Embraer to increase market share and production: Analyst

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Embraer's commercial aviation orders in the first half of the year coupled with expected market share growth in the regional sector are set to drive up production rates, says RBC Dominion Securities Associate Analyst Derek Spronck in a research note to initiate the firm's coverage of the airframer.

RBC expects Embraer to ramp up production based on the more than 100 orders that the Brazilian airframer has already received from US carriers in 2013, says Spronck, estimating that Embraer has cut regional jet deliveries this year by about 15% compared to 2012. Flightglobal reported in June that Embraer's second quarter deliveries declined 59% from the same three months of 2012.

Based on new orders, the production rate will have to increase, says Spronck. He explains that based on Embraer's delivering 20 Embraer 175 regional jets in 2012, the company saw a production rate of 1.7 units per month. This means it would take seven and a half years to clear out its backlog at that rate, he says.

"As such, we are looking for Embraer to ramp up the production rate on the E-175 line to 2.8 units per month," he says. "That gives 34 units of the E-175 delivered in 2014 with a production backlog anticipated at 2.8 years should no new orders come."

United Airlines and Utah-based regional SkyWest are among the carriers that committed to new current generation E-Jets this year, placing orders for 30 and 40 E-175s, respectively. Delta, on the other hand, selected the Bombardier CRJ900 to revamp its regional fleet, ordering 40 of the type plus 30 options last December.

American Airlines is also in the process of choosing between the CRJ900 and E-175, a decision that Bombardier chief executive told investors would happen "shortly" during a 1 August earnings call. Air Canada is also in the process of choosing its new narrowbody fleet this year, focusing on both of the regional jet manufacturers as well as aircraft from Airbus and Boeing.

Embraer's commercial regional jet market share will grow from the aggregate 54% market share the aircraft manufacturer has seen over the course of the last decade to 63% by the end of 2015, writes Spronck in the research note. In 2012 alone, Embraer saw 76% market share based on deliveries, he adds.

Meanwhile, Bombardier's regional market share will decrease 14% by 2015 compared to levels it has seen throughout the past decade, says Spronck. The 45% aggregate market share that the airframer has seen between 2001 and 2012 will drop to 31% between 2013 and 2015, according to the research note.

Bombardier says that it traditionally holds 50% of the 60 to 99-seat market and does not forecast the same type of market share decline.

While Bombardier and Embraer together will still make up the vast majority of deliveries through 2015, Sukhoi is expected to boost deliveries of its Superjet from 1% of market share to 6% by the end of 2015, the study shows.

Contributing to RBC's projected market share gain is Embraer's new revamped E2 E-Jet family, which launched at the Paris Air Show in June and will compete head-to-head with the Bombardier CSeries. The new aircraft features new Pratt & Whitney geared turbofan engines, more advanced avionics, new wings and fly-by-wire controls.

Spronck says that while the two aircraft types will compete, the CSeries' longer range and "better-anticipated economics" is expected to reach a different customer base than the E2. However, the E2 will "improve the value proposition" against Bombardier's next-generation CRJ models, he says.

"While Bombardier management believes that the existing CRJ line-up offers a competitive product line-up, we believe Bombardier will need either to launch a clean-sheet regional jet offering in the coming years or (and more likely) concede market share in the regional jet segment," says Spronck.

But the Canadian airframer maintains that it is "already ahead of the competition" with its CRJ offerings and constantly has improvements in the works.

"We are looking at additional enhancements," it says.

Embraer's E2 family includes the 97-seat E-190 E2, scheduled to enter service in 2018, the 118-seat E-195 E2 with first deliveries in 2019 and the 80-seat E-175 E2, hitting the market in 2020. These aircraft types could vary depending on the configuration, but generally covers the 70- to 130-seat range.

Lessor ILFC signed a letter of intent for up to 100 E-190 E2 and E-195 E2 jets at the show, while SkyWest launched the E-175 E2 with 100 firm orders.

Embraer has said that the E2 will show "double digit" reductions in noise fuel consumption, emissions and maintenance than similarly-sized aircraft. Pratt & Whitney, which provides versions of the PW1500G engines for both CSeries models, says the 110 to 160-seat CSeries will have 20% fuel burn advantage over existing aircraft.