Premium #298 – Why the E190-E2 will be a winner

The Embraer E2 aircraft are still in flight test, but as we obtain more information on the aircraft they look increasingly compelling. The flight test program apparently remains ahead of schedule and the development program remains on budget. Looking at the market where the E190-E2 will be focused shows substantial support for our thesis. The following chart shows that the segment between 101-130 seats, in red, is stable and viable. What do the numbers behind this chart look like? The following table of the 101-130 seat segment indicates the big duopoly has been the main source of aircraft in this segment in the past. But Embraer and Bombardier are the “new guys” at the table. (Bombardier currently has two CS100s in service, but only had one in service at the end of 2Q16) Note how the older names, like Douglas and Fokker are dropping fast. Even the “Other” segment has been dropping off. Embraer is the only OEM that has seen steady growth in the segment for a few years, and it will be joined by Bombardier with the entry into service of the C Series earlier this year. The two legacy players, Airbus and Boeing, are finding it difficult to market their new neo and MAX models in this segment, with Boeing now growing their MAX7 by three rows to more than 138 seats, pulling it out of this segment. Against the E190-E2 and CS100, the A319neo and 737 MAX7 cannot effectively compete economically, even with new engines, as they are shrink versions of larger aircraft and carry excess weight. The Embraer and Bombardier models are optimized for this size category, for which we are expecting steady fleet renewal. The E190-E2 offers a strong combination of aircraft-mile and seat-mile economics that make it compelling when compared to the A319neo and 737 MAX7. The only threat to the Embraer models is the Bombardier C Series. Even though Airbus and Boeing currently hold 87% of the market, this is down from the peak of 88% they held between 2011 and 2014 and likely to fall further rapidly as older aircraft retire and are replaced by new models from Embraer and Bombardier. With a combined fleet peak of 3,640 in 2011 the big duopoly has seen their combined fleet decline by 304 over the last five years. During that period Embraer has seen its fleet grow 68%. A key reason that Airbus and Boeing are likely to lose share is aircraft age. The chart below indicates that the two major OEMs are at a disadvantage. Boeing has 528 in service aircraft that are currently over 15 years old in this sector. How likely are these to be replaced by another Boeing? We confidently say less than a 20% chance. The 209 Douglas and Fokkers are up for grabs, and again, unlikely to go to Airbus or Boeing. While Bombardier is a threat, it is still ramping up production rates as it introduces the C Series, while Embraer is continuing E-Jet production as it transitions to E2 models. This is a distinct short-term advantage for Embraer. For some time, the Embraer E-Jet has been the only optimized aircraft in this segment. Bombardier has moved into the segment and offers the only true competition. Airbus and Boeing must discount their aircraft to remain competitive economically. And this has occurred, evidenced by the recent United Airlines order for 737-700s. Embraer noted that they were asked by customers to not change the dimensions of the E190-E2 from the E190. Embraer has kept the E190-E2 dimensionally the same as the original. The following chart shows how closely the OEM kept to this request, but also managed to grow the aircraft’s capabilities. For about a 10% growth in MTOW the E190-E2 offers 15% better range, in addition to lower fuel burn and better environmental performance. The E190-E2 is a more capable successor to the E190. The Embraer E-Jet program shows that the E190 is the by far the most popular model. The following charts illustrate the in-service fleet as of 2Q16 and orders. The Bottom Line In summary, Embraer has an advantage as a known OEM in the segment. Bombardier is a new entrant and delivering a clean sheet design. Embraer’s E2 deliveries could be 18 months away, giving Bombardier a chance to (assuming P&W gets engine deliveries on track) to have an in-service fleet of 60 before the first E2 enters service. Since the E190 is the size airlines and lessors have asked not to be changed for the E2 demonstrates that it is the size many customers want. Meanwhile Bombardier has managed to win two crucial competitions at Delta Air Lines and Air Canada. Given the segment opportunity is around 3,000 aircraft at minimum, both Bombardier and Embraer should achieve success. By that we mean deliver enough aircraft to exceed their breakeven numbers. We estimate Bombardier and Embraer splitting 80% plus of the market. Bombardier’s new aircraft has started delivering. Embraer’s mid-technology E-Jets are going to be replaced by a high-technology E2 in 2018. The E190-E2 is highly competitive with virtually identical economics to the CS100. Embraer will be offering a solution that the market already knows well, understands and has bought in volume. On this basis we believe Embraer has a winner in the E190-E2.

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