Embraer SA (ERJ:US), a pioneer in building regional jets, is emerging as the global leader of a market that’s shrinking as airlines opt for bigger aircraft.
Bombardier Inc. (BBD/B), the Embraer competitor that began selling the planes two decades ago, is focusing on developing a larger model for carriers’ main jet operations and hasn’t landed a regional deal in the U.S. this year. Mitsubishi Aircraft Corp.’s new entry faces a second delay and won’t be ready until 2017.
The result is a clearer field for Embraer amid a slowdown in industrywide regional-jet orders to less than half of 2007’s peak of 408. Sao Jose dos Campos, Brazil-based Embraer is due to start shipping upgraded E2 models in 2018, with newer technology than Bombardier and a heritage that Mitsubishi can’t match.
“With the proposed E2, Embraer looks more likely to be the leading, i.e., dominant, producer in regional jets because Mitsubishi is late, late, late,” Cai Von Rumohr, a Cowen Securities LLC analyst in Boston, said by telephone. He rates Embraer’s American depositary receipts as market perform (ERJ:US) and doesn’t cover Mitsubishi or Bombardier.
Embraer is positioning itself to survive the shakeout with the E2 upgrade announced earlier this year, adding improved engines and a new wing design to its signature E-jets.
“The business plan of the E2 was based on very solid, maybe even conservative assumptions,” of orders, Embraer Chief Executive Officer Frederico Curado said on a conference call with analysts last week. “The airplanes will be extremely, extremely competitive.”
Bombardier said it’s not abandoning the regional-jet market even as it works on its CSeries, a future rival to the smallest Boeing Co. and Airbus SAS (EAD) models. Mitsubishi has said the MRJ will benefit from new engines cutting fuel use 20 percent compared with existing regional aircraft.
A fivefold increase in jet-fuel prices, to $2.80 a gallon, since 1994 is helping drive airlines toward larger planes, which they can pack with more passengers, and away from the regional models once embraced for their combination of speed and the ability to serve smaller airports better than models from Boeing Co. (BA:US) and Airbus SAS, the world’s biggest plane makers.
Last week, New-York based JetBlue Airways Corp. underscored that move by delaying an order for 24 Embraer E190 planes, the smallest in its lineup with capacity for about 100 passengers, to 2020 through 2022, instead of taking them from next year into 2018. Its fleet of E190s will be limited to 60, down from a previous order of 100 with options for another 100.
Future demand for regional jets will come primarily from full-service carriers, such as AMR Corp.’s American Airlines and Deutsche Lufthansa AG, seeking an economical way to serve limited markets, George Ferguson, a senior air transport analyst with Bloomberg Industries in Skillman, New Jersey, said.
“That makes it a much smaller size market for the regional jets than for the narrow-body,” Ferguson said. “It’s a very small market and Embraer is doing a nice job of taking that.”
Investors are rewarding Embraer with a stock-market premium over Montreal-based Bombardier. The Brazilian company closed yesterday at 17.29 reais, about 17 times estimated 2013 earnings, while Bombardier’s ratio was about 12 times, according to data compiled by Bloomberg. Embraer rose 20 percent this year compared with a 24 percent increase for Bombardier.
Regional jets remain an important offering for Bombardier, said Philippe Poutissou, vice president of marketing at the company’s commercial aircraft unit.
“There should be no suggestion that we are pulling out, or pulling back, from the regional-jet marketplace,” Poutissou said in an interview. The company hasn’t announced plans yet to update its CRJ regional lineup.
Hirofumi Takahashi, president of Mitsubishi Aircraft Corporation America Inc., in Addison, Texas, declined to comment on the delays in producing the MRJ model. The parent company announced in August that it would hand over its first plane in the second quarter of 2017.
The imbalance between demand for regional jets and single-and twin-aisle aircraft shows the challenge for Embraer, Bombardier and Mitsubishi. The global order backlog for full-size airliners now numbers 7,856, according to data compiled by Bloomberg, while the total for aircraft in the 60-to 120-seat range is 633.
Embraer and Bombardier are now vying for a regional-jet order from American, which may be the last one this year in the U.S. after purchases by United, Delta Air Lines Inc. and two commuter operators, Republic Airways Holdings Inc. (RJET:US) and SkyWest Inc. since December.
Embraer prevailed in all of those contests except for Delta. An American order is contingent on its bankruptcy exit, and the airline has declined to say when it might buy new regional planes as it works to leave court protection and complete its planned merger with US Airways Group Inc. (LCC:US)
While Embraer is still under the cloud of a bribery investigation by the U.S. Department of Justice and the U.S. Securities and Exchange Commission dating from 2010, investors aren’t focusing on that case, according to Darryl Genovesi, a UBS AG analyst in New York.
“The bigger issue for Embraer is that they’ve been missing estimates -- three quarters in a row,” said Genovesi, who rates Embraer’s ADRs neutral.
Embraer said in an emailed statement to Bloomberg that it can’t comment on the SEC investigation.
Embraer’s third-quarter consolidated operating margin fell to 5.9 percent from 7.2 percent a year earlier, according to data compiled by Bloomberg. Pressure is coming from having an order mix tilted to more of the smaller, lower-margin E-175 models than the E-190 and slow growth in sales, Genovesi said. Bombardier’s operating margin slid to 4.58 percent in the third quarter from 5.15 percent a year earlier.
At the same time, Embraer benefits from being able to finance upgrades for the E2 lineup with cash flow from its defense unit and its business-jet divisions, Genovesi said.
Bloomberg Industries’ Ferguson said Bombardier’s struggles to find buyers for a new model like the CSeries, which can seat as many as 160 people, show Embraer’s advantages in pitching the upgraded E2 jets.
“Bombardier is learning that just because you’re offering something in a space that has 8,000 orders doesn’t mean people want it,” Ferguson said. “That gives Embraer a leg up, because they have a bunch of operators already.”
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