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Article24/04/2019 | 10:18

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Embraer is the leader in its market niche and competitors are not a threat

Embraer Board uses the argument "threat of competition" as the main reason for the sale to Boeing. The study below contests this false argum

Proponents of the acquisition of Embraer's commercial aviation business by US-based Boeing have as their main argument, the inexorability of this operation, that is, according to them there are no alternatives, either this operation is carried out promptly or Embraer will not be able to compete and will cease to exist in a relatively short time.

The memorandum of understanding released by Embraer on July 5, 2018 made it clear that the partnership with its American counterpart is in fact the sale of the commercial aviation business area to its US counterpart.

The main argument for this operation presented in this memo, indicates the need to expand the business scale of Embraer, particularly after its main competitor, the Canadian Bombardier, has partnered with the European Airbus in commercial aviation. Proponents of this argument also point to increased competition in this market segment with the entry of new companies coming from Russia, China and Japan as a negative factor to Embraer.

Below we present a brief report on technological aspects and on the global aviation market in the niche where Embraer aircraft are. It also follows charts with order numbers of Embraer "competitors" divided according to the aircraft size and number of seats.


 

The companies, the Chinese Comac and the Russian Sukhoi-UAC are NOT a threat to Embraer
The Russian and Chinese aeronautical industries only compete with Embraer, respectively, with the models Sukhoi Superjet 100 (87 to 98 passengers) and Comac ARJ-21 (70 to 105 passengers). However, both aircraft are technologically inferior and are focused, almost exclusively, to meet the demands of their respective domestic markets. In short, they do not stand as effective competitors for the jets manufactured by Embraer. Chart below:




It is worthy clearing up that Chinese company, the Comac and the Russian Irkut are launching new commercial jet models, respectively the C919 and the MC-21, in both cases with a capacity of more than 150 seats. Thus, these new aircraft will compete directly with the families of single-aisle (narrow-body) aircrafts of Boeing (737 Max) and Airbus (A320Neo) and not with Embraer commercial jets.




Regarding the "new" competitors, only the Japanese Mitsubishi can be considered a new competitor, but still with some restrictions. Despite the competence of the Japanese aircraft industry in the production of systems and aero structures, this industry has never had a prominent position in the commercial aircraft market and has not produced a single commercial aircraft for decades. As a result, Japan has been experiencing serious difficulties and delays in the development and certification of the Mitsubishi Regional Jet MRJ90 (81 to 92 passengers), resulting in a very low amount of orders. 

Moreover, this new commercial jet will be able to carry a maximum of 92 passengers, competing only with the E175-E2 (80 to 90 passengers), the smallest of the three models of Embraer's new commercial jet family. Chart below:




A joint venture Airbus/Bombardier
Based on what has been presented, the new Bombardier C-Series family of commercial jets (renamed to Airbus A220) are practically the only competitors of Embraer. Being so, the association - not the sale, as proposed in the Brazilian case - between Canadian and European companies does not disqualify Embraer to continue fighting for market leadership in commercial aircraft of up to 150 seats.

The Canadian manufacturer has two models initially named CS100 and CS300, which have been in commercial operation since 2016. In 2018 Airbus renamed the planes as A220-100 and A220-300 respectively.

The models of the two manufacturers that most resemble each other are the E195-E2 and A220-100. This is Embraer's largest model against the smallest model of Airbus / Bombardier.

The Embraer jet is six meters longer than the plane developed by Bombardier. This feature gives the Brazilian aircraft a capacity to accommodate a larger number of passengers. The E195-E2 can carry up to 146 passengers. In turn, the A220-100 can carry up to 135 passengers.

The two planes also have a major difference in the way the seats are distributed inside the cabin. In Embraer jets, there are four seats per row, divided into the 2-2 configuration. The jets developed by Bombardier have five seats per row, in configuration 2-3. Thus, the Embraer aircraft have an advantage in relation to passenger comfort, since there is no unwanted middle seat.

On economic issues, Embraer aircraft have the advantage over the jets developed by Bombardier which were recently incorporated into the Airbus portfolio. The E195-E2 is 25% cheaper than the A220-100. The Brazilian plane has a base price of US$ 61 million, while the Canadian jet costs US $ 81 million.

