Premium #208 – The Improving E2 – What it means for the market

Embraer rolled out its first E2 Jets last week, beginning with the E-190 E2. While this is an important milestone and has been extensively covered in the news, it is also important to understand what recent changes to the program mean for the industry, and any longer-term implications. The E2 continues to evolve. From an initial wing that included winglets, the current E2 variant has an all-new wing that looks like it could have come from the Boeing design studio. This wing, which has a canted edge, looks like it came from a 787 or 777-X. On the surface, these changes look close enough that we wonder whether there are any design patents at Boeing that might have shared and whether there is an emerging relationship between the two companies. The performance of the E2 continues to improve as well. The performance of the Pratt & Whitney GTF engine, that enabled CSeries to beat its projected numbers and is on-target at Airbus, should deliver on its promises from day one. With significant growth potential, we would expect learning from earlier versions on CSeries and A320neo to be applied to the E2 engines by the time they enter service. In addition, the E2 engine will benefit from whatever lessons are learned from the two prior programs, and any upgrades will likely be applied. Embraer announced a significant increase in range for the aircraft, from 2,000 to 2,450 nautical miles. While these does not make the aircraft transcontinental, it does provide additional flexibility for operators with respect to tankering fuel and operational efficiencies. But without transcontinental range, the E2 Jets are not targeting the mainline markets from Airbus and Boeing, and Embraer has, to a great degree, escaped the destructive price competition that Airbus and Boeing have waged against Bombardier. Airbus and Boeing don’t perceive Embraer as a threat to their markets. Embraer's CCO John Slattery expressed great confidence in the aircraft, and plans to sell aggressively. All in all, the changes to the E2 Jets appear to make it a more effective, and more competitive airplane. The image shows the E-190 above and the E-190 E2 below. Major differences are clearly in the wing and engines. Schedule and Cost Appear on Track The re-engining programs at Airbus and Boeing are on schedule, and it appears that Embraer will join them as well. While flight testing has not begun, and that is the area in which problems tend to occur, Embraer is dealing with a known engine and existing airframe, rather than pioneering both an all-new engine and all-new design. It is easier to re-engine an existing design than an older aircraft, and we expect the E2-190 to enter service in 2018, followed by the E2-195 in 2019 and E2-175 in 2020. However it should be noted that Embraer E2 is much more than a simple re-engine program. Each of the three members of the E2 will have a new wing and each is different. The E2 program also appears to still be on budget, despite that budget being significantly less than those at Airbus and Boeing. The estimated $1.7 billion cost for the program is lower than the estimated $2+billion neo and $3+ billion MAX programs. While we understand costs are somewhat lower in Brazil after the devaluation of the real, the cost appears low to us. Particularly as the company has modified the wing by adding an extra piece to increase range and payload. Is there a possibility that the program could incur additional expense? Even if it does, there is a cost-advantage over competing programs that provides Embraer a cushion. Time will tell, but Embraer has been effective at introducing new business jets at a rapid pace, consistently on-time and on-budget. The Value of an Existing Customer Base Embraer has delivered more than 1,100 EJets, which has significant commonality with the E2 Jets. It will be a simple transition for existing customers to move from the old to new models, with minimal incremental training (3 days), spares inventories, and maintenance changes. Yes, the new engine will be different, but with the majority of customers choosing by the hour arrangements with engine OEMs, the impact should be minimal. Embraer is also focused on reducing MRO costs, which have been a sensitive issue for some E-Jet operators. This underscores the firm's mission which is customer focused. This provides a competitive advantage in campaigns. First, Embraer already knows the customer well. Second, the minimal transition costs versus the costs for a new aircraft type provide an economic differentiator, which can often be a swing factor between two aircraft that are very close. Third, the existing aircraft are well proven and down the learning curve with respect to airframe maintenance, and that should not change with the re-engined models. The result should be easy acceptance by existing customers. Outlook Taken together, these add up to the fact that Embraer has improved its aircraft to be competitive with CSeries, appears to be on schedule and budget, and has an inherent advantage in campaigns with existing EJet customers. This bodes well for the program, and should keep Embraer as the shining star in a Brazilian economy. Plus, with labor costs in Reals and aircraft sold in dollars, Embraer is well positioned to cost-effectively compete in an environment of heavy discounting.

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