foreseeable future.

Slattery said: “The E175-E2 is a tiny stretch of the E1 version, just enough that if needed we could put in one extra row of seats. It gives you a small increase in revenue potential, but it is designed to be a replacement for the current 76-seat E175-E1, which is a massive seller; if you look at the 1,500-plus E1 family jets flying today, well over one third of those are from the lower end of the family.”

Latin America

Although in many ways considered to be Embraer’s home market, Latin America is predicted to experience only modest growth in the company’s outlook period, equating to 1,150 aircraft, or 11% of the total forecast.

John Slattery revealed that he had been in discussion with Azul to find ways both to accelerate deliveries of the E195-E2 to the airline and find homes for the current E1 aircraft as they are displaced by the new jets.

Noting the recent grounding of Avianca Brazil, Slattery said the marketplace in both Brazil and Columbia will be unsettled in the near term, as airlines focus on the changed competitive dynamic.

He said: “I would also like to do more business in Brazil [and] I think now with the E195-E2 there will be other opportunities in the country in the fullness of time. I think we have a good franchise footprint in Latin America, and I want it to grow. I’m particularly excited about the E2 in that market and we do have campaigns going on in the marketplace …I would describe some of those campaigns as slightly longer-burn campaigns than immediate ones but, frankly, we see Latin America as a core part of our DNA.”

Asia-Pacific

With fast-growing middle classes in India and China, the outlook for regional aircraft in Asia-Pacific is stronger than even Europe or North America, with 2,990 aircraft forecast in the next 20 years, or 28% of the total.

However, Slattery says that Embraer’s market penetration of the South Pacific region has in the past not been as strong as he would like. In December 2018, Air Kiribati placed an order for two E190-E2 jets, with purchase rights for a further pair, and there are also several ongoing campaigns in the region, including a potentially lucrative opportunity in Australia to replace the Bombardier Q400 turboprop fleet of Qantas’ regional partner, Qantaslink.

Without identifying any specific campaign, Slattery said: “As a general note, Asia-Pacific is an enormous opportunity for Embraer, we have excellent penetration in China with 80% of the activity for jets below 150 seats. But when I think of the Indian subcontinent in fact, and Australia, I think there are going to be plenty of opportunities for us – particularly with the E195-E2 at the top end, because of the extra range …

“Range is very important in this part of the world, so now that we have the extra range and revenue capability of the E195-E2 I think it’s going to be very attractive to the market. I think the ‘hot and high’ performance of the E190-E2 in western China is going to be particularly attractive as well and, in due course, when the E175-E2 enters service it will ‘right-size’ a lot of those smaller markets that are looking for a jet service, but are not viable from a trip, or a per-seat basis, to go up to larger equipment.”

Finally, at the lower end of the market outlook, Embraer sees a demand for 810 aircraft from the Middle East and African market, representing 8% of the total number of aircraft forecast over the next 20 years.

The future

Despite the fact that the production rate of the E2 family is expected to reach parity with the E1 fleet in the next 12 months or so, the two families are built on a hybrid production line in São José dos Campos and Slattery says the outlook for the first generation of aircraft remains bright.

He explained: “If we look at current E1 production, it will probably be next year before we see the crossover, in terms of volume, and production of the E2 will be a more dominant feature as we go forward. That being said, the E175SC, which is replacing the 70-seaters in the US market [as airlines reach their capped limit of 76-seat E175s], we have the capability from an infrastructure and architecture perspective to continue production of the aircraft with full support from our supply chain for as long as it is required …Of course, I’m specifically talking about Scope. I think you will see the E190 and E190 being eclipsed naturally by the E2, but we have a hybrid line in São José dos Campos, and we have the capability to produce the E1 for as long as the customer wants.”

Finally, regarding the longrumoured Embraer turboprop airliner project, Slattery said market studies are ongoing. He explained: “We are certainly not there today, we’re not launching a turboprop today, but I can tell you that it’s a market that continues to interest my leadership team and me. We are doing what I would describe as very meaningful work in the background, in researching the customer’s appetite for the market not only as it sits today, but [also] what we can expect going forward.

“I think you will hear more from us on that subject. I just don’t have any more news on it today.”