For smaller aircraft manufacturers like Embraer (NYSE:ERJ) and Bombardier, competing with giants like Boeing (NYSE:BA) and Airbus (NASDAQOTH:EADSY) 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 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.
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.
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.