Embraer SA or Bombardier Inc.: Who Stands to Gain More From the Expanding Regional Jet Market?

The regional jet market is growing rapidly, and both Embraer and Bombardier are leapfrogging over each other to get the lion’s share.

May 17, 2014 at 1:05PM

Brazilian jet maker Embraer (NYSE:ERJ) has a perfect vantage to capitalize on the absence of major aerospace giants in the regional service jet space. The aircraft maker expects as many as 6,400 deliveries in the 70- to 130-seat segment in the next two decades. Asia-Pacific would play a major role and is predicted to place orders for around 1,500 regional jets during the period.

While this opens huge prospects for Embraer, this aircraft segment isn't entirely free of competition. Canadian player Bombardier (NASDAQOTH:BDRBF) also specializes in making smaller jets, and stands to gain from the same opportunity. But who can grab a bigger share of this potential market?

Embraer's market deliveries forecast of 30- to 120-seat aircraft (2012-2031)

Erj
Source: Embraer; chart by author. Note: 30-60 seaters are expected to account for only 405 jets of the total projected deliveries of 6,795 planes. Out of 1,510 projected deliveries in Asia Pacific, 1,005 are expected to come from China.

Equation with Bombardier
Back in 1998, Bombardier was the top regional jet manufacturer, while Embraer was working hard to inch closer to the larger rival. To keep Embraer at arm's length and solidify its reign in the regional jet market, the Canadian aircraft maker launched a $1 billion program for developing a 90-seat regional jet called the BRJ-X. However, the program was shelved due to lack of sufficient funds.

Meanwhile, Embraer went on consistently with its effort and unveiled the "E-Jet" family of regional jets that positioned it where it is today. Things dramatically reversed over the years with the Brazilian plane maker taking the lead with 51% of the net orders till date in the 70- to 130-seat segment. 

Erj
Source: Embraer

Presently, both Embraer and Bombardier are fighting for a bigger share in the regional jet market with their respective new offerings -- the E2 Jets and the CSeries. Bombardier's CSeries was launched at the Farnborough Airshow in 2008, while Embraer recently unveiled the E2 series at the Paris Airshow 2013. 

Conquering "a good part of the first wave"
Despite being launched five year ahead, CSeries hasn't been able to secure a time-gap advantage. In contrast, the E2 Jet received a warm reception at the Paris Airshow where the company bagged orders for 215 aircraft from seven customers, grabbing more than half the $5 billion worth deals that were signed at the event. In comparison, CSeries signed no deals at the airshow. Selling the CSeries has been a tough job -- total firm orders and commitment stand at 214.

CSeries planes were originally slated to enter service in 2013, but it's been pushed forward to the second half of 2015 due to some technical issues. In comparison, there have been no significant technical snags with the E2 Jets, and they are all set to enter service as originally scheduled between 2018 and 2020. 

Embraer's "conquered a good part of the first wave of orders last year", and what remains to be seen is if it "can maintain that market share with the second wave", said chief executive Frederico Curado. Jeff Knittel of CIT Group echoed the same sentiments saying "Embraer has done a very impressive job of gaining market share very, very quickly." 

The E-Jet E2 stands out
There's a reason why E2 Jets are bagging more orders. They feature the Pratt & Whitney powered turbofan engine, better avionics, and refreshed wings. The jet claims double digit fuel saving, reduced emission and noise with lower maintenance cost. Bombardier also claims of similar cost savings, but Embraer's technology is more advanced. 

Luis Carlos Affonso, Embraer's COO of commercial aviation, says the E2 Jets are more suitable for the regional aircraft market than both CS100 and CS300. The 106-seater E190, with "a lower trip cost", is a better fit for a regional market compared with the 125-seater CS100. And to serve a slightly higher requirement, Affonso says that the E195 E2 "is the most optimized aircraft". CS300, being a bigger jet with up to 160 seats, overlaps more with the A320 Neo and 737 Max market. This makes E195 E2 more relevant for the 120- to 130-seat requirement.

Embraer also has huge advantage over Bombardier on the development cost of the jets. The E2 Jets have an investment budget of $1.7 billion, which is remarkably lower than Bombardier's CSeries development cost of $4.4 billion. 

This is because instead of engineering a new plane altogether, Embraer's working on a proven platform and upgrading its popular E-Jet family planes. Working on an existing platform involves lesser complications and keeps cost under check compared with Bombardier's approach of replacing the existing offerings with a totally new aircraft range. Making an aircraft from scratch needs huge R&D spending and is more susceptible to delays -- quite visible in Bombardier's case.

Foolish last word
Demand from the emerging markets is giving equal chance to both the jet makers. But the current developments show that the E2 Jets have an edge over the CSeries, and the former could be a bigger beneficiary. This improves Embraer's prospects in the commercial aviation segment.

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