Podcast: Will Embraer Step Up To Challenge The Duopoly?

The last company to take on Airbus and Boeing was crushed, but market conditions could be ripe for another challenger. Bank of America analyst Ron Epstein joins Aviation Week's Joe Anselmo, Jens Flottau and Guy Norris to discuss what Embraer might do.

• Airbus, Boeing And Embraer Begin Defining Next Narrowbodies
• Embraer CEO: Next Development Program Decision To Come ‘In A Couple Of Years’
• Opinion: Industry Must Make Developing A New Aircraft Affordable

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Transcript

Joe Anselmo:      

 Welcome to Aviation Week's Check 6 Podcast. I'm Joe Anselmo, Aviation Week's editorial director, and editor-in-chief of Aviation Week & Space Technology magazine.

Is Brazil's Embraer looking to go toe-to-toe with Airbus and Boeing in the large commercial aircraft market? It's hardly a new question, but one that is popping up again as Boeing continues to resist calls to move more quickly to develop a successor to the 1960's-era 737 family.

Embraer certainly has the know-how and engineering capability to develop a narrowbody. But it's also a tiny company compared to Boeing and Airbus. The last company to take on the duopoly, Canada's Bombardier, was crushed and doesn't even make passenger jets anymore. 

But if Embraer did decide to take the plunge, when would its airplane arrive, what would it look like, and who would provide the billions of dollars needed for the project? Here to break things down for us are three guests who have all followed Embraer closely for years. Jens Flottau is Aviation Week's executive editor for commercial aviation. Bank of America analyst Ron Epstein joins Jens. And rounding out the trio is Aviation Week senior propulsion editor, Guy Norris.

Jens, let's start with you. Embraer looked hard at entering the narrow-bodied market more than a decade ago, but took a pass. It's appears they're starting to look again.

Jens Flottau:    

Yes. And just to set the record straight, what the Wall Street Journal reported as an exclusive story isn't so exclusive at all. Actually, we've reported this months earlier. So here's what's going on. They are looking at what their next big investment program could be. They've said on the record that it could be in executive aviation, it could be in commercial. They've also said that this phase of investigating options will take one to two years. So we're not there yet. They're not there yet. But they're clearly talking to people. They're talking to potential partners. They're talking to potential financiers.

Now on the commercial side, why would they do it? There are several reasons. One, the E2 hasn't really been the growth engine that Embraer had hoped for. If you look back, way back, to production rates they've enjoyed in the 2000s... Actually, our colleague Dan Williams of our data team has looked at these numbers recently. Peak production was in 2008, and that's E1s, 2008, close to 160 aircraft a year.

Now last year, E1s and E2s combined were 64. And Embraer is projecting 80 for 2024. So really, the E2 hasn't taken off the way that they had hoped for. And it's hard to imagine that it could still become that huge growth engine that they wanted it to be. Yes, Scoot has just introduced its first 190-E2, and Embraer obviously hopes that that will help break into the big Asian markets. But time will tell, I guess. That size category of aircraft will always be a niche compared to the narrowbody markets.

As you say, Joe, there's little doubt that technologically and industrially they could be doing it. They have great engineers. They have low cost. Their reputation as being a reliable OEM in terms of delivering aircraft on time and on spec has just been highlighted by American. And there's a timing issue really here. As we all know, Boeing is in crisis mode and will be for some time. So, if you are looking at doing a narrowbody as a new entrant to the market, to that segment of the market, I should say, maybe now is the time to do it.

Joe Anselmo: 

Ron Epstein, welcome. You are one of the foremost experts about Embraer on Wall Street. You and your team issued a research on it on May 3rd where you wrote, number one, "This is not a done deal that Embraer will do this." But then you said, "Those of us who have followed Embraer for a long time understand the full capabilities of the company. If they should choose to launch a narrow-body jet at some point in the future, we are confident they will succeed."

Ron Epstein:     

Yes, we wrote that. I mean, it's a complex question. So let's walk through some of the points. I have no doubt that Embraer is capable of developing a very good airplane. No doubt. If they were to enter the market for, call it roughly a 200 seat narrowbody, plus or minus 20 seats, whatever size you want to call it, could they make an effective aircraft? I have no doubt that they could. My guess is if they were to do something, they would do something a little different. It could be a platform with an unducted fan. Who knows? It could even be a blended wing body.

