The focus on long-haul business passengers is now close to absolute. This, in turn, reinforces the importance of jets in the 70-to 130-seat segment to feed international flights
On October 12 this year, the Brazilian aerospace major Embraer forecast a market demand of 1,540 new aircraft in the 70- to 130-seat jet segment (valued at $80 billion at list price) in Europe and the CIS (Commonwealth of Independent States) over the next 20 years. Currently, there are 29 airlines operating Embraer jets in both regions. Last year, around the same time, Embraer had announced same projections but with valuation of $72 billion. The break-up is Europe 1,160 aircraft that is an increase of 18 per cent and CIS 380 (6 per cent increase).
According to the International Air Transport Association (IATA), the total traffic of European carriers increased by 3.5 per cent, while load factor climbed to 81.9 per cent in the first eight months of 2016. Air transport demand growth continues to face a number of headwinds, including terrorist attacks and political instability in parts of the region. However, the capacity/demand balance has been sustained by keen price competition. Yields have been decreasing 2 per cent per annum for the past five years. Despite the region’s wealth, high propensity for air travel and high load factors, Europe’s perennial woes are attributed to the weak revenue environment, resulting from a savagely competitive aviation market.
Embraer said that airlines are already questioning the sustainability of the current scenario as they need to operate in an environment that demands ever more effectiveness and agility. Traditional full-service carriers restructured in order to improve efficiency, reduce costs and secure profitability. The focus on long-haul business passengers is now close to absolute. This, in turn, has reinforced the importance of jets in the 70- to 130-seat segment to feed international flights. Hub efficiency is critically important and 70- to 130-seat jet aircraft play a key role feeding those hubs. The segment provides global and intra-region connectivity with ideal capacity to support regular frequencies at Europe’s key hubs.
Smaller jets fly around 40 per cent of the total traffic to or from Paris CDG, Amsterdam, Frankfurt and Munich. Connecting traffic, which now represents 65 per cent of total passengers flying an E-Jet aircraft, will largely remain the core business of the major international airlines.
Second Largest Market
Europe and CIS regions form the second largest market worldwide for the segment with a fleet growing from 740 to 1,560 units by 2034. In parallel, some LCCs (low-cost carriers) are reaching the limit of growth in trunk routes. As opportunities to explore trunk routes are limited, low density markets are becoming more relevant in their networks. The imbalance between aircraft capacity and demand has led to an increase in the number of service cancellations — carriers withdrew from 460 markets in 2014 compared to 370 just three years before. High LCC growth rates cannot be maintained indefinitely. There is one market cancelled for each market opened, down from 2007 when LCCs opened seven times more markets than they cancelled.
CIS Intra-Regional Growing Fast
In another development stage, intra-regional aviation in the CIS has been the fastest growing mode of transport as a key to improve links between cities. To support that growth, countries have changed their transport strategy and focused on the domestic market, making air travel more accessible to more people and providing global connections. Those changes include air transport liberalisation and investments in the aerospace industry. New 70- to 130-seat aircraft are able to better match seat capacity to variations in demand and offer more connectivity by increasing frequencies and opening new markets.
Ten ERA (European Regional Association) member airlines operate Embraer aircraft on a network that spans Europe from Portugal to Belarus. Europe now has 30 airlines from 21 countries flying more than 300 Embraer aircraft. The ERJ 145 family accounts for 60 units, while there are 245 E-Jets in operation. Five ERA member airlines fly the ERJ 145 family of regional jets, while six member carriers operate E-Jets.
Vastness of CIS
The vastness of the CIS hampers regional integration and the implementation of common economic and trade policies and legislation among member states. Consequently, intra-regional aviation, the fastest growing mode of transport, is key to improving links between CIS cities. Air transport liberalisation will be one of the main engines of growth over the next years and is projected to grow demand 4.8 per cent over the next 20 years, slightly below the world average.
To support that growth, CIS countries have changed their transport strategy and focused on the domestic market to strengthen ties within the region, to make air travel more accessible to more people and to provide global connections. Those changes include air transport liberalisation and investments in the aerospace industry, including replacement of the current fleet which is composed mainly of inefficient and old technology aircraft. New 70- to 130-seat aircraft are able to better match seat capacity to variations in demand and offer more connectivity by increasing frequencies and opening new markets.
Europe has been a top risk for the world economy for years. The economic backdrop was sluggish in 2014 and fragile in 2015. The region’s economy is projected to grow 1.8 per cent annually over the next 20 years. Despite the relentless headlines about sluggish economic performance, debt crises, bailouts, unemployment, deflation and recession, the region’s airline industry remains strong. Margins for European airlines have been under-performing relative to other sectors.
Globally, Embraer foresees demand for 6,350 new jets in the 70- to 130-seat segment over the next 20 years, representing a total market value of $300 billion. By 2034, 61 per cent of projected deliveries will support market growth and the remaining 39 per cent will replace ageing equipment. Also by 2034, 2,250 70- to 90-seat jets will be delivered worldwide to sustain hub-and-spoke efficiency as those aircraft have the capability to link many lower-density markets to major hubs and to develop regional aviation in emerging countries. The 90-to 130-seat jet segment provides the opportunity to complement current narrow-body operations and to develop new markets with lower risk. Some 4,100 aircraft in the 90-to 130-seat jet segment will be delivered in the next 20 years.
Despite multiple divergent trends, the global economy is set to speed up in the few next years. Falling oil prices and more stimulus from key central banks will boost global real GDP growth from 2.7 per cent in 2014 to 2.8 per cent in 2015 and 3.3 per cent in 2016. The global economy is projected to grow 3.1 per cent annually over the next 20 years, doubling in size by 2034. Continued economic recovery is expected in North America and Europe, averaging 2.5 per cent and 1.8 per cent, respectively. Despite slower momentum, growth in emerging markets will continuously outpace those in advanced economies.