Wednesday, July 5, 2017

Embraer to Face Tougher U.S. Market If JetBlue Drops E190 Jet

Embraer SA’s E190 aircraft is flown by airlines around the world, but has struggled to find much of a home in North America. Now the largest U.S. operator of the plane may walk away, casting doubts on whether the next version of the jet can succeed in the market.

JetBlue Airways Corp. plans to decide by the end of this year whether to join American Airlines Group Inc. and Air Canada in dropping the plane, ending an original plan for one hundred E190s in the New York-based carrier’s fleet. It would leave Aeromexico Connect as the only airline in North America flying Embraer’s second best-selling commercial jet, which can carry 96 to 114 passengers.

The E190’s fall from favor in the U.S., the world’s largest air travel market, illustrates the struggle for aircraft designed for point-to-point, high-frequency routes, operating between smaller planes that ferry passengers to airport hubs and big jets that are flown greater distances by large carriers. Operators have to charge higher fares for the convenience of multiple daily flights between the same cities to cover the increased costs of flying a plane with fewer seats.

“There are arguments for the 100-seater, but it’s far from guaranteed,” said Richard Aboulafia, an aerospace analyst at Teal Group. “It’s always depended upon the confidence that airlines could make it work from a pricing standpoint. This JetBlue decision is kind of a referendum or judgment on that.”

JetBlue’s fleet review comes as Embraer prepares for the first commercial flight next year of the E190 E2, a new version with an engine the Brazilian planemaker says will burn less fuel and have lower maintenance costs than the current jet. The Sao Jose dos Campos-based company also is marketing the E2 version of its larger E195 small jet.

“Right now its important to have a stake in the North American market,” said Nick Heymann, a William Blair analyst. The E190 “is supposed to be a natural walkup to the E2. North America is a pretty important market for both regional and small narrow-body airplanes.”

Boeing, Airbus

At least 38 airlines outside of North America fly 40 or more E190s. The jet has competed against 120- to 150-seat planes from Boeing Co. and Airbus SE that were already in use when it was introduced, John Slattery, head of the Brazilian planemaker’s commercial aviation unit, said in an interview. JetBlue’s version carries 100 passengers.

The shaky position of the E190 doesn’t mean that Embraer is lacking fans in the U.S. The planemaker’s 76-seat E175 aircraft is flown by most U.S. regional carriers. But union contracts at American, United and Delta airlines require that planes with more than 76 seats be flown as part of their main jet operations, where higher-paid pilots raise the operating costs of the E190. Still, Slattery doesn’t think that history will hamper Embraer’s ability to sell the new version in the U.S.

Transition Moment

“It feels to me we are at a point of inflection, a moment of transition, where the U.S. major network carriers and also the low-cost carriers and ultra low-cost carriers are looking at re-fleeting at the lower end of their narrow-body fleet,” Slattery said. “That’s where the 190 and 195 E2 will play. We predict plenty of opportunity for Embraer in North America.”

Every option is being considered as part of JetBlue’s review, Chief Financial Officer Steve Priest has said, including shedding the sixty E190s it now flies, keeping them or replacing them with another small plane. In addition to Embraer, candidates include Bombardier Inc.’s C Series or Airbus’s A319. A smaller jet from Mitsubishi Corp. also may be ready by mid-2018.

“I am cautiously optimistic we will continue our amazing partnership with JetBlue for many decades to come,” Slattery said. The planemaker will present “the full family” of its aircraft to JetBlue, “especially the E195 E2, which we believe could be a perfect fit for the broader JetBlue fleet for the coming years.”

Hunter Keay, a Wolfe Research analyst, has said he expects JetBlue “will announce its exit as an E190 operator by the end of the year.” American and Air Canada plan to shed their E190s -- 20 and 25, respectively -- by the end of 2019.

Costs for each seat flown a mile on the aircraft are about 20 percent higher than JetBlue’s Airbus planes when adjusted for longer routes flown by the larger jets, Priest has said. The E190 also has “significantly higher” revenue on that basis, he said, declining to be more specific. Such differences generally are true for smaller jets because there are fewer seats to spread both costs and revenue across.

JetBlue’s E190s have been used for high-frequency flights to the Caribbean and out of Boston that are favored by business travelers willing to pay more.

(Mary Schlangenstein - Bloomberg News)

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