E-Jet Evolution

“New dynamics and models are emerging in the region,” Alex Glock, Embraer’s vice president Asia Pacific said. “And a lot of optimism”.

Glock’s comments sum up the direction Embraer will be pursuing in the coming years to build on the success the company has experienced in Australia since it first entered the market in 1978 with the twin-turboprop 19-seat Bandeirante. Today there are 43 Embraer aircraft in service in the region, a figure Embraer is intent on growing.

Changing dynamics

Glock sees a lot of changes occurring in the domestic and regional markets that give him cause for optimism.

One of the key changes is the emergence of hub bypass services that airlines are introducing as a means of avoiding congested capital city airports and as regional authorities capitalise on the tourism potential opened up by higher capacity aircraft.

While coastal tourism in Queensland has matured during the last two decades, New South Wales coastal centres are beginning to feel the positive economic effects of jet services by Jetstar, Virgin Australia and Tiger Airways. In the last 12 months Ballina/Byron and Coffs Harbour have seen the arrival of competitive high-capacity services by the three airlines as they each seek to grow one of the last remaining niches in the domestic market.

However, the smaller economies of scale that highly seasonal and thinner demand regional centres offer major airlines will likely become problematic and will inevitably create casualties as A320s and 737s replace Dash 8s and Saab 340s. In effect, each daily A320 or 737 service offers the same capacity as three to four turboprops, meaning the demand for jet services either reduces frequency to the aggravation of business travellers or creates unsustainable over-capacity.

Competition in Australia is increasing dramatically. This is the basis for E-Jets. ALEX GLOCK

This is one scenario Embraer hopes to address. With its E-Jets offering capacity in between turboprops and larger jets, airlines can more affordably match demand while preserving frequency and product consistency. And it is this formula that has seen airlines successfully deploy Embraer’s E-Jets on thinner regional routes with great effect.

Similarly, this theory applies beyond linking regional centres with capital cities to links between regional centres themselves, foregoing comparatively expensive and delay-inducing services through the principal airports.

As Glock explains: “One thing we haven’t seen in Australia that we have seen in Europe and in North and Latin America is the regional jet revolution. We haven’t seen hub bypass or ‘hub raiding’ happening in Australia to the same extent. Most of the applications we saw here were for hub feeding.

“If you have a country with huge distances and dispersed population the regional jet model fits well,” he added.

Glock compares the situation in Australia with Mexico where there is a similarly wide population distribution, many island communities and high proportions of labour-based traffic demand.

“Mexico has up to 50 regional jets operating there yet there is a much lower number in Australia where the same – if not more – potential exists. Australia should have seen this dynamic, and I believe the reason Australia hasn’t seen this is because it presupposes a higher level of quality in the regional service,” Glock explains.

The growth of competition in Australia is a feature he sees as being important as carriers seek to capitalise on differentiated products and services.

Glock said that in a monopoly environment a carrier would use the largest aircraft available to reduce seat cost and to try and maximise network compatibility, something he describes as “understandable”.

“Competition in Australia is increasing dramatically,” he said, adding: “This is the basis for E-Jets. These aircraft do well when you need to differentiate your product.

“So if you need to hub bypass then these aircraft are well-suited. Bypass represents an attack on a neighbouring airline. Not everyone needs to connect at the same hubs and in this sense I believe the E-Jets can be doing a lot more (in Australia).

Attack or defend

“Either as a defensive tool or as an attack posture, the E-Jets are well suited,” Glock summarised.

Virgin Australia’s operations demonstrate well the way in which the E-190 integrates seamlessly with the airline’s larger aircraft in terms of scheduling, product and customer appeal.

By way of example, he said: “We can see Virgin Australia moving in to attack the premium market,” adding that frequency is an important tool in the airline’s strategy. “If you want to move to attack the premium market you need to offer the frequency density. You can keep the level of frequency that you offer customers while keeping good economy by being able to up and down-gauge capacity throughout the day,” Glock explained, adding the decision to incorporate business class seating on the E-190s ensures no detriment in the service offered or in yield.

“That is one of the very strong attributes of the aircraft – ‘right-sizing’ capacity,” which Glock said is what roughly 50 per cent of the global E-Jet fleet is used for.

