The commercial aerospace industry has two duopolies – a big one (Airbus & Boeing) and a small one (Bombardier & Embraer). If markets were clearly differentiated these four companies would coexist in an environment where there are two competitions. But, as we know, the commercial aerospace business is not cleanly split – there is a growing area of friction between the duopolies where their interest meet.
The area where the friction is occurring is the 111-140 seat segment, and that segment itself built on the foundation of the 91-110 seat segment. The under 100 seat segment is where the regional jet makers of the small duopoly have traditionally traded and honed their craft. Success at the sub-100 seat segment has enabled the smaller duopoly firms to experiment by stretching aircraft and even developing aircraft with more than 100 seats. The success Bombardier and Embraer enjoyed has attracted attention and competition from Mitsubishi in Japan and SuperJet from Russia and Italy. To maintain their duopoly Bombardier and Embraer decided to grow their aircraft up to the nominally 130 seat size.
In doing so, they are now entering the deeper side of the pool. The going has been tough because the big duopoly has learned about new entrants. While Boeing fixated on McDonnell Douglas, Airbus quietly entered and ended up being the other in the big duopoly. The lesson is seared into both Airbus and Boeing’s conscientiousness – nobody will be allowed to enter their space without attracting the toughest trading conditions.
So what does this mean for the ambitious players in the small duopoly? Are they doomed?
At the end of last year the global in-service fleets showed the market being over 5,000 aircraft for the two seat segments listed. This is certainly large enough for the small duopoly to find highly attractive. The stepping stone of the 91-100 seat segment provides sufficient momentum to encourage their ambition. The big duopoly has a big stake – but its offerings are no longer competitive. The A318 and 737-600 have been eclipsed. The 717 is a one trick pony at Delta Air Lines; which is the only airline acquiring the type in second hand markets. Besides, there is a juicy segment of aircraft in service that come from OEMs which have left commercial aerospace. One can’t blame Bombardier and Embraer seeing opportunity.
However once the small duopoly decided to move into the over 100 seat segment, it had to offer a family solution that spreads over more than one segment. The obvious spread has to go up. Which brings the small duopoly into a big market of over 3,000 aircraft but also confrontation with the big duopoly.
However as the backlog chart shows that although the future is fraught with risk, it is not bleak. In backlog terms the big duopoly has been pushed out of the 91-110 seat segment. Many of the 526 aircraft in that backlog will replace big duopoly aircraft as they retire – making the backlog likely to grow considerably. Since nothing new in this segment is coming from the big duopoly, the small duopoly will gain momentum for its smaller next generation families in this segment.
Looking at the more dangerous 110-140 seat segment, we see the small duopoly already has a respectable foothold. This is the segment where 737-700, 737-7MAX, A319 and A319neo exist. We have previously suggested that the big duopoly might be quietly vacating this space. Based on what we see, we continue to think so. Which means the larger sized family members of the small duopoly offerings are likely to gain traction here too.
The big duopoly can and is playing a spoiler role though. It plans to eviscerate the 111-140 segment by moving as many of its bigger customers to the next highest segment. Even if it manages an nearly impossible 50% market move, the remaining market is likely to offer the small duopoly sufficient space to exist. We estimate the these two segments could generate demand for 4,500 aircraft over the next 20 years. Of course the ambitious small duopoly can then start the next phase of airframe stretches and the fun will continue.