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Embraer's E2-Jets Bring in Orders

Zacks Equity Research

Embraer SA (ERJ) has launched the second generation of its E-Jets family of commercial aircraft, E-Jets E2. This set includes three new planes E175-E2, E190-E2 and E195-E2. With the launch of the jets the company has also successfully clinched fresh orders.

SkyWest Inc. is the launch customer for the E175-E2 aircraft. It has made a firm order for 100 aircrafts with purchase rights for 100 more. If the order is fully exercised the contract would be worth $9.36 billion.

In May 2013, Embraer had received an order for up to 200 current generation E175 aircrafts from SkyWest. Put together the potential order from SkyWest for the E-Jets comes to 400.

Moreover, Embraer SA has signed a Letter of Intent (“LOI”) with the International Lease Finance Corporation (“ILFC”) for 25 E190-E2 and 25 E195-E2. The LOI also includes additional options for the same number of planes. The company has also signed LOI from five unnamed airlines on four continents for 65 E-Jets E2. Taking into account all the new contracts, the total number of potential orders comes to 365 for the next-generation E-Jets including the launch order.

With an extended seat row in comparison to E175, the E175-E2 can seat up to 88 passengers. The E195-E2 has added three seat rows compared to E195 bringing the number of seats to 132 while the E190-E2 has 106 seats, the same as E190. The company expects E190-E2 to enter into service in the first half of 2018, E195-E2 in 2019 and E175-E2 in 2020.

The second generation launch demonstrates the company’s focus to invest in its line of commercial jets while holding onto its dominance in the 70 to 130 seat market. Over the next eight years, the company expects to spend $1.7 billion on the new E-Jets E2 models.

With more than 1,200 E-Jets orders, Embraer has achieved a 42% market share in this segment. Over the next 20 years, the company expects demand for commercial jets to rise to 6,400. To date, more than 950 E-Jets have been delivered to 65 customers from 47 countries.

The second generation of E-Jets would improve fuel burn and reduce maintenance costs in the double digits. Indeed, E-Jets E2 burn at least 16% less fuel per seat with E-195 specifically burning 23% less fuel.

These jets will help the Brazilian jet maker to secure its position in the U.S. aviation market. Going forward, we expect the company’s focus on its productivity improving programs, strong global customer base and tie-ups with other companies to boost the top and the bottom line.

Despite a growing order book, we remain concerned about the highly competitive industry that is compelling the company to incur high costs, the possibility of order cancellations and a drop in demand for business jets. The company presently retains a short-term Zacks Rank #3 (Hold).

Stocks well placed in the industry are Erickson Air-Crane Inc. (EAC), Wesco Aircraft Holdings, Inc. (WAIR) and Raytheon Company (RTN). While Erickson Air-Crane carries a Zacks Rank #1 (Strong Buy), Wesco Aircraft and Raytheon hold a Zacks Rank #2 (Buy).

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