May 28, 2015, c. Leeham Co. Embraer is ramping up is messaging that the E-Jet family provides a better Return on Capital Employed in many circumstance than the larger Airbus and Boeing single-aisle family.
In a new push to be unveiled at the Paris Air Show in a little over two weeks, Embraer will describe its “New Metrics for Success” to an international audience in an open forum.
EMB has been showing airlines and lessors the concept for some time, and we received a briefing on the essential elements when we visited EMB last October at is home base in San Jose, Brazil.
New Metrics for Success takes airlines away from the traditional metric of economics, the Cost per Available Seat mile, and focuses trip costs and the higher quality revenue obtained by limiting the number of low-yield seats on a flight that must be offered to fill larger airplanes.
“We focus on return on capital employed (RACE),” Rodigo Souza, VP-Marketing, said in an interview with Leeham News. “This is not an E-Jet speech. It could be about the CSeries, the CS100, the CRJ. It’s about 70 to 130 seats. It doesn’t matter which aircraft is there.”
The message is getting through. “US carriers are talking much more about providing an adequate return to investors.”
The airline industry worldwide is evolving, Souza said. There has been major consolidation in the US and tremendous growth in the low cost airline sector. LCCs now command 45% of the North American market (Canada, US, Mexico), up 10 points from 2004. Europe has seen LCCs grow from 18% to 42% of the market and Asia has gone from 6% to 34%. In real dollars, revenue has gone down since 2009 from $2.40 per RTK to less than a dollar. Opportunities for ancillary revenue have about peaked out, EMB believes. Maximizing profits means adjusting thinking from the unit cost to RACE, EMB says.
In a global analysis of airline flights and revenue, Embraer concludes that the 110 seat airplane, although producing about 15% lower revenue than a 174 seat airplane, provides a greater RACE because of the lower capital and operating costs of the smaller aircraft. The smaller aircraft produces a return on aircraft asset (ROaA) 36% great compared with the larger aircraft.
Embraer uses the average of three appraiser current market values as the basis of the aircraft cost in making its computations.
Souza said an airline shouldn’t be focused on market share. “The purpose of business in not to increase market share. It’s one metric to consider. The prime purpose is return on capital employed.”
Embraer has long argued “right-sizing” the aircraft, replacing Airbus A319s and A320s or Boeing 737-700s and 737-800s on certain routes and certain times to better meet demand. A high fuel price environment has also been a significant factor.
The current lower fuel price environment is spurring a pause by some airlines in placing orders for new jets. United Airlines recently agreed to lease up to 25 used A319s from AerCap as these come off lease from China Southern Airlines. Low fuel prices and low current and future market values of the A319s, leading to low lease rates (believed to be below $100,000/mo by the time UAL begins to take delivery) prompted the deal. United is going to push down E-175s into smaller markets, with a knock-on effect of regional jets pushing down to retiring the 50-seat Bombardier CRJs.
Souza said Embraer looks at this as a temporary phenomenon.
“The A319 and 737-700 at low lease rates are an easier solution with low fuel prices (for those airlines with these types already in their fleet), but it is temporary. We don’t see fuel prices staying very low forever, or cheap A319s and 737s available forever,” Souza said. “The one that loses more right now is the CSeries.
“We predict oil will be back to $90/bbl by 2020 and beyond.”