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Brisk demand for 70- to 130-seat segment in Asia Pacific market: Embraer

The company maintains that airlines will take delivery of 1,570 new jets in the 70- to 130-seat segment over the next 20 years (valued at US$75 billion, at list prices), representing 25% of the worldwide demand for the segment, in the period. According to the global Embraer Market Outlook for the 70- to 130-seat capacity segment for the next two decades, the entire market will demand 6,350 new jets in this category, which is valued at US $300 billion over the period.

The Asia Pacific market will become more affluent, competitive, and open, further stimulating airlines to seek system efficiencies, brand differentiation, and improved service levels. In this context, the 70- to 130-seat jet segment will play a key role in supporting the intra-regional development in Asia Pacific.

“We are showing to airlines the benefit of moving from ‘red oceans’ to ‘blue oceans,’ that is, to move away from a crowded marketplace and seek out opportunities in markets that are currently underserved, or not served at all, where yields are also stronger, moving from one to two digits,” said Paulo Cesar Silva, president and CEO, Embraer Commercial Aviation.

Asia Pacific has experienced rapid social and economic development in recent decades. The region’s above-average economic expansion, with a projected annual GDP growth rate of 4.1% for the next 20 years, combined with increasing urbanization and shifting demographic patterns, will result in higher household incomes and increased discretionary spending, including air travel.

The rise of Low Cost Carriers (LCC) was a direct and natural response to the surge in demand for air travel in the region, in the last decade. However, the large inflow of capacity has influenced ticket prices and created a new dynamic: a vicious cycle in which lower yields force lower unit costs, leading to larger aircraft that add more capacity which, in turn, lower load factors that promote even more fare discounting.

Reducing fares to offset falling load factors has its limits, and focusing primarily on ancillary revenues is not a sustainable business strategy. There are already signs of saturation; despite 8.6% RPK growth in 2015, carriers in the region are estimated to have earned a net margin that averaged only 2.9%, boosted by the lower price of oil. Profitability remains elusive for Asian carriers facing the challenge of surplus capacity.

Embraer sees untapped opportunities in Asia Pacific, where more than 250 markets, or 30% of narrow-body exclusive markets are served with less than one daily frequency. Markets like these would be better served with 70-130 seat jets, based on the average number of passengers per departure. Also, 37% of intra-regional turboprop capacity is offered on routes longer than 200 nautical miles, which are better suited to jet operations, due to their higher network productivity, better operating economics, and superior passenger appeal.

Another opportunity in the region is the replacement of aging fleets, where there are more than 250 jets in the 50 to 150-seat category with over 10 years of age, which will become targets for replacement in the near future.