Embraer: Market Improving But Fundamentals Still Weak
Embraer Executive Jets (EEJ) tentatively takes the view that the business aviation market is maintaining what its president and CEO Marco Tulio defined as “mild recovery” during a press briefing at the Brazilian airframer’s headquarters in São José dos Campos. The company, which generated revenues for its group of $1.65 billion for its parent group last year, is forecasting a relatively conservative number of deliveries for 2014 with a projected total that is likely to be close to the 119 jets delivered last year. In the first quarter of this year EEJ delivered 20 jets, including 17 Phenom light jets and three larger models from its Legacy and Lineage families.
Tulio told AIN that some signs are positive–for example, GDP growth rates in the U.S. and Eastern and Central Europe, and strong U.S. corporate profits. In addition, the number of high-net-worth individuals worldwide is higher than before the 2008 financial crisis, with this segment now representing a total of around 12 million people.
So why is the recovery in the industry not stronger? “Confidence remains low,” Tulio acknowledged, pointing to low traffic levels in the U.S. In 2007, the average number of flights per month ranged from 190,000 to 200,000, whereas for 2013 the total was only 170,000. U.S. flight activity in what is still the biggest market for business aircraft has remained weak in the early part of 2014.
Pre-owned Prices a Concern
In Europe, traffic levels are recovering to those last seen in 2007, but, claimed Tulio, the market remains at risk. While pre-owned inventory is steadily returning to pre-2007 levels, there are still 2,296 jets older than 10 years for sale (compared to around 1,700 in 2007), and 617 jets that are up to 10 years old (compared to fewer than 500 in 2007). The situation may not be as bad as it once was, but average market depreciation is growing, said Tulio. “Pre-owned prices are still of concern. The U.S. market will dictate the speed of the recovery,” he added.
With this uncertainty in the short-term, Embraer prefers to focus on long-term prospects for the market. The company’s 2014-2023 market forecast predicts worldwide sales of 9,250 business jets worth $250 billion. North America, with 47 percent of the market, will retain the lion’s share, while Europe and the Middle East will represent the second largest market with 25 percent of new deliveries.
Meanwhile, Embraer believes the emerging markets in Asia and China are now slowing growth. It still believes Asia will see solid growth going forward, however. “The fleet size of Asia and China is that same as Brazil, at around 900 aircraft, so the potential for Asia is huge,” said José Eduardo Costas, senior vice president market intelligence for EEJ.
He recognized that the Chinese market needed the airspace to be freed up but, still, Embraer is forecasting 805 new jet deliveries in China, worth some $29 billion, over the next 10 years. Out of this number, the Legacy 650, which is now assembled at Embraer’s facilities in Harbin, northern China, could take a good share, Costas believes. A second example is due to be delivered in mid-2014; the first one was delivered in January.
In the mid-light and midsize segments (for which Embraer offers the Legacy 450/500), the company expects to see one of the biggest increases in demand, with 2,000 deliveries over the next 10 years. “We brought EVS [enhanced-vision systems] and fly-by-wire to those segments while it previously was reserved to the large and ultra-large segments,” said Tulio.
In the entry-level and light jet segments of the market, Embraer’s Phenom 100 and 300 will see growth in numbers of 2,700 new aircraft by 2023, the manufacturer forecasts. The main share of that growth will come from the Phenom 300 in the light jet segment, however. According to Embraer, the Phenom 300 has captured 47 percent of the market for new light jet deliveries over the past five years, even though it is up against the Cessna CJ4 and CJ3. Embraer claims that the aircraft is 15 percent more fuel efficient than the CJ4, despite being heavier. According to consultants Conklin & de Decker, CJ4 direct operating costs are 16 percent higher than those of the Phenom 300 ($2,149 per flight hour compared to $1,856) giving the Phenom a crucial advantage.
While the niche ultra-large market segment gives Embraer scope for some sales of its Lineage 1000E large-cabin model, the Embraer market forecast asserts that the $26 million Legacy 600 and $31.6 million Legacy 650 will sell well, generating $31.1 billion and $64.7 billion, respectively, through sales of 1,270 and 1,670 new jets through 2023. Legacy 600/650 deliveries reached 21 aircraft in 2013, compared to 11 in 2010.
Embraer claimed that the Legacy 650’s direct operating cost per unit of cabin volume is 29 percent lower than for the Bombardier Challenger 605, and 37 percent lower than for the Gulfstream G450 (according to figures generated by Conklin & deDecker). However, it remains to be seen how the 12-year-old Legacy types will fare against the new Dassault Falcon 5X when that aircraft enters production in 2017. Both aircraft have a similar cabin volume, the 5X being slightly shorter and wider than that of the Legacy 650. Direct operating costs will be very different, though, which will be a concern for Embraer in this segment.