Brazilian aircraft manufacturer Embraer believes that it has a stable situation when it comes to its commercial orders. In a first-quarter earnings call on June 1st, executives highlighted that the manufacturer has seen no cancelations, only deferrals. And, with a sizable order backlog, Embraer believes it has a stable production program through 2021.
Embraer believes it has a “stable production program”
Embraer CEO Francisco Gomes Neto stated the following in the earnings call:
“We have at this point of time a quite stable situation. We have seen some deferrals but no cancelations. We might have some changes in the following months depending on the progress of how this crisis evolves. But at this point of time, we believe that our situation is quite stable in terms of production program in 2020 and 2021”
The manufacturer is working on a new set of five-year plans to help it ride out this current crisis. Part of that includes ensuring Embraer is focused on efficiency and profitability. The lack of regional jet cancelations means that it is unlikely Embraer will wind down parts of its commercial division permanently. In fact, Embraer is continuing forward with the development of the E175-E2 jet. Deferrals, on the other hand, make sense as airlines seek to reduce their short-term cash expenditures.
After the demise of the cooperation deal with Boeing, Embraer is continuing to seek damages after claiming the agreement was wrongfully terminated.
Commercially, Embraer is focused on two specific jets: the E170 family and the E-Jet E2 series. The E2 is the latest and greatest from Embraer, but it has not sold as well thus far. Regardless, Embraer maintains orders for both types and will be able to keep them in production in the years to come. With the stable production program, it is unlikely that Embraer would send either line to the chopping block.
Regional jets could help lead the industry out of this crisis
Embraer believes that its regional jets could help the industry out of this crisis. Large airlines are not expecting a full recovery until between 2022 and 2024. Until then, larger aircraft like Airbus A320s or Boeing 737s may not be necessary on many routes– leaving the E170 family and E2 jets as some of the prime aircraft to serve some routes.
In the United States, this is especially true for large airlines that operate hub-and-spoke networks. Some cities are served multiple times per day using mainline aircraft. In the future, airlines could replace some mainline service with Embraer regional jets. Several cities have already seen this trend work out.
At the end of the first quarter, Embraer had a backlog of 318 jets after delivering 14 aircraft. Though not as impressive as Boeing or Airbus, it is still a significant number for Embraer. Its customers include lessors, US regional airlines, African airlines, and European airlines, among others.
The common theme in all of these markets is that regional jets are going to be necessary to help airlines ride out the crisis. The E175s are flying across the United States and replacing A320s and 737s on some routes through the summer– and likely beyond. Airlines have also chosen the E170 family to replenish its regional options as the CRJ family produced by rival Bombardier goes out of style.
Does this mean Embraer will see no order cancelations?
As much as Embraer would love to see its firm order backlog remain stable, if not increase, it will have to contend with market conditions. One of the biggest places where Embraer could see a hit is actually from US customers.
US airlines contract out regional flying. These contracts are governed by scope clauses that limit the size and number of regional jets that airlines like Delta, United, and American can contract out. The issue with these is that, as airlines retire older aircraft and likely will have to layoff or furlough some pilots, it means that the airlines also have to fly fewer regional jets or else take out seats.
However, the newer Embraer jets might be better suited to replace older CRJs and even some older Embraer aircraft. SkyWest, the largest regional airline in the United States, has bet on the E175, and big airlines like Delta, American, and United have all preferred the E175 to enter regional service in 2020 and phase out some older aircraft.
But, even for those airlines outside the US have Embraer jets on order, those planes will, according to Embraer, be necessary to fly them out of the current crisis. Thus, keeping them on order may be more beneficial than a cancelation in the long-run.
Do you think Embraer will see no cancelations due to COVID-19? Let us know in the comments!