Embraer bridging between E1 and E2

Much hype there was during and after the Paris Air Show last year, when Embraer launched their EJet E2 family. 365 orders, MoU and LoI from Skywest, ILFC and five unannounced customers sounded like a good start and some media was quick to compare it to the current backlog of the CSeries, which had a similar amount of orders at this time – but 5 years the “launch” LoI from Lufthansa/Swiss.

Now, a few months later, there are “just” two the two orders that were announced at PAS13: 100 aircraft for Skywest (E175E2) with 100 further options and both 25 E190E2 and E195E2 for ILFC also with an equal number of options. None of the five unannounced customers came forward since June 2013 and no other customer was added.

Last week Embraer announced their numbers for orders and deliveries in 2013. Deliveries for the EJets were exactly at plan with 88 for the year. Orders looked great with American, United, Skywest ordering large numbers of E175 and taking even more options.

But let’s have a deeper look in the orderbook: Open Orders at the beginning of the year was at 279:

    1 E170

188 E175

  73 E190

  17 E195

The E170 is obviously one delivery away from dead. It is too small for the North American regional market, where the new sweet spot if 76 seats in two classes and this is where the E175 fits in ideally. The backlog of 73 for the E190 does not look too bad at first glance, but in fact you have to subtract the 24 E190 for Jetblue as they are deferred until after 2020, when the E2 version of the E190 is available and Jetblue made it already clear that they are aiming for a switch to the E2. It could also be that they will abandon the 100 seater altogether by that time and finally cancel the order.

The 7 E190 in the orderbook from flynas (or Nasair) are also questionable, as the airlines is phasing out their EJets they already have. Another shaky part of the order book are the 24 open orders for E175 from flybe. The carrier is deep in a restructuring phase and has to become profitable soon. But let’s keep them in for that following exercise:

Without the 24 E190 for Jetblue the backlog at Jan. 1^st, 2014 was 255 aircraft. With a constant delivery rate of 88 aircraft per year the backlog will be at zero in Q4 2017 2016. But the EIS for the E190E2 is slated for the middle of 2018, the E195E2 should come in 2019 and the E175E2 finally in 2020. So Embraer has

-          to find more customers for the current EJets

or

-          to speed up the development of the E2 family

Well, in essence, they have to do both, I would say!

Embraer first announced the EJet E2 with in January 2013 when they said that they will be powered by PW1700G and PW1900G engines by P&W. These engines are essentially the engines for the Mitsubishi MRJ (PW1200G) and the Bombardier CSeries (PW1500G). These engines are already existing, tested and, in the case of the PW15000G, certificated. This is the big difference between the EJet E2 reengine program and the A320neo and B737MAX program, where the engines are the pacing item.

The EJet E2 aircraft are getting new wings, new undercarriages, a new flight deck and a full fly-by-wire system: sure, these things take their time, but Embraer took a lot of time already to decide how to react to the MRJ, CSeries and the A320neo/B737MAX. So there should have been more than just a concept at the beginning of last year and Embraer is currently testing a full fly-by-wire system with their Legacy 500 Business Jet. In fact, they “learned” so much that they switched to Moog as a supplier for the FBW system for the E2 Jets, as the Parker system contributed a lot to the delay of the Legacy 500/450 program (there could also be another reason behind that switch, as Parker is part of the “GE World” and GE lost the engine contract…).

In short, I think Embraer has to bring forward the E2 program as much as they can – otherwise they would face a production hole – but wait: there is hope: if the Mitsubishi MRJ would be delayed even further, the two big customers (Trans States and Skywest) for the MRJ would be forced to look at alternatives. The only logical aircraft that could replace the MRJ90 deliveries in the 2016/2017 time frame with the same cabin comfort would be the E175E1. This might be the reason why Skywest took options for 100 E175E1 last year when placing the order for 40 E175E1. Also United, American Airlines and Republic took further options for the E175E1. It looks like there is a considerable “hedging” against a further MRJ delay and this might help Embraer to bridge to gap between the current E1 and the forthcoming E2.

The long wait...

Two days, two announcements, two delays: yesterday Bombardier told the aviation public that the CSeries will not fly in July for the first time, but in „the coming weeks“.

Today Mitsubishi Aircraft announced that the MRJ will not fly this year, but until the end of 2014  - a full one year delay (again). This is of course disappointing. According to the article Mitsubishi still has problems how to document the design and the production of the parts to be compliant with certification rules (this is my interpretation, based on what was the reason for the last delay). At least, it seems, there seems nothing wrong with the design of the aircraft itself.

The same can be said for the CSeries – hopefully! It seems that the integration of the software takes more time than planned. The question is why until now the Bombardier executives always build up pressure by announcing exactly when first flight will happen. Airbus with the A350 was smarter by only saying first flight would happen in the second half of 2013 and the surprising the aviation world by beating that target by two weeks. At least Bombardier has learned now by being vague. On the other side that does not build up confidence, especially because fixed dates were given three times before (end of 2012, end of June 2013, in July 2013). So everyone who waits for this first all-new narrowbody since the A320 first flew in 26 years ago in 1987 should hope that “in the coming weeks” does mean in the “next low single digit number of weeks”.

Embraer could feel the heat...

Last week's Farnborough Airshow yielded not many surprises - maybe the surprise was that mayn anticipated orders did not happen.

• Boeing does not have 1000 firm orders (or more) for the B737MAX (but Airbus did not either after the Paris Air Show last year.
• There was no VLA order from Turkish Airlines (nor from any other).
• There was no order for the A320neo or the B737MAX from Pegasus. Apparently Boeing trying all they can to keep Pegasus in the Boeing camp...
• There was also no order from Aeromexico - but all points to an order for Seattle/Chicago here...

But wait - there was one order that was remarkable and that could mark the beginning of a shift in the regional aircraft market. Although this order was not quite a real - firm - order. But the "agreement in principle" between Skywest and MITAC shows that the MRJ gains some confidence in the marketplace despite the recent announced delay in the development schedule and subsequently the EIS.

A few days before Embraer announced their statistics for the second quarter of 2012. backlog is now at a 6 year low for the EJet Family. It fell from 476 aircraft at the end of 2007 to 200 at the end of the second quarter. There are a lot of options, but if these ever get firmed up is not a safe bet.
Embraer shares took a hot following the release of the backlog and analysts called the airshow to be "dismal" for Embraer.
Well, that may be a little bit overstated, as Embraer got a lot of orders at the last airshows, including orders from ALC and GECAS that showed confidence in the EJet Family also from the leasing community.

But in fact Embraer could feel a little bit pressure now to react. The 50 seater replacement cycle in the U.S. regional market just has begun. The MRJ won two rounds, at Trans States and now at Skywest. The direct competitor to the MRJ90 is the E175, but according to todays planning the E190 would get the reengining first. On the other hand Embraer recently announced that there would be an "aerodynamic cleaning up" including new winglets in the works for all the EJet family members that results in a 5% lower fuel burn for the E170 and E175. This could give Embraer some breathing room, but I doubt that this is enough to cope with the brand new design (aircraft & engine) of the MRJ.
Embraer currently plans with an EIS of the E190G2 in 2018, probably meaning that the E175G2 could come in 2019. It remains to be seen if Embraer now speeds up their plans, despite saying that the Skywest order does not change their strategy.