 I would imagine that they might not go down the path of just sort of a me-too airplane. That being said though, however, and one of the things we point out in the note is if you build a really good airplane, that doesn't mean they're going to come and buy it. So the bigger governing factors, as I see it for Embraer, the if, when, and how they enter the market, a lot of it has to do with the other things outside of their ability to engineer and fabricate a plane. It's how are they going to pay for it? If you look at Embraer's market cap, let's call it somewhere between $5-6 billion. Both Boeing and Airbus are over $100 billion. They're a much smaller company. That's not lost on them. They understand that. I think one could argue reasonably, they might get some support from Brazil, but they're not going to get the kind of support out of Brazil that Airbus gets from Europe plus UK and Boeing gets out of the US. So on that level, they just have less support.

So it's not a decision that they would take lightly. Historically, they've been generally very, very careful and very, very thoughtful about the investments they make. They could do other things, and they can't do everything, so they're looking at, I would imagine, this project, maybe a new business jet. That could be something they're looking at. Maybe something in the defense market. KC-390 seems to be gaining some momentum. So they haven't done that. But the point of the note really is there's more to this than just the ability to build a plane. Now, if they do do it, we're presuming in the note that they will have financial support for it. Now, that could come in the form of suppliers, that could come in the form of sovereign investment. That could come in the form of investment from other players, countries, industrial companies that want to get a footprint in aerospace.

And you can think about... There's big companies in India that would want to do this. Big companies in Korea, maybe even Japan, that would want to expand their footprint in the aircraft OEM market, that could potentially partner with Embraer, invest in the project or... So they have to work through all those details. Then the other thing is you need support, at least quiet support, from the trade organizations in the different regions of the world.

One of the things that kind of pushed the Bombardier C Series into the hands of Airbus was the US tariffs that they were going to put on aircraft made in Canada and imported into the US. So you'd need some sort of at least tacit support from trade organizations that that wouldn't happen. So there's a lot of variables here. There's a lot of things that would have to line up. And it's not obvious at this moment that that would happen. But as we say, "Why do we think they would be successful if they do it?" I don't think they would go forward with something like this unless they get that stuff outside of the engineering realm lined up.

Joe Anselmo:            

Ron, you put out a note last fall that said Boeing has to move forward with a new airplane. And you noted that the 737 dates back to around the time you and I were born. Does Boeing's inaction change the equation at all in favor of Embraer doing something?

Ron Epstein:        

I think it does, but you have to be careful when you think about that. So Boeing presumably won't always be without action. At some point will Boeing do a new airplane. Let's hope. You're on the verge of a new leadership team coming in. And one of the big decisions they'll have to make is if, when, how they do it, I would imagine Boeing will bring a new product to market at some point here. Maybe a little bit sooner than later with the change in management. So I don't think you can always count Boeing out. But what are the ripples of the current Boeing situation? One, you do have customers in the world that... I mean, airlines will always say they want another competitor. But I think that's more real now because airlines have been really put out by the delay of aircraft.

Now, those delays have been for any number of reasons that have been talked about on this podcast and others, supply chain issues, so on and so forth. But a lot of that has been self-inflicted at Boeing. So having a third reliable supplier, I don't think there's any airline in the world today that would not like that. So that's one factor. And then the other factor you have to bear in mind is this is a long cycle industry. So let's think the peak of next cycle. So if Boeing and Airbus in this current narrowbody cycle can go to Airbus, say 75,80 airplanes, Boeing, 50,55, well, what's the peak of next cycle? Are you talking 160, 170, 180 narrowbodies?

 If you have a market with, say, 170 narrowbodies, you could easily have another player, a third player in that market with minority shares making a reasonable volume of airplanes. And then I think another factor that doesn't get talked about much that... You've got Comac, which seems to be gaining some momentum. Is there some counterbalance in the world that needs to happen of another emerging manufacturer that's not Boeing or Airbus to offset Comac? And I think that's something that can play maybe in Embraer's favor in the geopolitical realm.

