Premium #162 – Wild Swings in the 100-130 Seat Segment Orders

The recent first flight of the CS300 encouraged us to take another look at the segment it is to enter. The market segment between 100-130 seats is often thought of as one of the toughest segments in commercial aerospace. It has been a graveyard for many planes. The A318, 717, 737-500 and 737-600 are the most recent unsuccessful models. And based on new orders, it seems the A319neo and 737-700/7MAX might similarly stumble here. The following chart shows orders in this segment from 2000 to the present, after the demise of the Fokker100 and Avro RJ. The Duopoly (Airbus & Boeing) had this space to themselves until 2002, when the Embraer 190/195 came on stream, driving down the Duopoly market share. By 2004 the Duopoly aggressively reacted to the post-911 recovery, but peaked in 2006 and has barely been heard from since in this segment, as it has upsold customers to larger models. In 2008 Airbus took a 24 aircraft cancellation on A319s and Boeing got 31 orders while Embraer earned 112 orders. In 2009 Bombardier entered the space with its CSeries. The upstarts have not looked back since. We believe the orders the Duopoly secured from 2009 onwards are prime targets for up-sizing, with some as “lower cost placeholders” for leasing companies that will upsize, but prefer to pay lower progress payments. In 2007 the Duopoly had nearly a four aircraft to one advantage over the Upstarts in this segment. By 2014 the pendulum had swung to nearly six to one in the other direction. In absolute terms, the segment did fall off after the Duopoly appears to have abandoned it. However even as the Duopoly’s role fades, the Upstarts have managed to start re-growing the segment. The reason for the Duopoly dropping out is economic performance, the CSeries and E2 Jets simply have better economics than the A319neo and 737-7MAX, and airlines are rejecting the latter in favor of the former. It may be early days, but looking ahead it appears to us the segment has life. Over the period displayed the segment averaged 149 orders per year. Since the Duopoly faded (2007) the average after 2008 has been 42 firm orders per year. This is certainly not enough volume to excite the Duopoly for sure. But is this enough to excite the Upstarts? When one counts options, purchase rights, and orders that are “semi-firm” with easy cancellations, several hundred more aircraft enter the picture, all with the Upstarts. Airlines have seen they can successfully deploy aircraft made for the segment. Aircraft such as the E-190/195 have seen good sales over the period, and CSeries has generated more than 550 commitments. Certainly the Duopoly aircraft shrinks have shown themselves unable to compete unless discounted to the point of economic indifference. For Airbus and Boeing this discounting is a fool’s game when they can do better by up-sizing customers to the standard models which provide better revenue capabilities. The Duopoly is better off focusing on the 150+ seat segment. We think this segment actually looks better than is generally realized. Take a look at some key markets: Europe: green taxes mean airlines want right sized aircraft with lowest fuel burn and quietest operations that can serve small communities and hubs. The Duopoly does not compete well with its larger offerings. The Upstarts have an advantage. North America: consolidation means many communities are losing service. Turboprops work for some. But others might be better served with fewer flights using right sized aircraft. These aircraft must either have state of the art economics, or have been purchased at dirt cheap prices. The Duopoly offerings work best in mainline services between hubs or big centers. Feeder operations are hampered by scope clauses, making multiple daily frequencies with regional jets costly. The Upstarts have an advantage. Asia: rapidly growing middle class wants to travel. Many airports are too small to handle 150+ seat aircraft. Options are turboprops, regional jets, or smaller trunkliners (between 100-130 seats.) Airlines serving communities in well-populated counties like India, China and Indonesia likely will focus on right sized aircraft to move people. These aircraft need to be able to work in smaller airports and the Upstarts offer the better options. If these three key markets play out as we think they will the Upstarts should see strong demand for their 100-130 seat aircraft in the near future, and an increase in orders as the CSeries and E2Jets enter service beginning late this year and continuing through the remainder of this decade. A significant portion of the markets in North America are served by 100-130 seat aircraft today – there are a lot of A319s and 737-700s in service. Many markets will not react well to lower frequencies with larger aircraft, as business travelers prefer choice and convenience. As a result, there should be a significant continuing role for 100-130 seat aircraft that have favorable economics that are comparable to larger aircraft on a seat-mile basis, which the CSeries and E2 Jets will provide.

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