News from PAS 2013 today was eye popping; 100 E175-E2 is no small launch. One looks at this order, and keep in mind last year’s Farnborough order for 100 MRJs, firmed up at the end of 2012, and then does that leave space for anything else?
At last year’s Farnborough show the MRJ order by the airline, notably absent at the announcement was any airline management. This year the airline’s CEO is at the show and present for the Embraer order.
SkyWest is a big airline – far bigger than most people realize. It has a fleet of 750 aircraft. The two big orders now account for at least 200 (27%) of that fleet’s replacement. Is it over?
We spoke with Skywest’s CFO Mike Kraupp and he said it might be. Might, because they buy aircraft based on their major airline partner needs. For example, United and American Eagle both requested SkyWest to go for the Embraer airplane. He went to explain that as the airline was going through its replacement evaluations they looked at Bombardier, Embraer, Mitsubishi and Sukhoi. Sukhoi was deselected soon into the process. According the Mr Kraupp, Bombardier “lacked interest” and the CSeries was out of scope for the airline but of interest from Bombardier. Deciding on the MRJ and E2 means some engine commonality.
This means that unless an airline partner requests a Bombardier airplane, SkyWest is focused on Embraer and Mitsubishi. SkyWest likes the economics of these two airplanes. Mitsubishi was “aggressive” last year to win the business and Embraer “stepped up” this year. Bombardier could come back if an airline partner secures a deal that SkyWest can work with.
Embraer formally announced its its E-Jet replacement today, now known as the E2. The OEM will be offering E175-E2, E190-E2, and E195-E2. Embraer says the E190-E2 is expected to enter service in the first half of 2018. The E195-E2 is slated to enter service in 2019 and the E175-E2 in 2020.
Embraer went to to advise that in a typical single-class layout, the E175-E2 is extended by one row, compared to the current generation E175, and will seat up to 88 passengers, while the E190-E2 keeps the same size as the E190, of up to 106 seats. The E195-E2, compared to the current E195, has grown three seat rows and will accommodate up to 132 seats. The company also says “New aerodynamically advanced, high-aspect ratio, distinctively shaped wings, improved systems and avionics, including 4th generation full fly-by-wire flight controls, and Pratt & Whitney’s PurePowerTM Geared Turbofan high by-pass ratio engines (PW1700G on the E175-E2, PW1900G on the E190-E2 and E195-E2) will result in double-digit reductions in fuel consumption, emissions, noise and maintenance costs, and increased aircraft availability. The E-Jets E2 will be capable of achieving similar costs per seat of larger re-engined narrowbody aircraft, with significantly lower costs per trip, thus creating new opportunities for lower risk development of new markets and fleet right-sizing by airlines.”
The E2 is a shot across the bow of Bombardier. Bombardier’s CSeries remains the only new airplane in its class, the E2 is a derivative, but benefits from a large in-service customer base. Airlines will now have to consider the trade off – which is lower risk? The E2 is being built on a known airplane with a big customer base. Embraer has 1,200 E-Jets on order and 950 in service. This is a great base to work from. But will its economics match the CSeries?
The E2 will see engine thrust grow from 13,800 (E-175) and 18,500 (E-190/5) to 17,000 and 19,000 respectively. Bigger thrust means heavier airplanes, even with a new wing. Note the smaller E2 needs over 23% more thrust.
It is early days and yet Embraer has already announced 100 orders from Skywest (remember last year’s big MRJ order?) plus 165 LoIs. This is a great start, so let’s take a look at the E-175. The larger E2 airplanes are CSeries focused and deserve a separate post.
The E-175 has an empty weight of 559lbs/seat. We don’t have the empty weight of the E2 version but,based on thrust requirements, it is likely to be heavier.
The comparative airplane is the Bombardier CRJ900 – which requires 13,360 in thrust (3% less than the current E-175) and comes in at 549lbs/seat. The numbers are close and the CRJ is likely to be outclassed by the E2 version.
The E-175-E2 should be out by 2020, which gives Bombardier time to consider a response. What might this be?
Given the resources that have gone into the CSeries, we would assume that Bombardier would prefer a lower cost and risk solution. We think that Bombardier could take a leaf out of the well-thumbed derivative book. Everyone else is doing it, why not them?
Might a GTF solution be part of this? For example, taking the engine of the MRJ might do the trick. Even the smaller of the two MRJ engines, with 15,600 in thrust provides a CRJ900 with nearly 17% more power. Along with this will come a far smaller noise footprint and better fuel burn. Clearly there will be a weight penalty because the GTF will be heavier than the CF34 currently used. However, much of the derivative book was written by Bombardier and we think they could pull off the design changes needed. Moreover we would guess Bombardier could get this done well before 2020.
