PREMIUM #255 – Embraer’s amazing growth

Embraer is perhaps the "quietest" of the big four commercial aircraft OEMs. But they have made a tremendous impact in the global marketplace, as the table below, showing the active Embraer fleet across the globe, illustrates. The USA has been the OEM's largest market throughout the listed period, with currently about 43% of the fleet, followed by Europe with 17.5%, Latin America with 14.6% and Asia with 10%. Embraer's initial targets, the US and Europe, are two well-established commercial aviation markets that are difficult both to break into and to sustain market share. Embraer successfully accomplished its objectives in those key markets and has been steadily diversifying its customer base in recent years. Embraer's commercial business evolved as the company grew in expertise and aircraft sophistication. The company started out producing 19-seat unpressurized turboprops, followed by 30-seat pressurized models and later 50-seat regional jets to today's 76-seat regional and 100-120 seat mainline jets. The following chart shows the evolution of Embraer's jet aircraft and active fleet from 2003-2017. Embraer has delivered more than 1,400 EJets, which will provide a substantial installed base that the company will target with its E2 models. However, the strong growth rate in installed base the company has enjoyed has slowed in the last two years, and market turbulence is looming. Let's examine how Embraer got to where it is, and what is likely to happen in the future. Embraer's jet story comes mainly in three parts; the E-145 regional jet family, the larger E-175 regional jet, and the E-190 mainline jet. The first trend is that the early 50-seat jet models are beginning to be retired in greater numbers. The second is that the regional sized EJet, the E-175, continues to be successful but the E2 version faces scope clause issues, and the third that the small mainline jet models have also continued to grow, albeit at a much slower pace since 2015. The 50 seat E-145 was the best selling version of the ERJ family, but the market for 50-seat jets is fading, with substantial retirements continuing. Among the E-Jets, the race for market share is tight between the E-175 and E-190. At 3Q17, there were 476 E-175s in active service and 524 E-190s. The E-175 is very popular in the world's largest regional jet market, the USA. The larger E-190 and E-195 were timed extremely well at their introduction. These models emerged just as several existing OEMs with decades of history left the market, including Dornier, Fokker, and BAe. Embraer was in the right place at the right time with the right airplane. Their novel designs set them apart and airlines like KLM, the original Fokker customer, migrated over to Embraer replacing its Fokker fleet. The E-Jets success catapulted Embraer into the big leagues. Depending on how you define it, they are either the third or fourth biggest airframe OEM today. The success of the ERJ enabled Embraer to develop a successful family of business jets. The confidence of the E-Jet program provided the company the confidence to develop the KC-390 military freighter/refueling tanker. The KC-390 joins Embraer's other successful military application, the Super Tucano. The impacting of changing airline fleets The following table shows Embraer aircraft that are parked and not in service as of September 30, 2017. The ERJ program has 247 aircraft that are parked and out of service, while the EJets have 64 aircraft parked and not in service. The smaller regional jets have lost favor in the marketplace, resulting in low residual values due to a market glut that has also impacted the other 50- seat regional, the Canadair CRJ200. But that is not the whole story; new business models are emerging as the price of these aircraft falls to a point that restores their economic viability. Take a look at OneJet, which is starting a business connecting cities where there's no service. Using low capital cost ERJ's, they can they create a service with no competitors. Is the 50-seater RJ dead? No, certainly not. In the right hands, with the right business model, older aircraft can come back, provided the aircraft has been well cared for. Will disruptive new business models stem the tide towards early retirement of ERJs, and will this business model be copied in more markets and countries? Disruption often changes trends when we least expect it. Meanwhile, among the larger Embraer's, several relatively young E-190s are available, but are likely to be taken up as markets emerge.. One example in South Africa is a small regional that typically flies ERJ-sized aircraft remaking themselves into a more sophisticated operator using a second-hand EJet. The new air service from South Africa to St. Helena, in the middle of the South Atlantic, is being handled by a small airline called Airlink using an E-190. The lower capital cost of used aircraft, suitably maintained, allows for creative new services. Nobody expects Airlink to stop its growth at St. Helena, as there are a plenty of opportunities in Africa to conquer. The question for the future is can Embraer continue to grow its in-service fleet at historic rates. Several factors appear to mitigate against this: First, the 50-seat RJs have fallen out of favor. While innovative opportunities are available to low capital cost carriers, starting an airline, even with an innovative business model, remains a difficult task. Second, the popular E-175 is scheduled to be replaced by the E175-E2, with the more fuel-efficient Pratt & Whitney GTF engine and a new wing. But with an additional three seats and heavier engines, the new model exceeds the current scope clause requirements in the largest market for regional aircraft, the US. Embraer has already pushed back initial deliveries for a year, awaiting the result of the next union contract negotiations with major US airlines. That vote, scheduled for 2019, appears not to favor any modifications, which would render the E175-E2 unavailable to regional carriers in the US. Third, the mainline E190-E2 and E195-E2 appear to be excellent airplanes with industry-leading economics, but are facing more intense competition from the Bombardier-Airbus C Series, which has won several major orders. While we have no doubt that these aircraft will be successful, short-term opportunities will be limited because of the young ages of the 677 models currently in service, which remain too young for replacement. As a result, in the short-term, Embraer will need new customers for the E2 models, as add-on orders with existing customers will likely not be large enough to generate substantial growth. The Bottom Line Embraer has earned a place at the table in the industry and continues to show creative ways to keep its products active. But the company will face several tests over the next five years that may be difficult as the EJets to E2Jets transition evolves. Great airplanes will succeed, and we expect Embraer to continue to grow - but perhaps at a slower pace over the next half-decade.

US Flight Planner - US DoT On-Time Data	Airbus vs Boeing - Official OEM Data
US Airline Schedule Performance - US DoT Data	Daily OEM Production & Deliveries -

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