Yesterday SkyWest and Embraer announced an order for another 16 E-175s. This order boosts SkyWest’s E-175 fleet, which is already the world’s largest of the type. These 16 aircraft will be used exclusively for Delta Air Lines regional service. SkyWest already operates 71 E175s for Delta.
This news does not surprise us. Even as Bombardier was winding down its CRJ line there were credible rumors Delta wanted another 50 CRJ900s. Delta has come through the pandemic rather well – it had the right aircraft for the pandemic-induced traffic shock. Both of these were Bombardier creations: the CRJ900 and C Series, AKA A220.
However, Bombardier was in no shape to execute. As part of a way to make their mutual lawsuits go away and enable Mitsubishi to acquire some regional airline customers, Bombardier sold the CRJ program to Mitsubishi. For both OEMs, this was a mutually beneficial outcome.
For the regional airlines, it was less so. The loss of the CRJ line and the fact that Mitsubishi’s SpaceJet program was in the freezer means any new regional jet orders default to Embraer. For airlines, this is no bad thing, since the E175 is the benchmark regional jet. For Embraer this is also as good an outcome as could be wished for – a monopoly in a segment that still demands new aircraft and there is no price competition.
Being able to hold margins on the E-175 is very important if your E175-E2 is not making progress and the larger E2 line has slow orders, in part because of the pandemic. Embraer orders have always been E175 “heavy” and the departure of Bombardier came at the perfect moment. After the Boeing/Embraer fiasco, Embraer needed a change in its fortunes.
Currently, Embraer has a monopoly and is certainly benefiting. While it has a monopoly, it cannot charge whatever it wants. This is because pricing has to be set so that Embraer wins every deal without attracting any competitor into the space. Embraer gets better pricing than before, but it has to be careful. Nurturing the market provides Embraer with stability in its most important segment. This is a long game. Winning a deal provides a two-decade longtail revenue stream from spares and support.
Meanwhile, the absence of any moves in Montreal and Kobe sends a signal to regional airlines – support for CRJs is all there is. This decision means that as CRJ900s get retired, as is the case at SkyWest, Embraer wins every time. If you sense something like “757-Deja Vu“, we are in agreement. It is clear how that is playing out with the A321neo winning left and right. This is not the strategic choice Mitsubishi should be making. The market is big enough for two OEMs.
The longer Mitsubishi takes to recover from the SpaceJet errors and offering a CRJ replacement, the stronger Embraer becomes. The delay builds Embraer because market absence creates a growing hurdle – look at the hurdle Boeing faces competing with the A321neo variants, even when it has something to offer. Mitsubishi offers nothing – no product, no ideas, no concepts.