Please ensure Javascript is enabled for purposes of website accessibility

How Embraer Will Compete with Boeing and Airbus

By Adam Levine-Weinberg - Feb 17, 2016 at 4:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Rather than building bigger planes, the Brazilian aircraft manufacturer wants to move the market towards the smaller jets it already specializes in.

For smaller aircraft manufacturers like Embraer (ERJ 0.10%) and Bombardier, competing with giants like Boeing (BA 1.29%) and Airbus (EADSY 1.29%) isn't easy. During 2015, Embraer delivered 101 commercial airplanes and Bombardier delivered 73. By contrast, Boeing and Airbus delivered 762 and 635 commercial jets, respectively.

Boeing and Airbus dominate the market for larger jets. Image source: Airbus.

Boeing and Airbus thus have huge economies of scale that enable them to beat back would-be competitors either through innovation, discounting, or a combination of the two. In light of this competitive dynamic, Embraer isn't trying to break into the market for larger jets. Instead, it hopes to move more of the market toward the smaller jets it specializes in.

Embraer carves a different path
The troubled history of Bombardier's CSeries jet shows the danger of trying to compete directly with the Boeing 737 and Airbus A320 families, the two best-selling jet designs in the world. The CSeries jets seat up to 160 passengers, putting them in the same segment as the smallest 737 and A320 variants.

Bombardier had high hopes for its new jet, based on its superior fuel efficiency. But Airbus and Boeing quickly discounted their competing offerings to stop the CSeries from gaining a big foothold. They then each introduced updated versions of their best-selling jets with new engines, dramatically narrowing the fuel efficiency gap.

This has led to persistently slow sales of Bombardier's CSeries jet. Meanwhile, cost overruns nearly put the company out of business. Bombardier was forced to turn to the government for big cash infusions in order to stay solvent.

CSeries cost overruns have nearly bankrupted Bombardier. Image source: Bombardier.

By contrast, Embraer has recognized that discretion is the better part of valor. Even when it decided to redesign its E-Jet family, Embraer made sure that the largest model (the E195-E2) remained smaller and lighter than anything offered by Airbus or Boeing.

Shifting the market
Limiting its focus to smaller jets means that Embraer is counting itself out of the biggest, most lucrative segments of the commercial aircraft market. However, Embraer thinks it can instead get more airlines interested in smaller planes.

Embraer has pushed this line of thinking aggressively at the Singapore Airshow this week. The company noted that for every two new routes that Asian budget carriers launched in 2015, they canceled one. Embraer thinks the problem is that these airlines only have larger Boeing and Airbus jets and many routes don't have enough demand to support planes of this size.

Embraer thinks Asian budget carriers would be more profitable if they had smaller planes in their fleets. Image source: Embraer.

While Embraer's E-Jets have somewhat higher unit costs (cost per passenger) than the popular 737-800 and A320 jets, they have significantly lower trip costs (cost per flight). When there's enough demand to fill a Boeing or Airbus jet at reasonable fares, it's sensible to use the bigger plane. But when lots of seats would remain empty -- or be sold well below cost -- a smaller plane like Embraer's E190 or E195 could be more profitable.

Operating smaller jets would also enable low cost carriers to offer daily point-to-point flights on routes that are currently only served a few times a week. Finally, Embraer believes that there are many Asian markets with no flights today that would be viable with smaller jets.

Hoping for a philosophical shift
Embraer has put less emphasis on Asia than Boeing and Airbus. For example, Boeing expects to get nearly 40% of its sales over the next two decades from Asia (excluding the Middle East). For Embraer, the comparable figure is only 25%.

However, that's still a significant chunk of Embraer's total market opportunity. Moreover, there is potentially huge upside to that market estimate if Embraer can convince Asian airline executives to focus on matching capacity to demand rather than minimizing unit costs by any means.

Embraer is already having modest success in China. Tianjin Airlines operates dozens of E-Jets, with more on the way, and Embraer has also captured smaller orders from several other Chinese airlines. Meanwhile, start-up airline Air Costa has big ambitions to kick-start regional aviation in India. It has ordered 50 next-generation E-Jets and may soon look to buy more.

Embraer thus has a clear opportunity to participate in the strong growth of the aviation sector in developing markets. Most importantly, it should be able do so without provoking a deadly competitive response from Airbus and Boeing.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Embraer S.A. Stock Quote
Embraer S.A.
$10.45 (0.10%) $0.01
The Boeing Company Stock Quote
The Boeing Company
$127.14 (1.29%) $1.62
Airbus Stock Quote
$28.18 (1.29%) $0.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.