Looking ahead for 2020 and 2030 decades: Embraer

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Fourth in a series.

By Bjorn Fehrm

Introduction

July 8, 2020, © Leeham News: All airliner OEMs have a disastrous 2020, but for Embraer, the year has been even worse. After spending a year and over $200m to carve out the Commercial Aviation division to merge it into Boeing, the Joint Venture Agreement (JV) was stopped by Boeing at the last moment.

The Executive Jets and Defense side were not affected, but now Embraer was organized as two companies instead of one. The company must now re-merge the organizations to save costs in a COVID-19 environment where limiting cash outflow, and lowering costs are necessary for survival. At the same time, it’s arch-rival on the world market, Airbus A220 has gone from strength to strength through basket selling with the popular A320.

How does Embraer come back from the Boeing pass up and regroup in a regional market that is no longer a fight of equals? Embraer competes with Airbus that in 2019 was 11 times larger in airliner deliveries and 29 times in airliner revenue.

Only in the below 100 seat market is it saved from the giant, who doesn’t have a model in the segment. And it seems the below 100 seat competitor, Mitsubishi, might fold its entry.

Summary
  • The botched JV with Boeing came at the worst possible moment for Embraer, just when the COVID-19 pandemic stopped airliner deliveries.
  • The planned JV had held back sales and deliveries, waiting for the JV to complete.
  • In addition, it cost Embraer $200m, pushing it into the red for 2019.
  • Embraer must now find another fix to the Airbus problem while wrestling with a worldwide COVID crisis.
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The future of regional jets is limited by choices, Scope Clause

By Judson Rollins
Introduction 

July 6, 2020, © Leeham News: The fallout from COVID-19 is beginning to intersect with the beginning of a wave of regional jet retirements globally. However, the market for smaller commercial jets today stretches the meaning of “regional” as most aircraft still in production have 100+ seats and can fly more than 2,500nm.

In the critical US market, both Embraer’s E175-E2 and Mitsubishi’s remaining M90 are too heavy to comply with the Scope Clause limits imposed by pilot labor agreements. These clauses restrict regional carrier flying to 76 seats and 86,000 lbs MTOW, while also capping the number of regional jets that can be flown by each carrier.

Delta Air Lines is limited to a total regional fleet of 450 aircraft, while American Airlines is capped at 75% of its single-aisle fleet and United Airlines is limited to 255 aircraft plus 90% of single-aisles in service. Earlier this year, American accelerated the retirement of some EMB-140s to maintain compliance with its limit.

Summary

  • Regional jet utilization will be lower in the near term due to higher unit costs and US Scope Clause fleet limits.
  • There will still be some replacement demand for regional jets over the next decade.
  • Scope Clause relief is unlikely to happen in the coming round of US pilot contract negotiations.
  • Lack of Scope relief will extend the life of Embraer’s E175-E1 through the 2020s.

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Regional Jet Retirements

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By Vincent Valery

Introduction  

June 22, 2020, © Leeham News: Last week, LNA analyzed the narrowbody aircraft retirements. We now turn our attention to the regional jet market.

LNA analyzes retirement prospects for Embraer’s E-Jet and ERJ, the ex-Bombardier CRJ100/200 and CRJ700, Fokker 70/100, BAe 146/Avro RJ, Sukhoi Superjet 100, and Comac ARJ21.

Summary
  • Four families dominate the market;
  • Heavy geographical concentration;
  • Challenges for old and small regional jets;
  • Retirement trends in the two largest regions;
  • Regional breakdown for the oldest types in service.

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Looking ahead for 2020 and 2030 decades: Airbus

First in a series of reports.

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By Scott Hamilton and Vincent Valery

June 17, 2020, © Leeham News: Airbus was riding high in February.

The A321XLR was a clear winner. An important order was won from United Airlines, up to then an exclusive Boeing narrowbody customer. American Airlines selected the XLR. An order was expected from Delta Air Lines.

Each order was another that made it impossible for Boeing to launch the New Midmarket Airplane (NMA).

In one of his first actions, Boeing CEO David Calhoun, taking office Jan. 13, put the NMA on indefinite hold, pending a complete review of Boeing’s product strategy.

The Boeing 737 MAX remained grounded by regulators, with no return to service in sight.

The Airbus A321XLR. This 9-hour capable airplane helps fragment routes–and soften demand for widebody aircraft. Source: Airbus.

Things couldn’t be going better for Airbus.

And then in mid-March, the COVID crisis became a global pandemic. Air transportation fell up to 95%. Airlines required government bailouts. Airbus CEO Guillaume Faury said the very existence of Airbus was threatened.

Summary
  • COVID’s impact.
  • A320 family ‘s commanding lead over Boeing.
  • A220 commands low-end of single-aisle sector.
  • A330neo is the weak link.
  • Looking ahead in product strategy.

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Mitsubishi’s options for the SpaceJet

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By Scott Hamilton

Introduction

June 2, 2020, © Leeham News: Mitsubishi Heavy Industry (MHI) yesterday closed the acquisition of the Bombardier CRJ program.

There are 15 CRJs in backlog to complete. But the purpose of the acquisition was to give MHI a global product support system for the SpaceJet.

With the aviation world still reeling and confused by the “suspension” of the SpaceJet program, what are the options going forward?

MHI last month announced it was suspending indefinitely development of the M100 SpaceJet. MHI said it will reevaluate the market demand of the M100. It suspended further flight testing of the M90 SpaceJet. It says it will proceed with office “validation” of the M90 for certification. Facilities in the US and Canada devoted to the SpaceJet program are closing. About half the workforce devoted to SpaceJet in Nagoya, Japan, is being reduced.

Customers that signed MOUs for 495 M100s and which have firm orders for some 200 MRJ90s (the previous brand for the M90) are in limbo. Suppliers are in limbo. MHI’s failure to communicate with them leaves a planeload of questions and no answers.

