Embraer SA (EMBR3) is stretching its newest, largest regional jets in a bet that it can nudge its way into the narrow-body airliner market dominated by Boeing Co. (BA:US) and Airbus Group NV. (AIR)
The E2 family’s biggest plane will have 144 seats, up from 124 in the current E-195 model, Vice President Claudio Camelier said in an interview. It’s targeted for delivery in 2019, when Boeing and Airbus will both be offering upgraded versions of their top-selling single-aisle models.
With Boeing and Airbus winning few orders for their smallest Max and Neo offerings, the planemakers are focusing on single-aisle jets with about 175 seats, creating an opening for Embraer and Bombardier Inc. (BBD/B)’s CSeries. Having a roomier cabin on the new E-195 will help Embraer as its larger rivals pull back, said Nick Heymann, a William Blair & Co. analyst.
“Time will ultimately see Boeing and Airbus in essence cede this end of the market to Embraer and to Bombardier,” Heymann said in a telephone interview from New York. “The re-engined aircraft from Embraer will still be more cost-competitive than the Neo and the Max.”
The E-195’s seating capacity thrusts the jet into an industry segment that includes Russian, Chinese and Japanese planemakers, along with new and used aircraft from Boeing and Airbus -- even as Sao Jose dos Campos, Brazil-based Embraer says it’s not taking on the more-established manufacturers.
“We’re not directly competing with Boeing and Airbus,” Chief Commercial Officer John Slattery said in an interview. “Our friends at Bombardier are.”
The companies’ lineups show the overlap that Embraer plays down: Standard seating on Airbusâs A319, for example, is 124. Typical two-class seating on a Boeing 737-700 is 126. The CSeries, an all-new plane, seats 110 to 160 people.
“We see E-Jets as potential substitutes” for airlines that can’t fill larger Boeing and Airbus jets on some routes, said Embraer’s Camelier, who’s in charge of market intelligence at the planemaker’s commercial aviation division. “It’s a big market opportunity for us.”
Bombardier makes a similar argument for the CSeries, an all-new plane. Boeing and Airbus’s emphasis on larger single-aisle jets creates “exactly the opportunity that we saw with the CSeries -- to go after a segment of the market that was not served by optimized platforms,” said Philippe Poutissou, vice president of marketing at Bombardier’s commercial aircraft unit.
The E2 models will be bigger than current Embraers and feature new engines. With the upgraded E-195 listing for $60.4 million, Embraer has a cheaper alternative to models such as Boeing’s $85.1 million 737 Max 7, the most-compact updated variant from the Chicago-based planemaker.
Embraer has shown that its E2 can attract lessors, which is important because they place jets with multiple customers. Los Angeles-based International Lease Finance Corp. was the initial E2 buyer, ordering 25 E-195s and 25 E-190s in 2013. India’s Air Costa made an equivalent order this year.
Embraer is investing about $1.7 billion in the E2 program, compared with a $4.4 billion development plan for Bombardier’s CSeries. The smallest E2 plane will have maximum seating for 90 people -- still a step up in size for a company that once sold 37-seaters among its pioneering regional jets in the 1990s.
“The E2 was a defensive move,” said Stephen Trent, an analyst at Citigroup Inc. in New York.
Embraer’s 34 percent stock surge since the start of 2013 beat Bombardier’s 8.6 percent gain. The shares traded yesterday at 15 times estimated 2014 earnings, topping Bombardier’s multiple of 9.8, data compiled by Bloomberg show.
Boeing and Airbus are upgrading their narrow-bodies to stay ahead of the newcomers while putting the most emphasis on the larger versions, where profits are fatter, according to Air Lease Corp. (AL:US) Chief Operating Officer John Plueger.
“I think Boeing and Airbus would agree that south of 150 seats is not their primary game space,” Plueger said in an interview. Los Angeles-based Air Lease had 193 planes under management at the end of 2013 and hasn’t bought any E2 aircraft, a filing showed.
Plueger said the threat to Embraer’s E2 family from used Boeing 737s and Airbus A319s can’t be discounted, because they are “very well-proven and now economically attractive used single-aisle aircraft.”
Airlines may choose the secondhand planes because the savings on the sticker price would outweigh any gains from the Embraers’ newer, more-fuel-efficient engines, Plueger said.
Orders for the smallest Neo and Max suggest that airlines aren’t embracing those models as rapidly as the larger versions, whose seating capacity tops 200 for the A321neo. At 57 purchases so far, the Max 7 has about 2.9 percent of the 1,934 total for the Max family. The A319neo’s 45 orders are 1.7 percent of the Neo’s 2,667 total, said Mary Anne Greczyn, a U.S. spokeswoman for Toulouse, France-based Airbus.
“There is definitely a market for the A319,” Greczyn said in an e-mail. “Our single-aisle family now offers every configuration and size our customers want.”
Boeing sees “market demand for 737 Max 7-sized airplanes of about 10 percent of the new single-aisle airplane demand,” said Lauren Penning, a spokeswoman.
While analysts including Citigroup’s Trent said Embraer is at risk for the delays that can strike any aircraft-development program, Cowen Securities LLC’s Cai Von Rumohr said the company’s focus on existing planes, not constructing new ones, helps minimize possible snags.
“The biggest challenge for Embraer is to hold that cost advantage of not starting from scratch,” Boston-based Von Rumohr said in a phone interview. He rates (ERJ:US) the American depositary receipts as market perform, the equivalent of the rankings from Citigroup’s Trent and William Blair’s Heymann.
As the redesign progresses, Embraer will have a “fair amount of flexibility” to further expand the E2 jets, Heymann said. “I wouldn’t be surprised if they go to 150, 160 before they’re finished.”
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