Overnight two deals announced by appear complex.

Embraer:

  • Lost a deal with Flybe in the UK for 20 E-175s and defers delivery on four. Flybe and Embraer agreed to reduce an outstanding deal for 24 E175s on order by 20 aircraft.
  • Won a deal for 50 E-175s at Republic (for United Express) – transferring the Flybe order plus more. United anticipates deliveries will begin in July 2015 and continue through the summer of 2017. The new aircraft will replace large airplanes and older, less-efficient aircraft and are in addition to 70 E-175s whose deliveries began this year for other carriers to operate as United Express.
  • Embraer’s backlog is net +30.

Bombardier:

  • Flybe gets 24 Q400s, leased from Republic. So this is not a new order for Bombardier.
  • The deal is a sublease and will “supplant 21 of the same aircraft type whose lease periods are ending over the next four years”.
  • Flybe is set to become the largest Q400 operator.

2014-09-17_9-52-53United continues to favor Embraer, but Republic made it clear the selection was theirs. Currently Republic is  Embraer’s largest customer and now will also be the largest E-Jet user worldwide.

The Republic Q400s are currently used for United Express and it seems United is standardizing on E-Jets.  United notes that it will extend its agreement with Republic’s brand Shuttle America on 38 E-170s, with new expiration dates beginning in September 2019 and continuing through December 2022; and begin removing, in 2015, 31 Q400s operated by Republic Airlines. It is not clear how the economics will match those of the Q400. United has, as of this writing, not responded to the question.

The Embraer order announced today is in addition to an order by in January 2013 for 47 firm and 47 option E-175s; 34 are already delivered. In addition to this new order, Republic Airways maintains 32 options for E-175 aircraft.  Republic Airways’ E-Jet fleet will consist of 72 E-170s and 151 E-175s, totaling 223 E-Jets.

The selection of the E-175 looks rational from how Republic’s feet looks now and possibly United deciding to standardize on the E-175.  Of course Embraer might also be keen to keep its E-Jet backlog as full as possible prior to the E2 coming on stream.

Reading the news today, there seems to be a sense that Bombardier “lost”, but this is not necessarily true.   Republic told us that they remain committed to Bombardier and the CSeries.  Republic’s CSeries delivery is two years away and this gives them lots of time to work out what they want to do.  Republic will hold on to those orders as long as they are valuable.  If one were to ask why did Republic not consider the CRJ; it makes more sense for Republic to stick with what they have.

The Republic and Flybe deal really may be more about how the markets they operate in are developing.  In North America distances are greater, so jets do make more sense.  However, Republic (and United) may have some challenges because the E-175 can’t match the seat costs of the A319 and United has lots of A319s.  There is almost certainly more to the story here.  Scope clause for example?  Also, could this deal be a first step in moving away from smaller communities?  The E-175 decision could be part of the long awaited move to cull service to smaller communities.   Moreover, it would be no surprise if United is sacrificing frequency for capacity.  The move to bigger jets is not being negative about the Q400; rather it may be more about a change in and focus.

In Europe, distances are shorter and jets are at a disadvantage.  When are 500-700 miles, the wins.  Flybe is committed to the Q400 – earlier this year they had five come off lease and the airline bought them outright.  If the airline keeps this up, they could end up with a fleet of 72 Q400s. If Flybe decides to go for the 86 seat configuration on the Q400, its costs drop to close to that of the A319 (like flown by easyJet).

LCC competition in Europe is brutal.  This is why we see Air Berlin, Austrian and SN Brussels deploying the Q400.  Replacing jets with a high speed like the Q400 is normal for Europe.  The Q400 breakeven is about 40 seats and the E-175 is closer to 55 seats.  This means on 500-700 mile thin the Q400 is going to provide better economics.  In the European market we are seeing the Q400 do well.  And in North America, with longer stages, we see jets doing well.

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