Last March, JetBlue Airways (NASDAQ:JBLU) began a full review of its aircraft fleet. The biggest question was whether the carrier should continue to operate its 60 Embraer (NYSE:ERJ) E190 100-seat jets indefinitely -- or if not, to find a better alternative.

Originally, JetBlue had planned to reach a decision by the end of 2017. But before it finalized a long-term plan, the market for small mainline jets was thrown into upheaval by Airbus' (NASDAQOTH:EADSY) decision to take a majority stake in the CSeries aircraft program developed by Bombardier. Since then, Boeing has started thinking seriously about trying to buy all or part of Embraer as a counter-move.

With the 100-seat jet market now in flux, JetBlue recently confirmed to Bloomberg that it has delayed the timeline for making a final decision on its Embraer fleet.

Why JetBlue needs to deal with the Embraer fleet

Back in 2005, JetBlue was the launch customer for Embraer's E190 jet. At the time, the young airline saw it as a great way to tap into smaller markets. However, introducing a second aircraft type to JetBlue's fleet hasn't been nearly as successful as management had hoped.

First, the E190 uses significantly more fuel per seat than JetBlue's Airbus fleet. Maintenance costs have also been much higher than expected. Lastly, pilot pay is rising quickly across the industry, and the E190 doesn't allow JetBlue to spread its pilot costs over as many passengers as an A320 or A321.

A JetBlue E190 being pulled by a tug vehicle

JetBlue's E190 fleet has had extremely high operating costs. Image source: JetBlue Airways.

The net result is that JetBlue's unit costs for the E190 fleet are about 20% higher than for its A320 fleet, adjusted for stage length. That differential will get worse after JetBlue reconfigures its A320s to add 12 extra seats to each one.

JetBlue's problems with the E190 aren't unique to the carrier. Back in 2016, American Airlines decided to retire its entire fleet of 20 E190s by the end of 2019, even though they will only be 12 years old on average at that time. (A typical commercial jet's lifespan is 20-30 years.)

JetBlue has a little bit of time

The Embraer E190 fleet is arguably JetBlue's biggest long-term restructuring opportunity. As a result, investors are eager to learn what its strategy will be.

That said, there is no reason JetBlue had to make a decision by the end of 2017. Half of its E190 fleet is leased, with expiration dates between 2023 and 2025. Of the 30 E190s that JetBlue owns, the oldest was built just 10 years ago, while the youngest is not even five years old. As a result, it probably makes economic sense to wait at least two or three years before starting to retire the Embraer fleet.

In the meantime, JetBlue has two relatively new considerations in making a decision on the E190 fleet. The first is the possibility that CSeries purchases would face steep tariffs -- or that JetBlue would have to wait for Airbus to start building CSeries jets in the U.S. to avoid such tariffs.

The second is that the recently implemented tax reform law provides an extra incentive for capex in the near term. Corporations will be able to fully deduct the cost of capital spending from their taxable income for the next five years; after that, this benefit will phase out over five years.

Embraer is still the most likely winner

Tax reform makes it more likely that JetBlue will opt to retire its E190 fleet early. The "full expensing" provision of the law is a meaningful subsidy for near-term capital spending, which would soften the blow from having to take a big writedown on the current fleet.

If JetBlue wants to complete the fleet transition during the early 2020s, it would give Embraer's E2-series jets an advantage, because of the current uncertainty around tariffs on the CSeries jets. Of course, if Airbus can resolve that issue soon and guarantee that tariff-free CSeries jets will be available within a few years, this advantage would disappear.

Beyond that, Embraer has various incumbency advantages. It is in the best position to remarket JetBlue's old E190s as part of a trade-in deal. In addition, the crew training process for switching from the E190 to Embraer's next-generation E190-E2 or E195-E2 is very simple. Finally, the E190-E2 is the only true 100-seat aircraft available.

That said, the CSeries is a formidable airplane. Furthermore, JetBlue has a great relationship with Airbus, so the latter's involvement definitely gives the CSeries program an extra boost. It will be interesting to see which route JetBlue decides to go -- whenever it makes its decision.

Adam Levine-Weinberg owns shares of Embraer and JetBlue Airways and is long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends Embraer and JetBlue Airways. The Motley Fool has a disclosure policy.