The interesting LOT “regional” order |

The news reports state that LOT is looking for 84 regional aircraft. It helps to know what LOT is operating now. [caption id="attachment_90405" align="aligncenter" width="141"] AirInsight[/caption] The table lists 71 aircraft, so 84 means significant growth. However, if the focus is only on regional jets, as reported, this is far more substantial news. Bear in mind that LOT has 13 737 MAX on order. LOTs of questions What is priority #1? Delivery speed or economics? LOT is state-owned, so politics must be added to the trade-off mix. Moreover, the mood in Europe is unsettled because of Russia and the US. The deal focuses on regional aircraft, but neither E2 nor A220 are regional aircraft. What does the airline need? Regional needs to be better understood. Across the airline market, regional is understood in terms of the US' view on regional airlines and aircraft. However, in this case, we need to stretch that definition. France, for example, because of HOP, treats up to 100 seats as regional. The news states the order size is 84. This is about the equivalent of the airline’s entire single-aisle fleet. From what we hear, the deal will have two phases: a firm order and a large number of growth options. LOT has 47 E-Jets in commercial service—43% are E170/5. The proposed deal will cover all of LOT's E-jet fleet. Indeed, the E175 is not being considered. Therefore, not only will there be a larger fleet, but also substantial upsizing. Airbus only offers the A220, which reaffirms our view on the E175. Aircraft mile costs are about the same, and Europe does care about emissions - something the US ignores. So, if this comes down to E190-E2/E195-E2 versus A220-100/300, we see similar economics, with the Airbus offering slightly more seats than the Embraer models. The question is, how many seats does LOT need? Deliveries vs Economics Both OEMs have relatively slow production rates. Reported delivery slots start in 2026 through 2030, and here's the data to prove that. [caption id="attachment_90406" align="aligncenter" width="640"] AirInsight[/caption] Airbus has increased its delivery speed (Days) this year. The A220 takes 23 days from the first flight to delivery, while the E2 takes approximately 47 days. In terms of delivery speed, it appears Airbus has an advantage. However, Embraer is accelerating its production rates and could improve this enough to close that gap. Airbus is planning 14 A220 per month by 2026 but continues to have problems getting to more than six per month. Can it really ramp up—particularly with the Canadian supply chain? Embraer hasn't had the orders it initially anticipated, as the replacement of earlier E190/E195s is just starting since those aircraft are not that old. As a result, Embraer relies on new customers E2 orders. Regarding economics, here's what we have based on Skailark data. The range capability is important because it allows LOT to serve markets with smaller aircraft. An example would be Beirut, which currently requires a larger single-aisle. Both aircraft being proposed have ~3,000 mile range, which gives LOT useful flexibility [caption id="attachment_90407" align="aligncenter" width="640"] Skailark; AirInsight[/caption] The ball size reflects the number of flights. [caption id="attachment_90449" align="aligncenter" width="523"] Skailark; AirInsight[/caption] The data is the average of operators worldwide tracked by Skailark. If we select fuel burn for LOT, for example, their E2 burns 1.3, better than the industry average of 1.4. This tells us that the difference between these two OEMs regarding fuel burn is tiny. This is expected as they both use essentially the same engine. The E2 is lighter, offering better fuel burn per trip. The A220's advantage is that it is slightly larger (more seats) and offers better fuel burn per seat. The competition is intense in terms of delivery rates and economics. Right-Sizing? LOT is working on a strategy focused on The Centralny Port Komunikacyjny. The fleet renewal is driven by creating a hub for Poland and central Europe. Talking about regional jets is a misnomer because LOT needs a fleet refresh with more range and payload than what is typically understood as "regional." This fleet update focuses on right-sizing; the tradeoff is at the margins. Switching OEMs Switching OEMs comes with significant costs, including pilot training and spares. Embraer's rollout of its top executives and mention of production in Poland highlights how much it has on the line. Embraer shared this chart in Poland last week. [caption id="attachment_90451" align="aligncenter" width="640"] Embraer[/caption] Embraer's case focuses on the E2's performance. Another issue to consider is that LOTAMS is the second-largest E-jet MRO in the world and the largest in Europe. Switching away from Embraer incurs significant risk, which every airline manager eschews. Similarly, Airbus can also be expected to roll out its big guns. Airbus is interested in the deal and is also an in-flight refueling opportunity. Embraer's C-390 competes with the Airbus A400 for Polish military orders. Politics is creating opportunities for both Airbus and Embraer. What does LOT want, and what does it need? Rational network planning seeks to optimize aircraft range/payload capabilities with markets. This is the famous "right-sizing" concept. The Skailark chart above guides ranges to under 1,000 miles for either aircraft type. Both aircraft can serve considerably longer ranges than that. Either aircraft could reach many international markets from central Poland. LOT has added to its E-Jet fleet by leasing three E195-E2. This guides to an "upsizing" trend, suggesting that LOT's regional definition is evolving. The LOT process focuses on aircraft between 100-150 seats rather than classic regional jets. That being the case, the A220 and E2 are as close a match as the A320neo vs. 737 MAX 8. Politics wins the day? Politics could swing the deal because the difference between the aircraft is so tiny. Will Airbus have an advantage if politics is the prime mover behind the decision? Perhaps, anticipating this issue, Embraer had this chart in its presentation. [caption id="attachment_90453" align="aligncenter" width="640"] Embraer[/caption] The chart highlights the financial reward for remaining with Embraer. Because of state ownership, politics plays a role, and the state must cover any negative economic impact. The message to Poland is switching OEMs comes with quantified risks. Recognition of this fact is likely why Embraer also made generous offers for an assembly plant in Poland for the C-390 and a conversion plant for the E190F. Both OEMs will play their best hands. The winner here is LOT, which is evaluating the best aircraft offers it has likely ever seen.

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