Premium – A market summary

Embraer is the third largest OEM It is flight testing its newest E-Jet What did the market look like at year end? Embraer has developed a good business in commercial aerospace. From its early turboprops, the company went on to develop competitive regional jets and then pioneered a new family of aircraft with its E-Jets. The E-Jets have been very successful with 1,300 in service. These were launched in 1999 and first E-Jet flew in 2002. If we look at these three charts we can see where Embraer was in 2016. The charts are based on in-service aircraft at the end of the period. In the global single-aisle market of in-service aircraft, Embraer is #3. Their lead over Bombardier is just under 500 aircraft. Embraer is focused on the 70-130 seat market. Even though their E2 aircraft will extend that, with up to 146 in a single class E195-E2. The third column chart shows that Embraer is dependent on the US for nearly its in-service fleet. Doing business in the US comes with a unique challenge for Embraer. Specifically, this is “scope clause”. Many of Embraer’s US-based in-service fleet are either E-170s (6.8%) or E-175s (37.2%), both of which are operating within the scope clause impacted segment. Embraer's top four customers are US-based regional airlines. The four account for 28% of Embraer’s active fleet. Another significant US customer is JetBlue, which is not a regional airline. JetBlue launched the E-190. While Embraer’s ERJ line fits in the 50-seat segment, this segment is increasingly being retired. Regional airlines are focused on the larger models. The following table shows the in-service fleet of Embraer’s larger models in the US. The most popular model by far is the E-170/175, accounting for close to 44%. Of the 1,201 in-service E-Jet fleet, 463 or 38.6% operate in the US. Of the in-service E-170/75s, the US accounts for 67.6%. Embraer is dependent on the E-170/75 models (47% of all in-service E-Jets) and the US is by far the most important market. The table above shows the E-175s to be relatively new. The next time scope clause is negotiated is 2019. If scope stays fixed at current rates (as unions and airlines tell us) then Embraer must soldier on with its E-175. This is a fine aircraft that has become a good seller in the US. But it means the E175-E2 can’t work in the US market as it exceeds the scope clause limits. Embraer then has two paths to follow. First is to focus on its E190-E2 and E-195-E2. Of these, two models the E190-E2 is likely to be the more popular. In 2016 the E-190 had sold over 3 times as many as the E-195. But these two models account for 53% of the in-service E-Jets. So, while this a path that must be followed, it might not be sufficient. The E-190 is the best seller but the US only has 16% of the fleet compared to 38.6% overall. The second path is to figure out a solution to get around the scope clause. Since the E-175 is such an important model and the US so crucial to Embraer, this path should get the most attention. What could Embraer do to solve the scope clause issue? Embraer could market the E175-E2 directly to the network airlines and move out of the regional airline segment. Once in the hands of the network carriers, scope clause is a non-issue. JetBlue is already using the E-190 and has proven the utility of the E-Jets. There is a precedent for this strategy. Last year Delta Air Lines ordered the Bombardier CS100 and plans to use this aircraft in mainline service to markets down to the regional level. Looking at the parked fleet, we can see the 50-seaters have started retiring. This is the same for Bombardier's 50-seater fleet. But there are several E-170s and E-190s also parked. The E-190s are relatively young. Looking at the E-Jet orders and deliveries to date, the E-190 is the most popular model. Looking at the E2 orders, it is the E175-E2 that has the most orders. The problem is these E175-E2 orders for US regional airlines. They cannot take deliveries because of scope clause. This means over one-third of the E2 orders are possibly going to be moved to the right.

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