MHI’s move clears the way for Embraer to have a monopoly in the regional jet space. Unless—unless MHI restarts the SpaceJet program on its own or partners with another company to make a commitment to developing a new airliner.

LNA noted when the Boeing-Embraer joint venture collapsed that this presented opportunities for MHI and Boeing to renew and expand their previous relationship for the MRJ program. Here are some possibilities facing MHI.

Summary
  1. Kill SpaceJet entirely.
  2. Restart SpaceJet.
  3. Resuscitate the agreement for Boeing to support the MRJ program, updating it to the SpaceJet.
  4. Resuscitate and expand the previous agreement, strengthening the development SpaceJet and co-marketing by Boeing.
  5. Create an entirely new cooperative agreement, vastly broadening and strengthening decades-long ties between MHI and Boeing. LNA sees this as including SpaceJet and an entirely new family of aircraft replacing the 737 MAX.
  6. An expanded, broader agreement could even include development of a new “NMA Lite.”
  7. Finally, buy or create a JV with Embraer Commercial Aviation.

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Mitsubishi SpaceJet retreat is the best news for Embraer in months

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By Scott Hamilton

Analysis

May 25, 2020, © Leeham News: Mitsubishi Heavy Industries (MHI) surprising retreat from its SpaceJet regional airliner program is the best news in months for beleaguered Embraer.

This takes pressure off the Brazilian manufacturer and gives it time to regroup after Boeing jilted it at the alter by walking away from a proposed joint venture.

Going into storage: four Mitsubishi MRJ90s at Moses Lake (WA). Photo: Mitsubishi.

MHI’s actions leave Embraer with a monopoly in the 76-100 seat arena vs new airplanes. The M90 SpaceJet is not a viable competitor to the E175-E1 or the struggling E175-E2. Embraer’s competition will be its own used jets, plus used Bombardier CRJ-700/900s.

Summary

  • Closing US operations entirely. Closing the recently opened engineering center in Montreal
  • Continued operation of the CRJ product support center in Montreal or relocation to Nagoya uncertain.
  • Major cost-cutting drive.
  • MHI wants to certify M90, then consider whether to proceed with M100.
  • M100 has MOUs for 495 aircraft.
  • MRJ90 was not certifiable due to design deficiencies.
  • Redesigned M90 meets certification requirements.
  • M90 is economically uncompetitive with E-Jet.
  • COVID-19 upends entire airline industry, casting doubt in MHI’s commitment to SpaceJet future.

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HOTR: Mitsubishi, Bombardier set June 1 to close CRJ deal

By the Leeham News staff

May 6, 2020, © Leeham News: Mitsubishi Heavy Industries announced May 7 (Tokyo time) that it will close the acquisition of the Bombardier CRJ program June 1.

Production of the CRJ was to end this summer. The COVID crisis effectively terminates the program now. But the CRJ itself wasn’t the reason MHI bought the program, for US$500m. The attraction was the built-in global product support system for the CRJ that will transition to the M100 SpaceJet. It also provides a new revenue/profit stream as MHI enters the global RJ market.

Along with it, as icing on the cake, is acquisition of Bombardier’s sales team, infrastructure and other assets.

It would take years for MHI and Mitsubishi Aircraft Corp. (MITAC) to establish its own product support system.

This is a major step in development of the SpaceJet as a new global competitor.

With the collapse of the Boeing-Embraer joint venture, MITAC can reinvigorate and strengthen its relationship with Boeing.

Embraer, which said it needed the Boeing JV to compete in the future with Airbus against the A220, increasingly faces higher risks as MITAC and MHI evolve the CRJ product support system and potentially strengthens the Boeing relationship.

MHI also announced that it will immediately write down the $500m acquisition by ¥50bn- ¥ 70bn ($470m-$656m).

 

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Pontifications: Ugly, fundamental changes coming for airline industry

By Scott Hamilton

May 4, 2020, © Leeham News: The global airline industry is on the cusp of a fundamental restructuring that will be painful, and painfully long.

A few airlines already ceased operations.

Several others are on the brink of filing for bankruptcy—among them Lufthansa and Virgin Atlantic, brand names that aren’t normally at the top of an endangered list.

A shake-out in Europe was already underway before the COVID-19 crisis erupted. The inevitable shake-out in Asia hadn’t yet begun.

Fleet rationalization among legacy carriers will occur at rapid-fire speed. And some carriers now have the opportunity to shed unprofitable routes that were maintained for market share.

It’s going to be an ugly process, though.

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Airbus 1Q2020, preparing for “the gravest crisis in our industry’s history”

April 29, 2020, © Leeham News: Airbus presented its results for the first quarter of 2020 today. In the accompanying news conference, Airbus CEO Guillaume Faury said, “we are facing the gravest crisis in our industry’s history,” and the company is implementing several measures to secure Airbus’ future.

World travel has disappeared, and new airliner deliveries will be down for years. Production of Airbus commercial aircraft is cut with one third, but this will be adapted as actual demand evolves, with the next adjustment expected in June.

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Pontifications: Taking a knife to a gunfight

April 27, 2020, © Leeham News: There is a great line in the movie, The Untouchables. Sean Connery’s character tells an assassin that he’s bringing a knife to a gunfight.

By Scott Hamilton

That’s what came to mind when Embraer says it will seek remedies against Boeing following the latter’s terminating the joint venture agreement between the two companies.

In the movie, the assassin lured Connery into a trap. Connery was gunned down by a machine gun. But don’t expect Boeing to be lured into any trap by Embraer.

Boeing doesn’t pull a move like this without thinking through all the possibilities. It may muff the thought process, as will be noted below, but it does think through alternatives.

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