“It’s a business model that works well. You can fortify your routes having larger capacity at peak times then down-size at off-peak times. ”

Prospects

Embraer ended 2012 having delivered 106 E-Jets during the year; the E-190 being the most popular of the line with 63 units delivered. The manufacturer 185 aircraft on firm order backlog, with the E-190 holding 109 of the total, followed by 35 for the E-175, 31 for the E-195 and 10 E-170s including one for Darwin-based Air North.

Consistent with other aircraft manufacturers, Embraer sees the Asia Pacific region as the fastest growing in the coming two decades, with the region soon to account for 34 per cent of the world’s revenue passenger kilometres (RPKs). Globally, RPKs are expected to increase roughly 2. 7 times by 2031.

Fast Facts

Established 1969 Privatised 1994 Head office São José de Campos, Brazil Staff 17,629 E-jets in service >1,060 with 63 customers in 43 countries Embraers in Australian service Virgin Australia 18x E-190 Airnorth 4x E-170 Air South Charter 1x EMB-110 Hardy Aviation 1x EMB-120 King Island Airlines 1x EMB-110 Network Aviation 7x EMB-120 Skippers Aviation 6x EMB-120 Jetgo 2x ERJ-135

In its market segment of 30 to 120 seats, Embraer sees demand for 6,795 regional jets globally, with the 91 to 120-seat segment being the largest, accounting for 55 per cent – or 3,765 – aircraft. Approximately 270 of these are expected to be placed in the Asia Pacific region.

The forecasts are driven by GDP, population growth, propensity to travel, the natural growth rates of airlines, the replacement of ageing aircraft and new market development.

In Australia the growth of airlines, network strategies and the retirement of older aircraft each have key roles in creating expectations for the placement of Embraer aircraft into the market.

While the manufacturer sees more room for its jets in the Australian market to both dynamically ‘right-size’ capacity and promote viability to regional operations either as bypass services or links with capital city airports, the replacement of ageing aircraft is a key target of the company’s sales plan in the coming five years.

“No-one really owns the 100-seat market any more,” Glock said, with an eye to the eventual replacement of Fokker 100s and Boeing 717s currently in service on regional and fly-in/fly-out services.

This would place Alliance, Skywest (soon to be owned by Virgin) and Cobham as the prime candidates for E-Jets.

“The thing that’s going against us right now has been the low utilisation, though with used E-Jets coming onto the market I’m confident we can provide an attractive solution regarding ownership costs of those airplanes. ” The increasing availability of low-time used aircraft will challenge the sale of new aircraft. The average age of a used E-Jet on the market is around three-and-a-half years and with operating economics comparable to new aircraft, the discounted purchase price or lease cost represents a viable proposition for Embraer to place its products into the market.

Still, Glock believes the Embraer jets will continue to offer an advantage over new generation turboprops under consideration that may come to fruition. At the same time the 717s, for example, may be ready for replacement.

He questions, though: “Has there been a breakthrough technology that can enhance the efficiency or the benefits of the turboprop? That I think is the fundamental question. Because all the improvements that have been made to regional jets, they have been breakthroughs – whether engines, aerodynamics or new wing. This hasn’t been the case with turboprops. ” Glock doesn’t see a ready future for a Q400 or ATR derivative in such a fundamental or cost-effective way that they will be game-changers or a serious threat to regional jets. This would place Alliance, Skywest and Cobham as the prime candidates for E-Jets. Embraer itself is looking at refinements of its own products, announcing in December it has selected Pratt & Whitney’s PurePower geared turbofans for what it is calling its second generation E-Jets. While the program is yet to be officially launched, by the time the first aircraft are delivered in 2018, Embraer is confident it will realise “double-digit” fuel efficiency improvements through the installation of the new engines and aerodynamic improvements to wing design.

“With these developments the E-jets will offer yet more. So when we look at turboprop operations in the future quite honestly they’re not going to be making much sense with the amount of efficiency these new jets will provide. ” One of Embraer’s Australian customers, Air North, which has three E-170s and one more on order, is engaged with the manufacturer to help develop future products.

“Here is an airline with a very strong focus objective and we respect them very much. I believe Air North has room for growth. They have been growing at a steady pace which is enviable,” Glock said.

One market that remains elusive, however suitable the current or enhanced Embraer jets may be, is New Zealand where Glock remains mystified about the use of larger-capacity aircraft in the market where he sees the E-Jets as being better suited to demand in the domestic market.

“I believe in New Zealand there are some routes where there has been a misuse of capacity,” he said, noting the market is over-served.