Joe Anselmo:        

Fascinating. Guy Norris, you've always got your eye on the future. We would be talking about an airplane that I assume would enter service sometime in the 2030s. What would it look like and what are the propulsion options?

Guy Norris:       

 Thanks, Joe. Both Jens and Ron have raised really good points about... Just before I dive into where I think technology could be pushing this, if it does go that direction. I mean, just to sort of really follow up on a point Ron made there. I think what we've seen with JetZero, for example, the blended wing startup that's this seems to have attracted a lot of welcome response from airlines for the potential for a new mid-market concept. I think airlines are desperate. They're really crying out for somebody to contain the growing dominance of Airbus, to the imbalance we've now got in the market and also, at the same time, put a fire under Boeing, to Ron's point, about when and if Boeing needs to get going with a new product. All the airlines want to see this. They want to see some action back from the OEMs.

 And that's why I think JetZero, that was such a supported move. So could the same thing happen with Embraer? I bet it could. But anyway, so let's see what's going to be available. The great thing about... at the moment is that Airbus particularly has been driving the engine makers towards a new generation of propulsion systems for the 2030s. And right now, as well as the CFM Rise program, which is the open fan of course, we do have some things going on with Pratt & Whitney looking at a next generation geared turbofan, with MTU through the Switch program. And Rolls-Royce, of course, has put out its plan to develop a new family of scaled UltraFans with a new family of partners, if they can find them. So there may be a situation here where if Embraer is looking at a new competing aircraft into a narrowbody sector, it could have not one but three potential propulsion options to choose from.

 And it's all about propulsion, of course. I would say that because always the propulsion guy. But it does legitimately drive the market in that respect. And then if you look at what Embraer has been doing, I mean with the E2 that Jens was talking about earlier on, the E2, the 195 E2 for example, 146 seats, I think, Jens, in a high density configuration. I mean, that is the same as the 737-300, the 700, the MAX 7. Embraer has already been developing, or is into the big single aisle market there at least. And with the E2, one of the key things it demonstrated was the ability to... It didn't have to go to a composite wing for its high aspect ratio design. For the E2, it managed to do with an all metal wing. So it shows that it's got the technological design chops really to come up with solutions outside of the conventional direction of the way things go.

 So look at what they could do. They could bring in a next generation more electric design that builds on the lessons learned with the 787, and use the technology of the last 20 years to make that a much better solution. You could look at the idea of having a gold wing, which... They can come in with that clean sheet option. So even if it's tube and wing, you could still come up with something that would allow them from the get-go to take advantage of the higher bypass engines that are coming. And then if you look at their production costs, the manufacturing costs, that's an implicit part of this, I think. They do have that advantage of a lower baseline capability on manufacturing. And certification know-how. The Chinese... Of course, we mentioned the Comac with C-919. That's an issue for China, if it wants to break out of the Asia-Pacific, Chinese region really. Embraer doesn't have that problem. They know how to certify to Western standards, and they could do it. So it's an attractive option, I think, and definitely not to be laughed at.

Joe Anselmo:       

So Ron, you were on our podcast recently. Guy talked about Embraer's costs. And you had noted the last time you were on Check 6 that they developed airplanes for a lot less money than Airbus or Boeing.

Ron Epstein:   

 Yeah, they do. I think Guy brought up some very good points. One thing I'd note, if you go back in a 20-year period from roughly, call it 2001 to 2021, ballpark, in that window, Embraer did 15 distinct platforms. Largely on time, largely on budget. So when you look at the cost of something like this, Embraer could do it, no doubt, at a fraction of the cost that Boeing or Airbus could, just because of the nature of, A, they have a lower cost structure, B, they're more nimble because they're just smaller, and C, they've done it a lot. And on the certification front, which is always a costly... and you get surprises. And in today's world, given what's going on in the wake of the MAX and all the airliner authorities in the world dotting their I's and crossing their T's, Embraer's capability to do that is just huge. Flight testing is highly labor-oriented. Embraer has ability to do all of that in-house, locally. So it really does give them a very amazing cost structure.

