Why the New 737 MAX Is a Problem for Embraer SA

Boeing plans to create a high-capacity version of its most popular jet, which could prove popular for the very discount carriers ordering from Embraer.

Jul 18, 2014 at 10:08PM

Embraer SA (NYSE:ERJ) has spent years trying to convince mainline carriers that its E-jets are as capable as Boeing (NYSE:BA) aircraft when it comes to serving mid-range routes. The new 737 MAX 8 could make it harder for Embraer to win that argument, Fool contributor Tim Beyers says in the following video.

At the recent Farnborough Air Show, Boeing talked up the MAX 8, a high-capacity variant of the 737, capable of seating 200. That's a big boost when you consider that most comparably sized 737 aircraft top out at 175 passengers. Even the models flown by the sardine squad at Europe's Ryanair top out at 189.

It was only last year, at the 2013 Paris Air Show, that Embraer introduced its new "E2" version of the E-jet family, including a modified E195 jet capable of ferrying as many as 144 passengers in a high-density configuration. That's more than the majority of 737 aircraft flown by Southwest Airlines, whose 737-700 jets seat between 137 and 143 passengers.

To be fair, we've yet to see a rush of firm orders for the "E2" version of the E195 jet. Boeing's high-capacity Max 8 could keep it that way, Tim says. There's no reason to go for a smaller aircraft if a bigger one will ferry more passengers with as much, or more, efficiency.

What to do if you're an investor? The expanded MAX won't be in service anytime soon, so there's no reason to sell. And yet, it's probably a good idea for investors to compare the order books for both Boeing and Embraer. If E2 demand starts lagging as firm orders for the Max 8 roll in, it may be time to reevaluate Embraer stock.

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Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool recommends Embraer-Empresa Brasileira. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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