As elusive as New Zealand may be, the dominance of Airbus in the fleet strategies of Air New Zealand and Jetstar will continue to make it difficult for Embraer to gain entry into the small domestic market there, something Glock reluctantly concedes, although with ETOPS approval it is conceivable the E-Jet could operate trans-Tasman services.

Regardless, Glock remains upbeat about Embraer’s prospects in Australia.

“There are times I wish the fuel price would go even higher!” Glock muses about the fuel efficiency of the E-Jets.

E-Jets in Virgin service

With 18 E-190s in service, Virgin Australia is the region’s largest E-Jet operator. Australian Aviation asked the airline’s Embraer chief operating officer Sean Donohue about their experience with the E-Jets.

The introduction of any new type of aircraft into an existing fleet can present challenges for both airline operator and aircraft manufacturer. When Virgin Australia introduced its first E-170 in October 2007, Donohue said: “There was a significant learning curve initially for both flightcrew and engineers in operating and maintaining the aircraft.

“As experience grew on the aircraft type, serviceability improved significantly. The Embraer has matured into a reliable aircraft – all the flightcrew that operate the aircraft enjoy flying it. Virgin identified some issues with the E-Jet that Embraer worked with us to resolve, and we feel that we played a valuable role in helping to develop the aircraft in its early days. A number of changes to the aircraft flight manual were made as a result of issues identified by Virgin Australia,” he added.

Consistent with Alex Glock’s view that the E-Jets can add flexibility to mixed fleet operations, Donohue explained the E-190 provides an ability to tailor capacity.

“An example of this is using the E-190 on Brisbane-Sydney sectors during low demand times in the day to maintain the frequency of the service without creating an oversupply of seats,” he said. “Swapping the E-190 with the 737 on routes where there is a seasonal variation in loads is another example of the flexibility the E-190 brings. ” Rather than using the E-190 for market testing or development as some operators of the E-Jets do, Donohue said the aircraft is used as the primary provider of capacity on a route or to enhance frequency on routes where the demand doesn’t support the 737.

“The E-190 is used extensively around the domestic route structure such as capital city pairs as well as regional ports and is an integral part of the overall fleet strategy,” he explained.

“Essentially, anywhere we send the 737, we can send the E-190, and vice versa,” noting that ground handling processes and equipment are mostly consistent with the 737s.

Supporting the Embraer in service – as for any aircraft – involves having a maintenance regime that optimises utilisation and despatch reliability, the latter Donohue describes as being in line with the 737 fleet.

“A number of engineering ports are available for daily maintenance in Brisbane, Sydney, Melbourne, Adelaide, Canberra and Perth with partial maintenance available at a large number of other ports. Heavy maintenance is currently conducted by John Holland in Melbourne. The fleet is undergoing the business class cabin installation. The first aircraft was modified at C&D Zodiac in the US and the remainder of the fleet is being upgraded in Christchurch. We also have a heavy maintenance schedule this year,” Donohue said.

In 2010 Virgin Australia conducted a network-wide review to maximise the performance of its domestic and international routes. This led to the withdrawal of the smaller E-170s, as Donohue explains. “The addition of the A330 to our domestic fleet and the replacement of Embraer 170 aircraft with ATR 72-500 and 72-600 turboprop aircraft enhances our ability to align fit-for-purpose aircraft to each market. ” Virgin Australia has made no secret of its ambitions to compete vigorously across all market sectors. The acquisition of Skywest will, in addition to the existing regional operation along the eastern seaboard, enable Virgin to create an extensive seamless regional network across the continent.

While the airline awaits the decision of the competition regulator on the Skywest deal, Donohue said: “It’s too early to determine the E-Jets’ place in the market,” while adding: “We have no immediate plans to expand our E-Jet fleet. ” Whether or not Virgin Australia grows its Embraer fleet to compete with Qantas 717s and other (ageing) regional jets in key markets such as Western Australia, the popularity of the E-190 is strong among consumers.

As Donohue said: “Guests like flying on the aircraft due to the roomy, quiet cabin and the two-by-two seating configuration. With the upgrade to business class on the aircraft, we now offer a common standard across the fleet for business and economy class. ” The E-190s will enter an upgrade program in June 2013 to install inflight WiFi, further enhancing customer appeal and commonality across Virgin Australia’s fleet.

Anywhere we send the 737, we can send the E-190 and vice versa. SEAN DONOHUE