Guy Norris:  

 Yeah, and the other thing about it, which I think is sort of strange really at the moment, is that we're entering this new period where the classic models that we've all been used to for the past 40, 50 years in some cases, of the OEMs and their engine suppliers and the supply chains that support them... Yes, we've still got the Boeing-Airbus duopoly stronger than ever. But we're seeing because of that, in a weird way, the emergence of new options that would never have been contemplated before. I mean, who knows how successful they are. But for example, Boom trying to do a supersonic project with an engine that is going to be apparently created by none of the usual suspects. So we're beginning to see the emergence of completely different solution sets to these problems.

 JetZero, I bring them up one more time. Who would've thought that there was even the possibility of a middle of the market concept emerging out of the blue from a company that nobody's heard of, and been taken so seriously that there's now a full-scale demonstrator being planned? So I think that the landscape that we've all been used to is definitely showing signs of change. So that's why this is particularly intriguing because I think it's no longer tick the usual boxes. You've got to change your assumption level. And I think there is room for new competition like this. And of course, how they approach it and whether it takes off, who knows? But at least the landscape is definitely changing.

Jens Flottau:          

And what you say about the landscape changing is also true on the market side and on the investor side. I know that Embraer has been touring Asia for months now and visiting China, visiting India. [CEO Francisco] Gomes Neto has been to Turkey to see whether new industrial partnerships are possible. That, of course, initially relates to the E2 and the question whether they could become more important suppliers or even become a home of an additional final assembly line, something that others, Boeing, for example, have ruled out, but Embraer explicitly says is possible.

But there are other players in the markets that are emerging. Saudi Arabia, for example, is building a big, big aviation industry, creating a new airline, building new airports, is investing heavily into AAM. I think it's totally possible that Saudi Arabia could decide to partner with Embraer on this aircraft and maybe become a big supplier. Who knows? As you say, Guy, the world's changing, and I think it's actually very good news that the world is changing. It creates disruption. The cozy duopoly appears to be maybe ending. And I think given all the challenges that the industry is facing in terms of sustainability and becoming more efficient, that's good.

Joe Anselmo:     

Ron, we're running short on time, but you had noted market cap at the beginning. And I looked it up. Airbus yesterday was $124 billion. Boeing was $109 billion. And as you noted, Embraer is $5 billion, so less than 1/20th the size. And they don't have a government like Comac does with lots and lots of money to throw at them. So where would this money come from to develop a new airplane? Any thoughts?

Ron Epstein:    

 It's a very good question. Let me follow up on Jens' point. Let's look at Saudi Arabia for a moment. It's no secret that the Saudis have been in the market for some KC-390s. Could you see some sort of industrial partnership where the Saudis buy some KC-390s and then they make a sovereign investment in an aircraft, in aircraft development, in exchange for some level of production in Saudi Arabia? Same thing with India. India's been shopping around. And you could say maybe a similar deal with India. Potentially Tata or whoever could be involved with this. So it does seem that there's enough interest in commercial aerospace markets globally that you could find a partner on an industrial level who could make investments or even potentially a sovereign investment. And then there's just the old school way of doing it, where you do have suppliers who make investments.

So, just imagine this as a scenario, I’m not saying this is going to happen. But just like, if you will, the C Series was kind of the Trojan horse for the GTF. It sort of made it and brought it into the market. Could you imagine an Embraer platform with a CFM Rise on it? Is that the platform that's going to bring an unducted fan into the world? Maybe. Who knows? But there are scenarios where you could see between industrial partnerships, sovereign investment, the money be raised. I mean, ultimately, my guess for Embraer, it's probably for a new commercial airplane like this, call it a $5 billion investment. It's not an insurmountable amount of money to raise.

Joe Anselmo:      

 Well, on that note, we're going to have to wrap it up. But Ron, thanks as always for joining us. I'm sure we'll be having you back to talk about this some more, because this story is not going away. Jens, Guy, thanks as always for your insights. That is a wrap for this week's Check 6 Podcast. A special thanks to our podcast editor in London, Guy Ferneyhough. To our listeners, thank you for your time, and please join us again next week for another Check 6.