Embraer Warns Airlines of Profitability Time Bomb

 - June 29, 2018, 10:16 AM
Embraer Commercial Aviation CEO John Slattery (Photo: Embraer)

Embraer has turned its marketing sights toward low-fare carriers for its new E2 series of commercial jets as it eyes new heights in terms of sales numbers. John Slattery, president and CEO of Embraer Commercial Aviation, told journalists during a briefing in Lisbon last week that industry profitability is on the wane and LCCs might best serve their interests by developing secondary and tertiary routes that could offer better margins with an aircraft like its E195-E2. The large numbers of narrowbodies from Airbus and Boeing entering service on trunk routes is creating a glut of capacity, he warned.

“Airline profitability and EBIT margins are running at 7 percent and above, but the devil is in the detail," he said. "Low oil prices and interest rates and uniquely low labor rates had the aggregate effect of boosting profitability by a multiple. But look again at 2015 to 2018 and you can see the curve is on the wane.” Slattery explained that profitability relies on the Weighted Average Cost of Capital (WACC) staying well below EBIT. “In the long term you’ll be out of business [if it doesn't],” he warned. Meanwhile, profitability in each region around the world continues to fall year-on-year, said Slattery, who cited an environment of “higher fuel prices, interest rates, and pilot costs.”

With the “astonishing” number of available seat kilometers (ASKs) being pushed into the market, as Slattery put it, the Embraer executive sees airlines as exposed, and since the airlines used low interest rates to buy new narrowbodies, the overcapacity could make the industry vulnerable.

Therefore, with Embraer offering “up to 150-seat” jets rather than larger airplanes, Embraer believes more should consider its aircraft, said Slattery, who also noted the end of the "paradigm" of necessarily higher seat costs smaller aircraft; according to Embraer figures, the 195-E2's trip cost runs 18 percent less than that of an A320neo, and only 2 percent more per seat-kilometer. Meanwhile, the E195-E2's trip cost runs 10 percent below that of the Bombardier CS300, while its seat cost runs 3 percent less, Slatterly claimed.

With the E2 due to appear at the Farnborough Airshow in mid-July, as of June 26 the OEM had delivered three 190-E2 aircraft to Wideroe of Norway, and plans to deliver the first 195-E2 to Azul later this year. The 170-E2 will enter service in 2021.

Paulo Cesar Silva, president and CEO of the Brazilian OEM, said since its founding in 1969 Embraer had grown into $6 billion company with a backlog of $19 billion. It now builds business jets, counts more than 70 E-Jet operators around the world and the first delivery of its KC-390 military airlifter will take place to the Brazilian Air Force in the fourth quarter.

Asked about political and economic issues in Brazil, Silva said the country’s GDP had declined by 8 percent In three years “and we are now recovering from this.” With elections this year, he said hopes run high that the government’s reform plans would be supported “especially on labor.” The reforms are designed to make labor laws “more market-oriented,” he said. “The new president [when elected] will address the major reforms that Brazil must do.”

Comments

I find it somewhat strange that the author thinks that Embraer 'Warning Airlines' of 'Profitability Time Bomb', is particularly newsworthy. Especially when the article is simply a vehicle to promote the E2 as being the 'solution' to Airline profitability problems, as its cheaper to run than the A320NEO, or C-Series. Anywhere else and this would simply be called an 'advert' for Embraer. Ask Airbus and Bombardier for their views, and you can substitute the aircraft names for one another wrapped in the same article.