NOT WITH GAME CHANGING AIRCRAFT AND ENGINE TECHNOLOGY
The introduction of the Bombardier CSeries in 2014 will bring the first application of the next generation of engines for narrow-body aircraft, the Pratt & Whitney PurePower 1000G geared turbofan. The combination of a new engine and an advanced high technology airframe will generate a very substantial change in the environmental impact of airplanes, the largest we’ve seen since the first generation noisy cigar tube engines were replaced by high bypass engines in the 1980s. [Read more...]
Airlines and aircraft manufacturers periodically get into trouble when they over-commit to new aircraft and the OEMs raise production rates to levels that are unsustainable. We believe that another bubble situation is currently developing, and will result in an oversupply of narrow-body aircraft, lower residual values, earlier retirements of current generation aircraft, and will negatively impact the leasing market. [Read more...]
Embraer’s E-Jets are coming to United Express, after the airline ordered 30 plus 40 options. Deliveries are slated to arrive in the second quarter of 2014. The E-175 aircraft will be fitted to seat 76 passengers, the current limited under the scope clause in the pilots union contract.
The enhanced E-175 will provide significant improvements over the current E-175. Embraer speaks of the airplane’s new wingtips, systems optimization and aerodynamic refinements that will lower fuel burn by as much as 5%. United Airlines expects their new E-175s to achieve fuel savings of 10 percent in comparison to the 50-seater regional jets they will replace. The United order follows an order from American for 47 of the E-Jets.
Consolidation among the US airlines is making the competition fierce on competitive routes, but oligopolistic on non-stops. OEMs and labor are not the only ones facing fewer options. Passengers can expect to see fares rise sharply after the third quarter 2013 as American Airlines and US Airways merger goes through.
Of the “Big Three” airlines left standing, Embraer has won business at American and United. Bombardier won a competition at Delta. The table shows the score today.
Embraer is clearly seeing growing interest in its updated airplane. Bombardier won a competition at Garuda where its CRJ-1000 was competing with Embraer’s E-190. The loss came as a shock to Embraer.
Embraer had been reviewing its options in the 100-130 seat market after Bombardier announced its CSeries. In facing a new competitor, Embraer had to consider its options: a new airplane (with a steep development cost) or re-engine and update the current model (cost effective and a faster turnaround). Embraer decided on the second option. It is a less risky option and benefits from being able to offer a large consumer base a known product.
But with all the improvements, one aspect has remained largely overlooked. Airlines have contracts with their pilots called Scope Clauses. The clause is used by the union of a major airline to limit the number and/or size of aircraft this airline may contract out to a regional airline. Meaning the goal is to protect pilot jobs at the major airline from being eliminated by regional airlines operating larger aircraft. The language airlines use when they talk about these orders is interesting – they point to 76 seats.
Major airline pilots have a right to be wary of the growth of regional airline flying. APA, the pilot union at American Airlines, notes “the large regional jet has changed the aviation industry in the United States. Other airlines have grown regional jet capacity by 140 percent since 2000, while domestic mainline capacity has shrunk by 35 percent. More than 20 percent of all travel involves regional carriers. And among our network competitors, almost 25 percent of their total system capacity comes from regional jets.”
Major airline pilots are looking at the threat from larger airplanes in the hands of regional airlines from more than the seating capacity. This is smart because we have seen airlines discover ways to add more seats using clever cabin re-configurations. For example Ryanair squeezes 189 seats into an airplane (737-800) that the manufacturer touts as normally seating 162. Facing such creativity means pilots should not focus their contracts on seating capacity, which is too elastic.
Unions cleverly have a clause in their Scope that limits regional airlines to flying aircraft weighing under 86,000 pounds MTOW. Indeed 76 seats and 86,000lbs MTOW is the current “U.S. network carrier industry standard”.
The next table shows how the Embraer and Bombardier aircraft face off on this measurement.
Consider what happens when you update an airplane. Embraer has yet to release any data on their enhanced E-175. So we need to use a proxy. For example the re-engined 737MAX is expected to have an MTOW 4% increase. For the A320ceo to A320neo, MTOW is expected to increase 3%. Using these re-engine programs as guides, we expect to see a re-engined E-175 have its MTOW rise.
The numbers in red are outside the scope agreements US pilots and airlines have. Even as Embraer is ahead in orders, it appears that the enhanced (certainly the re-engined version) E-175 will need to go on a diet to ensure the airplane fits into the current scope language.
