Monday, April 21, 2008
Aircraft Right Sizing Key to E-Jet Success
Embraer is projecting that demand will continue to grow with a 5.6 percent jump in revenue passenger kilometers this year. On the other hand, fuel costs and environmental pressures may reduce demand but both are major drivers in accelerating fleet changes. Airlines, he said, are facing a different passenger profile than ever before, one for which pricing, frequency, direct services and comfort are overriding concerns.
“Given these factors and a weak revenue environment, efficiency is the name of the game,” said Kern, who indicated that worldwide, airlines are redeploying assets and adjusting utilization. He also indicated that one of the few ways left to gain efficiency is aircraft right sizing and replacement, something Embraer has learned from its customers. Both Air Canada and US Airways are using their ERJs to mix with larger aircraft in their daily frequencies. He also pointed out that JetBlue and Air Canada were mixing their ERJs with larger equipment, providing year-round network coverage and optimizing fleet capacity to seasonal market demand. Air Canada has found the ERJ 190 to be 20 percent cheaper than the A319 on a per trip basis, he said.
“The E170/175 can offer up to $1.8 million yearly fuel savings and up to $1.2 million maintenance cost savings over such aircraft as the Avro RJ85, the BAe 146, the Fokker 70 and the DC 9-10,” he said. “As for older narrow-bodies, the E190/195 can offer up to $2.1 million yearly fuel savings and up to $1.2 million maintenance cost savings over the 717, F100, 737-300 &-500, DC 9-30 and the MD-87. Replacing the old, smaller aircraft with the ERJ 195 is the equivalent of taking 2,100 medium-sized cars off the road annually and right sizing the A318, 737-700, A319, 737-300, MD-82 and DC9-50 is the equivalent of taking 3,000 medium-sized cars off the road annually.”
Kern projected world GDP growth around three percent over the next 20 years which would drive a five percent sustained annual growth in air transport demand. Indeed, Embraer sees a need for nearly 7,500 aircraft in the 30- to 120-seat market through 2027, the vast majority of which would be in the 60- to 120-seat segment. As for financing this equipment in a crisis credit market, he noted that since Embraer has proven the value of its aircraft, customers have had little trouble in aircraft financing. “The experience we had in the ‘90s and early 2000s, the finance market was more difficult for regional jets,” he said. “There was a lot of difficulty in financing aircraft and complex financing structures. With the E-Jets, what we have been observing in the past two years, is an increase in liquidity in market, making it much easier to finance Ejets. In future we shall see, but I don’t expect things to change dramatically.”
The main drivers for the evolution to larger jets is the maturity of the 50-seat market and the natural move to larger regional jets as is now happening in the United States. But more importantly, right sizing of equipment to demand, will account for 53 percent of aircraft deliveries worldwide – 51 percent in North America and 42 percent in Europe.
Kern pointed to Embraer’s evolution first selling to regionals, saying it is increasingly selling to mainline and low-cost airlines seeking to reduce fleet costs and increase flexibility in aircraft deployments. Its firm backlog numbers 430 aircraft with another 786 options. It has delivered 334 ERJ 170/175/190/195 aircraft with 450 orders for the 190 alone.
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.
Natural growth from 50 seaters accounts for only 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. 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 another 11 markets as direct replacement of Airbus and MD-80s. 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.
Kern noted that load factor was up nearly 10 percent while aircraft utilization jumped by more than 20 percent in the last decade. Fifty seaters continue to be the mainstay of regional fleets, accounting for 30 percent of domestic departures. In addition, the market is stable with only two percent of 50 seaters parked. Embraer has delivered nearly 869 ERJ 130/140/145 aircraft with only 46 ERJ145s remaining in its backlog. It also delivered its 1,000 ERJ to Grand China Express last September.
He also pointed to the 50-seater’s growing use in non-traditional markets, adding that the number in Mexico has grown from five aircraft in 2004 to total 44 last year. China, on the other hand, is growing at a slower pace but has far more potential. In 2003, China had 196 markets served by 45 50-seat regional jets. By the end of 2006, it had 223 markets and 63 aircraft.
“RJs will remain the backbone of the hub U.S. hub feeding system,” said Kern, “but there will be some long and thin new markets emerging in Europe and the U.S.”