The E195-E2 has a cost per trip 2% higher than A220-100 and as the Brazilian airplane can carry more passengers, the cost per seat ends up being 10% lower than the Canadian airplane.

Chart below:

Despite the entry of Airbus as a competitor, Embraer has maintained a high competitiveness in its market segment, as seen in the Aeronautical Fair of Farnborough, in England. The Embraer jet family had 152 firm orders and 46 purchase options, while Airbus received only purchase options of 60 A220-300 jets and no firm order of the Embraer's competitor A220-100 .

Chart below:



Can Boeing enter the competition if the deal with Embraer is not carried out?

An important consideration in relation to potential competitors refers to a possible entry of Boeing into Embraer’s market segment if the acquisition of the commercial aviation business is not completed. In this regard, Boeing could use two strategies: the acquisition of another company already established or the development of its own project.

In the case of the acquisition of another company, the only option with some viability would be the Japanese Mitsubishi, but the Japanese would never accept the same conditions that are being offered to Embraer. The Japanese government would never accept to hand over 80 percent of its business to the Americans. However, if the hypothetical partnership between Japanese and US companies were to be realized, MRJ would have better competitive conditions, but given the limitations of the project, this competition would be restricted to Embraer's smaller E175 commercial jet model, as explained above.

On the other hand, Boeing could decide to develop their own model aircraft, but this would require a fairly long time, especially if we consider the limitations that are public, which is, that the American company has in its engineering area, namely the retirement of much of its professionals in the coming years.
Furthermore, it would also divert the focus from Boeing, which should be focused on the development of new, larger aircraft. This is a niche which compete with its main competitor - the Airbus, in addition to the eminent entry of the Chinese Comac with the sophisticated model C919. In short, Boeing could become an important competitor to Embraer, but not for this generation of aircraft.

Conclusion: Embraer is fully capable of surviving being a national and independent company
Embraer may even suffer occasional marginal market losses due to all the possible challenges presented above, but certainly would not lose the ability to continue fighting for a leadership position in the jet market segment with up to 150 seats, at least in this decade, while these generations of newly launched aircraft - by the Brazilian company (E2 family of E-jets) - are in production. In this relatively long term, national and international political and economic conditions may change, and Embraer could negotiate partnerships that preserve the company and implement other strategies that would allow it to build new competitive advantages.

The Boeing-Embraer deal only serves the interests of the US company by expanding its scales because Boeing now incorporates Embraer's business, which is, it is worth repeating, the world's leading commercial aircraft company with less than 150 seats.

However, on the Embraer side we have exactly the opposite, a take-down of the company, which loses its main business unit. There will be a loss of scale, Embraer will no longer be a 6 billion annual revenue company, roughly the average of recent years, to become, roughly a less than a 3 billion, company, less than half it has been currently. Moreover, it is important to clarify that the Brazilian company will lose the synergy that exists between its different business areas.

Thus, the argument of Embraer's inexorable unfeasibility of competitiveness, if it is not associated with Boeing, is completely false. But worse than that, this argument is contradictory, because on behalf of the perpetuity of Embraer, it is promoting its disassemble which is clearly irreversible and with the certainty of very negative impacts for the technological development, the chain of domestic suppliers and the generation of jobs in Brazil.

Embraer is the world's leading manufacturer of commercial jets up to 150 seats. The company has 100 customers worldwide operating the ERJ and E-Jets family jets. Just for the E-Jets program, EMBRAER recorded more than 1,800 firm orders. The charts above for each "competitor" shed light on numbers, the potential of Embraer and demonstrate that the company is able to survive without its delivery to Boeing or any other company.

Herbert Claros da Silva - Mechanic Fitter at Embraer, director of the Metalworkers' Union of São José dos Campos and former member elected by the employees to the Embraer Board of Directors 2015-2017.

Based on the article by Prof. Dr. Marcos José Barbieri Ferreira, published in the journal Vínculo, of the BNDES Staff Association, on September 20, 2018.

1. The charts are based on information from company websites based on delivery reports until December 31, 2018.
2. MRJ set to start type certification testing in 2019. 21 December, 2018 https://www.flightglobal.com/news/articles/mrj-set-to-start-type-certification-testing-in-2019-454610/

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