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Monday, May 12, 2008

Embraer Continues to Study Future Requirements

Indianapolis, IN – Embraer continues to make no commitments on its next aircraft program, preferring to wait out the chaos in the airline market before making a decision, according to Executive Vice President – Commercial Mauro Kern, who briefed reporters at this week’s Regional Airline Association meeting in Indianapolis. He did say that turboprops were a growing factor, despite the fact he does not expect a new engine before 2015. “This is part of the scenario that we are studying,” he said.
While the price of jet fuel mitigates for earlier aircraft replacement which would favor the E-Jets, Embraer expects order size to be curtailed. "In the past, we received some orders of up to 100 planes. Today I would say that 30 is the number that we're targeting for big orders," Antonio Luiz Pizarro Manso, executive vice president for finance, told Reuters, adding that the company is expects 20-aircaft orders will be the norm except in the Asian market where the orders will be larger.
This is a departure from Kern’s comments a month ago when he told Regional Aviation News that financing E-Jets has not been a problem. That may be so, but the state of the industry and that of the capital markets does not bode well for replacing thousands of aging, fuel guzzling aircraft. These replacements have already awaited the previous round of restructuring wrought by bankruptcies and it looks as if it will now have to wait for the current restructuring from mergers as well as the industry regaining some semblance of fiscal health.
"Clearly this is a scenario that worries us a lot and we're evaluating the impact this might have on the industry as a whole," Manso told Reuters. "But at this moment, we haven't seen any indication that there will be any order cancellations in the near term.”
Kern repeated the impact of the E-Jets on rightsizing noting that half the use of the E-Jets is in right sizing markets previously flown by narrow bodies with a lower load factor. In addition, they are being used for new-market development such as longer haul flights like Chicago-Edmonton, Chicago-Vancouver, Chicago-Seattle and Denver-Los Cabos in Mexico, which he called one of the fastest growing markets. He also pointed to the natural growth from 50 seaters, saying it only accounts for 27 percent of sales in North America compared to 51 percent for right sizing, eight percent for direct replacement and 14 percent for new markets.
“The concept of having a regional jet with mainline comfort and truly seamless service was somehow not well understood until the aircraft where actually in the market,” he said of efforts to place the E-Jets into mainline operations. “With the strong presence of the E-Jets – at US Airways and Jet Blue, Air Canada and Finnair – airlines are now recognizing that.”
In Europe, natural growth accounts for 42 percent of aircraft usage and 43 percent for right-sizing. Seven percent is for direct aircraft replacement and eight percent for new markets. Five of its 11 European customers are mainline carriers. The E-Jets are right-sizing 76 percent of Finnair’s ERJ 170/190 markets with another 18 markets being used to complement Airbus 319/210 frequencies and 11 markets as direct replacement of narrow bodies. In Asia/Pacific and China, new markets take up most of the E-jet usage at 75 percent, while direct replacement accounts for another 20 percent and right-sizing just five percent. Related Story
“We cannot talk about specific campaigns, the market is really interesting at this point,” he said. “There is a significant reshaping of the entire industry. We see a lot of opportunity for replacing old jets and a lot of opportunity for rightsizing. The economic difficulties we have seen with high fuel costs and a recession is an increasing challenge for small aircraft on a cost per seat basis. On the other hand, if we have demand reduction, the cost per trip can make a world of difference even in terms of growth of regionals to replace 50 seaters with 70 to 80 seaters.”
In terms of future products there are a number of factors that must be considered before making a decision on what Embraer will do next. These include fuel prices, better understanding of the prevailing engine technology from GE, Rolls Royce and Pratt & Whitney and what Boeing and Airbus intend to do in terms of replacing their narrow bodies. The actions of Boeing and Airbus will determine the success of such programs as Bombardier’s CSeries and the Sukhoi Superjet since previous 100+-seat programs – such as the Fokker 100 – are seen as failures for the mainline airlines that acquired them. The question is whether or not mainline operators will try smaller aircraft, something they did not do in the past.
He also said that North America does not constitute the largest share of the worldwide market and is now only 43 percent, for the first time, dropping below the 50 percent mark. “The rate it is dropping is faster than the growth of other markets like the Middle East, Asia and Latin America,” he said.
North America will account for only 43 percent of sales or 3,330 aircraft, followed by Europe at 17 percent of 1,350 aircraft. China alone will account for 10 percent or 730 jets, while Asia/Pacific will account for another seven percent or 540 jets. Latin America will take eight percent (580) while Russia/CIS will take another seven percent (510). Finally, the Middle East and Africa will each account for three percent of the market or 190 and 220 aircraft, respectively.
The success of the 190/195, he said, “has opened the eyes of the countries who want to start or come back to produce aircraft. So, the natural starting point is that seat range. All the new competitors will have a share the market. The Chinese and Russians will have a significant share of their home markets and, for Russia, those in Eastern Europe. And the Japanese product (the MRJ) must be better understood, but it will still have a share of the market.” Kern gave a frank assessment of AVIC 1's ARJ 21, Bombardier C-Series, Sukhoi Superjet and the Mitsubishi MRJ during a recent briefing in Brazil saying the new technology offered by Bombardier’s CSeries and MRJ – Pratt & Whitney’s Geared Turbo Fan – is problematic. Related Story
Kern indicated that the ARJ 21 and the Sukhoi SSJ both face long delays which will harm their chances on the Western market. However, the SSJ is set to make its first flight this month, albeit extremely late.
“The toughest part is not in developing the aircraft so much as it is in the certification process of such a complex, new generation product with highly integrated systems,” said Kern. “They have their market assured in China but even so, when AVIC I discusses its production rates they will not fulfill the demand in China. So, we are talking to Chinese airlines about the 190.”
Kern is optimistic for the 50-seat regional jets given the fact that 40 percent of the markets they serve are served exclusively by 50 seaters. He indicated Continental, which operates only 50-seaters, says 50 percent of their traffic comes from feed. He sees a gradual transition from 50 seats to larger regional jets or turboprops, depending on fuel costs, and the migration of current 50 seaters to secondary markets in the Middle East, Africa, Asia, Russia and Latin America. He also sees an increasing roll for 50 seaters in markets where the larger jets cannot go adding there are two connecting passengers for every local passengers on regional jets.
“The connectivity still needs to happen in the markets that have low frequency with 50 seaters,” he said. “You cannot remove those aircraft overnight. With market growth and the existence of larger regional jets such as the 170/175, there will be a natural replacement.”
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