Leeham News and Analysis

Embraer E-Jets in focus

Embraer reported its third quarter earnings October 31 and disappointed the market with results that missed targets, resulting in a share price decline and some downgrades by analysts. Fewer commercial E-Jets and business jets were delivered than expected by analysts. Despite assurances by the company that year-end targets would be met, market reaction was unenthusiastic.

Embraer’s been struggling some on E-Jet sales. The backlog of the of current E-Jet, now dubbed internally as E1 with the launch of the re-engined E-Jet, called E2, had been shrinking until EMB won key orders from SkyWest Airlines of the USA, Republic Airways Holdings (for American Airlines) and from United Airlines, all for the E175. Even so, with a production rate capacity of 17 per month, there are large gaps but also open opportunities to offer near-term slots. The current production rate is only 7.5/mo-less than three years.

Embraer delivered 122, 98, 105 and 106 E-Jets in 2009, 2010, 2011 and 2012. It’s forecast to deliver 90 this year and next, followed by 85, 80 and 75 through 2017, the year before the E2 enters service. This forecast, by UBS, means Embraer has to find sales to fill the slots. Embraer and Bombardier are competing for a significant order from American Airlines. This order has been stalled pending the merger with US Airways, which has been delayed by the Department of Justice lawsuit seeking to block the combination. The order is important to Bombardier and Embraer because of the thin backlogs for the CRJ and E-Jet.

The E2 isn’t scheduled to enter service until 1H2018, with the E190 E2 the first model. The E195 E2 and E175 E2 follow in 2019 and 2020.

The EIS sequence for the E2 is intriguing. Although the E175 E2 has the largest backlog, it will be the last to enter service. The largest variant, the E195 E2, at 132 seats single class, is directly competitive with the Bombardier CS300 (135 seats single class) but somewhat less capable with a range of 2,000nm vs 2,950nm for the Bombardier.

Embraer has a large customer base for the E-Jet, 67, that gives it an advantage over Bombardier when it comes to selling the E2 vs the CSeries. Bombardier has to create a customer base for the CSeries, which is more directly competitive with Airbus and Boeing small jets than is the E2. Embraer made the conscious decision not to proceed with a brand new design in order to avoid the wrath of the Bog Two OEMs.

But selling the E2 also means replacing the E1, and our market intelligence tells us that placing used E-Jets is problematic. The cost of engine overhauls, a reported $3m+ on an engine that costs $4.5m at list prices, is a deterrent, one lessor tells us. Book values also tend to be higher than current market values, this lessor says, making remarketing sales and reset lease rates an issue.

Bombardier’s CRJ700 and CRJ900 have lower operating costs than the E1, but Embraer has the advantage on passenger comfort. Recognizing the cost disadvantage, Embraer announced modifications to the E1 to improve fuel performance to a point where it believes the E1 will be competitive with the CRJ economics.

Major carriers in the US also have labor issues to consider when it comes to evaluating the E1 or E2 vs the CSeries. Embraer’s E175, at 70 seats remains below the Scope Clause threshold of 76 seats in many US airline labor contracts. The E190 in dual class also falls just below this threshold. The CS100 seats 100 passengers in dual class and 110 in single class, eliminating it from Scope Clause-driven competition. The decision between BBD and EMB in this case may come down to whether a carrier wants the greater economics of the CRJ or the comfort of the E190 E1 and comfort and economy of the E2.

Embraer faces several years of soft sales in advance of the E2.