Embraer’s incremental approach to its product placement endeavors appears to have served it well, not only in the number of orders its E-Jet line of narrowbody jets has collected over the years, but also in the company’s ability to support the residual values of the airplanes already in service. Now as it prepares its new E2 line for entry into service starting in the first half of 2018, Embraer thinks it has positioned itself for a long production run without satiating the market’s appetite for the current line of E-Jets.
Embraer Commercial Aviation chief commercial officer John Slattery attributes the strong start to the E2 program to Embraer’s strategy of avoiding direct competition with Boeing and Airbus and its decision to adapt the E-Jet airframe rather than introduce a “clean sheet” design. In contrast, Embraer’s main competitor, Canada’s Bombardier, promotes its CSeries jet as just the kind of clean-sheet exercise it believes the market needs. While the question of which approach ultimately proves the more prudent remains open for now, the range and ready availability of financing instruments to customers could offer a clue to at least the level of confidence shown by the financial community in the products and the companies that stand behind them.
During an industry finance conference in Phoenix earlier this year, Bombardier Commercial Aircraft vice president of business acquisition Ross Mitchell insisted that “a lot of people are interested in financing the CSeries,” notwithstanding criticism from its primary competitor over the company’s historically heavy reliance on export credit agency backing. Of course, Embraer turns to its own credit agency as well for a bit less than 20 percent of its sales, but Slattery warned of overreliance on ECA financing.
“They play an important role, and I would also say that Embraer is grateful for the support that we get from the Brazilian government, specifically through BNDES in their support of our program,” Slattery told AIN. “I do believe that...there is a positive correlation...of poor residual values when you have programs that have an overreliance on ECA financing.”
The reason, said Slattery, lies in the benefits inherent in the financial community’s familiarity and commitment with the asset. If an export credit agency accounts for the asset’s primary source of financing, a crisis in confidence develops. “The investor community gets nervous if the only form of debt financing is the sovereign ECA, [and] that probably doesn’t bode well for long-term residual values, and that becomes a self-fulfilling prophecy,” noted Slattery.
Broadening the Operator Base
Still, for Embraer, the most important driver of residual values lies with a broad operator base, and, according to Slattery, the company has set a “hard-wired plan” to expand the number of E-Jet operators from 68 today to at least 100 by the fourth quarter of 2017. Already, customer diversity does not appear to present a problem. “We have airlines operating in 48 countries, operating as LCCs, operating as network carriers or legacy carriers, operating as regional airlines...so there’s a diversity of business plans...airlines with a diversity of business plans operating in all five continents,” said Slattery.
But while E-Jets account for 80 percent of the in-service jets carrying fewer than 130 seats in China, for example, Embraer’s penetration of the Asia-Pacific market remains relatively shallow, prompting management recently to commit substantial attention and resources toward that region. “I’m confident of our ability over the next 24 months to open up new customers in Asia-Pacific outside the Chinese market,” said Slattery. “We have significantly beefed up our human resources in our Singapore office to address that market, and I’m excited about what’s in the works out there.”
Embraer recently secured its first sale in Indonesia, a market Slattery calls “custom-built” for E-Jets because of the country’s geography and demographics. The new customer, Kalstar Aviation, also launched the ATR turboprop in the Indonesian market, where airlines such as Garuda and Lion Air have given the Franco-Italian airframer some of its biggest sales to date.
Of course, ATR can trace the success of its ATR 72-600 largely to operators’ familiarity and positive experience with the not dissimilar ATR 72-500, and systems commonality between the E1s and E2s accounts for yet another important factor in ensuring residual values of Embraer’s installed base, added Slattery. In the cockpit, similar Honeywell Primus Epic avionics systems promise a relatively seamless pilot transition from one model to the other. Pilots moving from the E1 to the E2 will not need extra simulator training, for example. “That’s actually got a positive impact on residual values of the E1s, because airlines can continue to operate the E1s with great confidence, knowing that even as they introduce the E2, airlines can [deploy] their pilots comfortably, moving between the E1 and E2, in the exact same way Airbus will experience with the Ceo and the Neo and Boeing with the NG and the Max,” explained Slattery.
Finally, by the time the Pratt & Whitney PW1000G “geared turbofan” finds its way into service with the first E190-E2 in the first half of 2018, variants of it will already have flown many hours on the Bombardier CSeries and Airbus A320. Although not a GTF pioneer, Embraer can reasonably claim that the experience of earlier operators will help alleviate “teething pains,” instilling still more confidence in the airplanes’ reliability within the airline market and on the part of financiers.
“By the time Pratt & Whitney’s geared turbofan gets to us, it will have roughly two and a half million hours on other platforms,” said Slattery. “That engine is well tested by the time we get to it.”
On the question of on-time certification of the E190E2 in the first half of 2018, Slattery compared Embraer’s prospects with those of Boeing and Airbus, both of whose re-engined narrowbodies appear firmly on or ahead of their original schedules. “We’re confident that Embraer will enjoy the same discipline with our entry into service,” he said. “And our customers are voting with their checkbooks.”