From late 2014 through 2015, there was growing speculation in industry circles that airline heavyweight United Continental (NYSE:UAL) would order jets in the 100-seat size class from either Bombardier (NASDAQOTH:BDRBF) or Embraer (NYSE:ERJ). This would have filled a gap between its largest regional jets, which have 76 seats, and its smallest mainline plane, the 126-seat Boeing (NYSE:BA) 737-700.
Instead, United went the "safe" route, ordering 65 more 737-700s from Boeing in early 2016. However, United's fleet plan and priorities have changed in the past six months. This again raises the possibility that United Airlines could order Bombardier's CSeries jets or Embraer's E2-series E-Jets in the next year or so.
United mulls an order for smaller jets
In late 2014, United Continental began having serious discussions with Bombardier and Embraer about buying either the CS100 or some of Embraer's larger jet models.
Adding jets in the 100-seat range would allow United to better match capacity to demand on certain routes. Furthermore, United's pilot contract allows it to expand its fleet of 76-seat regional jets if it also adds smaller mainline planes like the CS100 or E195. This would help United retire most of its fleet of cramped, inefficient 50-seat regional jets.
By late 2015, officials at both Bombardier and Embraer were cautiously optimistic that they could get an order from United. But ultimately, both manufacturers got shut out.
Back and forth
In early 2016, United Airlines ordered 65 737-700s, with deliveries scheduled to start in late 2017 and wrap up in 2019. This was surprising, given that the 737-700 has been around for nearly two decades and is much less fuel-efficient than the state-of-the-art models that Bombardier and Embraer were offering.
Price was the deciding factor. Boeing offered United Airlines huge discounts on end-of-line 737s, mainly to block Bombardier from gaining a foothold there. (It was also probably hoping to push United back toward an all-Boeing narrowbody fleet.)
However, United Continental CEO Oscar Munoz revamped his executive team last year. The company's new leaders concluded that even at a bargain price, it didn't make sense to buy outdated planes like the 737-700.
As a result, in November, the company effectively canceled the 737-700 order. It converted the four planes scheduled for delivery in 2017 to the larger 737-800 model. It deferred the other 61 orders indefinitely and plans to convert them to some of the larger variants of Boeing's new 737 MAX family.
Back to square one
United plans to keep some 50-seat jets around longer to fill the gap created by the 737-700 order deferral. However, that's only a short-term solution. As these small regional jets age, rising maintenance costs will make it increasingly uneconomical to keep them flying.
Meanwhile, the scope clause restriction in its pilot contract means that United can't expand its 76-seat regional jet fleet any further. Thus, now that United Continental no longer plans to load up on 737-700s, it is likely to look at the CSeries and E-Jet E2 aircraft families again.
At the moment, United Continental is in the midst of a thorough fleet review. This will cover the question of whether it should add planes in the 100-120 seat range, according to CFO Andrew Levy. The fleet review is likely to conclude within the next few months.
If United decides to buy planes in the 100-120 seat range, Bombardier and Embraer are the only realistic contenders for winning the order. Both companies will be highly motivated.
Bombardier secured big CSeries orders from Delta Air Lines and Air Canada last year, but it still ended the year with only 353 firm orders. Forty of those are from bankrupt regional airline Republic Airways and will be canceled. There are big holes in Bombardier's CSeries order book beginning in 2020.
Given that Bombardier has sunk more than $5 billion into developing the CSeries family, it needs to sell a lot more planes. Getting another marquee order from an airline like United would be a big help in that regard.
Unlike the troubled CSeries development program, Embraer's less ambitious E2 program is still in line with its modest $1.7 billion development budget and ahead of schedule. The E190-E2 began flight tests last year, and the larger E195-E2 had its first flight just last week. Both variants appear to be performing well.
However, order activity has been disappointing thus far. Embraer ended 2016 with 275 firm orders, but only 125 of those are really solid. That represents barely more than a year of production.
Thus, Embraer needs a big win almost as badly as Bombardier. Both aircraft manufacturers -- and their long-suffering shareholders -- are eagerly awaiting United's decision.