Embraer predicts 7,950-jet market for 30- to 120-seaters

 - September 28, 2006, 8:30 AM

Rising load factors for the 30- to 120-seat segment are evidence that carriers are becoming more efficient. But with revenues improving only “mildly” and labor costs continuing to inhibit growth, operators continue to look for ways to trim the cost of doing business and to combat the rising price of fuel. That’s the view of Brazilian aircraft manufacturer Embraer as it takes a long-range look at its segment of the airline industry.

Embraer v-p of market intelligence Luiz Sérgio Chiessi presented the broad forecast at the company’s São José dos Campos headquarters on September 1, following delivery of Embraer’s first E195 to UK-based low-cost carrier Flybe.

Despite forecasts by a number of respected industry analysts that crude oil prices will fall over the next decade, Chiessi warned, “Don’t believe this.”

While the cost of labor has come down from 34 percent of total expenses in 2000 to 25 percent last year, the cost of jet fuel has jumped from 14 percent of total expenses to 23 percent. Fuel prices, he said, will remain at about $60 to $70 a barrel and jet fuel at the pump will range from $1.70 a gallon to $1.90 a gallon through 2010.

On the other hand, said Chiessi, there is growing demand for regional service delivering passengers for the network airlines and for high-volume point-to-point service by low-cost carriers. He also pointed to “a very real need” in emerging economies for replacement of aging fleets. Embraer cites Russia, where the average age of 224 turboprops and jets in the 30- to 60-seat category is 33 years. In Russia there are 123 turboprop and jet airliners in the 61- to 90-seat category with an average age of 28 years, and the average age of 54 airplanes in the 91- to 120-seat category is 17 years.

China’s Requirement Is for 50-seat Regionals
The challenge in the People’s Republic of China, noted Chiessi, is a rapidly growing requirement for new fleets, particularly 50-seat regional jets, where 59 percent of total routes have less than one daily flight and carry an average of fewer than 135 passengers daily. Chiessi noted that there are currently 15 EMB 145s in service in China, with a 56-airplane backlog.

Chiessi predicts that the 50-seat aircraft will remain the backbone of the U.S. hub-and-spoke system, feeding passengers into the network airline market. The hub-and-spoke system has become “largely dependent on regional jets, which transported 22 percent of all domestic passengers in the U.S. in 2005.”

Despite this, in its long-range forecast Embraer projects an unspectacular rise in the number of 30- to 60-seat regional jets in service from slightly less than 2,000 last year to slightly more than 2,000 in 2015, to just short of 2,500 in 2025. In the 61- to 90-seat category, the leap is going to be more spectacular, going from about 700 aircraft in service last year to about 1,700 in 2015, to some 3,300 in 2025.

On the other hand, Embraer believes the demand for point-to-point low-cost aircraft in the 91- to 120-seat category will be strong too, going from about 1,800 airplanes in service last year to about 2,500 in 2015 and 3,800 in 2025.

While demand for regional jetliners has been strong, there are indications based on Embraer’s regional jet order book–ERJ 135/140/145s–that the bottom has dropped out of the market for 30- to 50-passenger regional jets. As of June 30, Embraer had firm orders for 864 ERJs, of which 858 had been delivered, leaving a somewhat anemic firm backlog of only six airplanes. And there seem to be few takers for the options on 159 aircraft.

As might be expected from a company that in the past seven years has launched a line of four new jetliners ranging from the 70-passenger E170 to the 118-passenger E195, Embraer forecasts a dramatic increase in demand from this niche market.

Nearly 8,000 thirty- to 120-seat Jets over Two Decades
Embraer is forecasting a requirement for 7,950 aircraft in the 30- to 120-seat category over the next 20 years with a total value in the $180 billion range. The bulk of this requirement, said Chiessi, will be for larger airplanes outside the 30- to 60-seaters that the regionals thus far have bought in droves. Embraer forecasts deliveries of 1,300 airliners in the 61- to 90-seat category from this year through 2015 and a total of 2,950 airplanes in that category from this year through 2026, with a total value of $65 billion.

More impressive is the forecast for 1,550 airplanes offering between 91 and 120 seats from this year through 2015 and a total of 3,450 from now through 2025, valued at $180 billion.

Of the 7,950 thirty- to 120-seat jets needed over the next 20 years, Embraer figures about 53 percent will go to North American and Caribbean customers and 18 percent to European customers. Growing demand in Russia and Eastern Europe, as well as China, suggests each region will take a 7-percent share of those 7,950 airplanes.

These larger Embraer E-Jets in the 70- to 118-passenger category are designed to be passenger-friendly with spacious cabins, no center seats, larger windows and wider aisles and seats. They are also designed to meet growing demand for high-density, low-cost carriers with a need for efficient, low-maintenance point-to-point airplanes that meet current and anticipated future noise and emissions requirements.
Embraer has said it expects its E-Jet series to produce revenues in the $15 billion range over the decade between 2004 and 2014. Embraer and its partners are thought to have invested $900 million in the E-Jet program.

If there is a flaw in Embraer’s projections for the E-Jets, it may come in the addition of the E195. The airplane appears to hold little interest for U.S. regional carriers, who see the additional 20 seats at the loss of some 400 nm in range as a poor tradeoff.
On the other hand, UK-based low-cost carrier Flybe sees the E195 as “ideal” for serving the high-density but shorter routes prevalent in Europe.

Not surprisingly, Embraer’s numbers appear to support its own expectation. The company forecasts an increase in airline profitability over the next five years, with European carriers leading the way. U.S. domestic revenue passenger miles are expected to rise 3 percent between 2005 and 2010. For European low-cost carriers, however, revenue passenger kilometers are expected to jump 10 percent in that same period.

As for the overall worldwide forecast for aircraft in the 30- to 120-seat range, Chiessi tied demand to economic growth, noting, “The projected average annual growth in the world GDP (gross domestic product) is expected to remain steady at about 3.2 percent over the next decade, allowing a sustained annual increase in air transport demand of about 5.9 percent.”