Harbin-Embraer’s fate rests with China talks
Brazil’s Embraer has given itself until the middle of this year to reach an agreement with its Chinese partners on adapting its assembly line in Harbin to produce 70- to 110-seat E-Jets. Projecting 50-seat ERJ 145 production to wind down completely in the first half of 2011, Embraer needs to know within a few months whether or not to launch preparations for a move to the larger airplanes if it expects to execute a relatively seamless transition.
“We think mid-2010 would be the deadline to start the implementation of the new tooling and training of people or to [head in] a new direction,” said Embraer executive vice president for the airline market Mauro Kern. Although he mentioned “other possibilities,” Kern chose not to name them. In any case, the manufacturer harbors no plans to build both 50-seat jets and E-Jets simultaneously, he said. The facility, as built, can accommodate just one assembly line and neither Embraer nor the Chinese have expressed a desire to expand it mainly because of the flagging market for 50-seat jets.
Speaking with AIN some three weeks before the start of the Singapore show, Kern said that negotiations have progressed “well” and that final deliberations primarily involve the Chinese government. “There are some agreements at the government level that need to be done, but this is progressing,” he said. “I would not say it’s just a matter of waiting for government approvals, but the interactions with the government are very important to the whole process in China.”
All signs point to an anemic or nonexistent market for Harbin-Embraer ERJ 145s after the joint venture builds its last 50-seat jet next year. As the rate of 50-seat jet retirements continues to accelerate in North America and Europe, a robust supply of used airplanes appears likely to satisfy any demand that exists for the relatively fuel-thirsty jets in the rest of the world, including China.
Of course, much of the exploding demand for new 50-seat jets in the 1990s came as a result of scope clause restrictions negotiated by the pilots of the major airlines in North America. With the subsequent relaxation of those restrictions, regionals in the West gravitated to larger RJs capable of delivering superior seat-mile costs. Now, as U.S. majors in particular effect capacity cuts, they most often target their least fuel-efficient assets– namely, 50-seat jets–for removal from their route networks.
Both Bombardier and Embraer have seen the number of their respective 50-seat jets grow appreciably in the second-hand market of late. In Embraer’s case, some 150 ERJ 145-family airplanes have changed hands since 2000, said Kern. However, mainly because of the existence of the Harbin-Embraer joint venture, established in 2003, none of the used jets moved during the decade involved deliveries to Chinese airlines. By the end of last year, Harbin-Embraer had delivered a total of 33 ERJ 145s. At the time, the backlog stood at a meager eight airplanes, all due for delivery to Hainan Airlines over the next year to year-and-a-half.
In China, as within the Asia-Pacific region as a whole, prospects look much better for Embraer’s E-Jet line. Kern noted that 25 E-Jets fly in China today–20 with Tianjin Airlines and five with Kunpeng Airlines. A subsidiary of Hainan Airlines, Tianjin expects delivery of another 30 E190s. Whether any of those airplanes scheduled for delivery after the second half of 2011 could instead come from Harbin-Embraer remains a matter for Embraer and the Chinese government to negotiate, but it seems clear that the manufacturer will stand a much better chance of selling more E-Jets in China if, in fact, the Harbin plant produces them.
All told, in the Asia-Pacific region, 23 airlines flew some 140 Embraer airplanes on 265 routes to and from 171 cities as of last October, said Kern. The manufacturer supports the Asia-Pacific fleet with a high-profile presence in Singapore, where it runs a training center with an E-Jet simulator, a spare parts depot and a sales office. Embraer also maintains a spare-parts supply and a commercial representative office in Beijing, from where it supports the Chinese fleet.
Those facilities stand to get still busier as Embraer continues to exploit the market for small, single-aisle airplanes in a still largely untapped Far East, added Kern. “There’s a predominance of larger airplanes serving those markets with low-frequencies. So the rightsizing concept is very much applicable to that area,” he said, noting that, for example, 49 percent of all Chinese domestic flights carried fewer than 100 passengers in 2008. “In China they’re building an additional 80 new airports, and they’ll be increasing the number of airports to a little over 240 by 2020,” said Kern. “So we see a very strong move into regional areas, and the same goes for other areas of [the Asia-Pacific] region.”
Still, Embraer considers China the biggest market in the region “without a doubt,” said Kern, even considering the coming introduction of the indigenous ARJ21-700, the 90-seat regional jet scheduled for certification late this year. Partially for that reason, Kern said he expects the 100- to 120-seat E190/195 and to dominate Embraer sales in the country, particularly now that China has turned its attention away from a stretched version of the ARJ21 and toward development of the 160- to 190-seat C919.
“Once we can assemble one of the models, the rest of the family is very easy to do as well,” said Kern. “But we see more of a demand for the 190/195.”
Kern hesitated to isolate a specific Asian country or region outside China that stands above the rest in terms of sales potential. However, one country in which airlines tend to fly large airplanes on routes where higher frequencies could spark more demand for travel–Indonesia–no doubt ranks among the most promising.
“It’s an important market, an important economy, with a big population–240 million people,” noted Kern. “We see good GDP growth and there’s good potential there. There are lots of markets with a low number of passengers.” For example, 83 percent of the markets in Indonesia see a throughput of fewer than 600 passengers a day and 43 percent of its markets serve fewer than 100 passengers a day, he said. “Airlines are flying [Boeing] 737-800s and 900s and [Airbus] A320s, so again, much like what we see in Brazil and other countries, there’s a lot to be done [as far as] increasing frequency and the quality of service with smaller airplanes,” said Kern.
Last year Embraer projected that the Asia-Pacific market, including China, will require some 1,400 airplanes in the 30- to 120-seat segment over the next 20 years. Although the Brazilian OEM had yet to finish compiling its 2010 market forecast, Kern said he expected it to adjust its 20-year outlook downward by some 15 percent worldwide. However, the Asia-Pacific market will likely show a less pronounced decline, thanks largely to continued buoyancy in China, for which the company last year forecast a 20-year demand for 975 airplanes in 30- to 120-seat segment.