While scope clause language can be changed, the pilots aren’t going to make concessions without an appropriate trade-off, which would likely result in economic impacts to both parties. With aircraft from the two regional jet manufacturers now growing to more than 120 seats each for their largest models, the E-195 at 122 seats and the CS300 at a nominal 130 seats, future pressure may come to re-draw the line between regional and mainline operations. While regional scope clauses certainly won’t rise to the 160 seats that the high density version of the CS300 can seat, the CS100 and E195 could be the next targets in future pilot contract negotiations to try and move the line from the current 76 seats to more than 100 seats.
As always, the Devil is in the details, and for the three US legacy carriers, by far the largest customers for regional jets, 86,000 pounds is the hurdle number today. Until those contracts change, it looks like the new technology alternative from Embraer may need to be flown by mainline pilots.
This morning United Airlines announced an order for 30 E-175 aircraft, plus 45 options. Deliveries are set for 2014 and 2015. The image below is what the airplane is set to look like when it enters service.
- Once again we see an airline focus on the newest models. Recall Garuda bought the CRJ over the E-190 because it was the newer airplane with better economics.
- Bombardier’s CRJ lost this order for probably the same reasons. Embraer was shocked at the Garuda loss. This deal is probably due to concerns by United’s frequent flyers that the CRJ is simply not as comfortable as the E-175, which has significantly more room.
- Leapfrogging can be expected to occur again, and will, with the larger CSeries, which is a different category of airplane. But the tradeoff between lower operating costs, for which Bombardier has the advantage with the smaller airplane versus comfort, for which Embraer has the advantage, will remain the competitive battleground in the 70-100 seat category.
- Consolidation in the USA means each order becomes more attractive because it is bigger. But it also means losing an order has a scary downside. Missing out on an order wave could put an OEM or an aircraft program in jeopardy. Buying cycles in the new environment makes getting a good share of big wins almost mandatory to stay in the business. Delta and American are both pondering new airplanes in this category. The same is true for airlines overseas. The jury is still out, and the competition is tight in the 70-90 seat class.
Consolidation in the USA also means a tougher environment for both labor and passengers. Passengers are seeing a steady rise in fares. But labor has it worse, especially for pilots, who fear the growth of the 76-seat airplane over the 50-seater leading to more jobs to regional airlines. Its the old mainline vs regional scope clause argument. With both Embraer and Bombardier producing aircraft that seat over 100 passengers, will these new airplanes go to mainline or regional pilots. Pilot unions are aware of the squeeze they face and want to retain every job they can for mainline operations. Despite the looming pilot shortage, pilot unions have valid fears.
Economic power has moved towards airline management in a compelling way. Airline management is unlikely to let this power slip out of their hands any time soon. This means lots of new negotiating styles. OEMs and labor now face an emboldened airline management group in the age of mega-carrier consolidation.
Huge orders are a siren song for OEMs – they are must wins every time. If Embraer is able to hold off Bombardier at American and Delta, Bombardier’s CRJ product line will face a tough environment. Both OEMs know this and will aggressively fight for every order. This is good news for airlines, who will get deals on regional airplanes at prices they have not seen in a long time. Keep watching, as this battle will get interesting.
Porter Airlines dropped the other shoe today. The CS100 provisional order announcement of April 10 was met with skepticism by the attendant media. As readers will note from our interview with airline Chairman Don Carty, the opposition to the airline’s plans are not exactly hidden.
So it is with interest that the airline provided the following PR.
“Two-thirds of Torontonians support Porter Airlines’ plans to fly Bombardier CS100 aircraft from Billy Bishop Toronto City Airport. This result is based on an unprecedented public opinion survey of 19,500 people, which is the largest-ever sample size for a publicly-released poll in Toronto.
A summary of the results are as follows:
- When asked, “Do you support allowing jets to fly out of the airport if they make a comparable amount of noise to the turboprops currently being flown from the Island Airport?”, 66.2 per cent supported these plans, 22.3 per cent were opposed and 11.5 per cent undecided or unsure.
- When asked, “Do you support lengthening the runway if the area currently used by boats will not be changed?”, 62.5 per cent supported these plans, 22.3 per cent were opposed and 15.2 per cent undecided or unsure.
- When asked, “Should Toronto City Council allow jets to fly out of the Toronto Island Airport?”, 51.3 per cent supported these plans, 28.7 per cent were opposed and 20.0 per cent undecided or unsure.”
People outside the area may not be aware that elections are coming in 2014. The airport expansion plans are going to be a big item for the parties contesting the election. We foresee the two sides taking, broadly, these approaches. The naysayers will talk about pollution (noise and air). The parties in favor of expansion will be talking about economics (especially Canadian jobs, Toronto jobs and competitive air fares)
It isn’t hard to figure out how WestJet and Air Canada will approach the project either. The election is going to be tough because the tradeoff isn’t easy. Both sides are going to roll out surveys and opinion polls. Expect more news as the story unfolds.