Embraer Sees Covid Leading to a Return to ‘Rightsizing’

 - December 2, 2020, 11:38 AM

This story is part of AIN's continuing coverage of the impact of the coronavirus on aviation.

Embraer’s projections of persistent downward pressure on airline travel demand due to Covid-19 influences—even beyond the time it expects the industry to return to 2019 levels in some three or four years—will serve to reinforce the Brazilian company’s market position as a return to “rightsizing” takes hold, company executives said Wednesday during a presentation of its latest 10-year market forecast for aircraft carrying up to 150 seats.

The company, whose forecast calls for a total demand for 5,500 aircraft in that capacity category through 2029, sees not only a resulting reversal in the trend toward larger-capacity aircraft, but a process of “regionalization,” in which companies seek to protect their supply chains from external shocks by bringing business closer together and thus generating new traffic flows. The company also envisions a decentralization of offices from large urban centers resulting in more diverse air networks and passenger behavior trending toward a preference for more short-haul flights and more environmentally friendly modes of transport.

Speaking during the online event, Embraer Commercial Aviation vice president of marketing Rodrigo Silva e Souza called the Covid pandemic the most serious crisis the industry ever has faced, citing a 60-percent decline in revenue passenger kilometers (RPKs) in 2020 compared to the 1.8 percent decline resulting from the 9/11 tragedies and a 1.5 percent fall during the financial crisis of 2008-2009. Embraer sees RPKs returning to 2019 levels by 2024, but remaining 19 percent below the levels the company previously forecast through 2029.

“The commercial aviation industry will be smaller,” said Silva. “This is the consensus in the industry. It will take years for it to come back…and when it does come back we believe that growth rates will be significantly lower than we had before.

“It will also have a different shape, so changes in global trade flows, changes in passenger behaviors, will for sure lead to changes in the air travel industry and passenger flows, leading to a different industry.”

Those changes will, consequently, lead to a different global fleet profile, favoring aircraft in the categories in which Embraer’s product line resides, Silva asserted.

“Of course, we saw how much stimulus was necessary to keep the economy running,” he added. “We believe this will have consequences over the next years. So it’s not only about the short-term impact but also about the mid-to-long-term impacts...on trade and consumer confidence.”

Silva also highlighted the social consequences of the pandemic, which, he said, has most affected low-income people, whose upward mobility had formed the basis for much of the growth in the airline industry. The resulting deceleration in the growth of the middle class will also contribute to what Silva called a re-calibration of the industry at large, leading to a shift, most significantly for Embraer, in the demand profile for commercial airplanes.

“People are talking about the great reset—a significant change in the profile of the industry,” he said. “To create value in a sustainable and responsible way is all about rightsizing. It’s all about using the right aircraft size for the demand that is out there. With a lower demand, we believe this will drive the average aircraft size downward.”

Meanwhile, what Silva characterized as regionalization, or companies “turning inward,” has already resulted in imports accounting for a smaller proportion of GDP since the great financial crisis. Embraer sees the pandemic accelerating that trend and, therefore, strengthening of domestic air travel markets—yet another factor favoring smaller aircraft, said Silva.

Finally, the accelerating trend toward telecommuting will not only reduce the demand for business travel overall but result in a sort of decentralization in which people choose to live in smaller cities, Silva suggested. “Instead of a daily commute inside a city, perhaps we will see short flights between secondary cities and big centers once, twice a week, or three times, and people prioritizing the quality of life in smaller centers.”