People often start a new year by making resolutions. I’m not one of them. In business, however, I like to identify things that I believe will shape the next 12 months.
2016 was a slow year for new commercial aircraft sales (700 fewer than 2015) and this year will likely be equally soft for the industry. Narrow and wide-body orders are 22% to 54% below their 15-year averages which suggest backlogs may drop as production increases to record levels to fill current orders. Narrow-body cancellations and deferrals could peak in 2017 after reaching an extraordinary one deferral for every 7 sold last year.
With an oversupply of narrow-bodies on the market, I see further downward pressure on yields, especially beyond the USA where carriers still haven’t fully embraced the concept of capacity discipline. Even with lower expected industry profits, labour and unit cost increases, and the price of fuel edging up, there are some bright spots for Embraer. Here are five things that I believe will influence the 70 to 130-seat aircraft segment in 2017.
1. Book-to-Bill Ratio
The ratio continues to decline for narrow-bodies and is likely to fall below 1:1 by year end. That could pose problems for already-planned production ramp-ups. For our aircraft segment, new sales are following the historical average. I see good prospects in China and the USA, especially for the E175 which has been riding a strong sales tailwind in North America. American carriers see 100-seaters as ideal replacements for 50-seat regional jets and older narrow-bodies. I also believe our E-Jets are viewed as natural complements to larger Airbus neos and the B737 Max in the networks of the US majors.
For these reasons, I see a book-to-bill ratio for 70 to 130-seat jets greater than 1:1.
2. Robust Demand in the USA
North American airlines have been adept at managing capacity and lead industry profitability. They’re focused on large regional jets and small narrow-bodies to maximize revenue with the right balance of seats, frequencies and demand. In the USA, the pilot shortage continues to pose a threat but airlines are working to mitigate the problem through higher starting pay, hiring bonuses and 50-seat jet replacement.
Consequently, I’m bullish on the USA.
3. Capacity Discipline in Europe & Asia
IATA predicts that European and Asian carriers will account for a 50% reduction in 2017 industry profitability. Overcapacity in those regions will drive down yields, reduce revenue, and costs will rise. A glut of seats leads to damaging price competition which weighs on profits. That over-reliance on capacity growth is destructive and unsustainable in the long term and why it’s time airlines work harder to get the supply/demand mix right.
Watch for signs that European and Asian airlines will adopt more capacity discipline starting in 2017.
4. China’s New Regional Policy
I’ve referenced China a lot in my previous posts. The country will figure prominently in our capacity segment this year. A recently-introduced policy by the CAAC requires new airlines to have a sizeable regional aircraft fleet before they can acquire narrow-bodies. Our 100-seat E190 and E190-E2 fit perfectly into the CAAC’s regional jet classification.
The CAAC policy should generate sales from new and existing customers.
5. Demand for Used Aircraft
As long as the price of fuel remains about where it is now, pre-loved aircraft will maintain their appeal with their low operating costs. I expect to see some airlines increasing their purchase or lease of second-hand jets in 2017.
Look for airlines to have a more diversified fleet of new and used aircraft, including from our segment.
My buzzword for this year is momentum. 2017 won’t be any less challenging than 2016 yet I believe the 70 to 130-seat jet segment continues to have enormous untapped potential. Airlines around the world are still discovering the benefits of smaller-capacity airplanes. It’s why we keep adding new E-Jet customers year after year.