Embraer Talks about the Regional Connectivity Plan & Pitches ‘Fleet Smart’ Concept
Brazilian aerospace maker Embraer, which is the leader in the 70- to 130-seat market, sees potential to refine further the policy announcement made by the government which will boost connectivity in secondary and tertiary cities across India. Jayant Baran
Jayant Baranwal (JB): My first conclusion is that the Government of India is open to ideas, the government is inviting stakeholders, the government is inviting manufacturers, the government is inviting operators to suggest what to do and what not to do. That is something I find quite encouraging and the Regional Connectivity Scheme (RCS) draft and before that the main National Civil Aviation Policy, all these seem to underline that sentiment. Even if they may not appear to be very friendly at this point of time, what is important is that the government is suggesting to the industry that if it wants changes after the complete formulation of the policies, to let the government know such that it will work out ways to deal with it. So that way I would say it sounds to be good and RCS indicates one thing that the government intends to promote the regional connectivity realising that there is so much untapped potential, un-served potential that needs to be taken care of and there is huge scope for both industry and passengers. The government realises that which means in the end there will have to be a certain numbers of operators, certain number of types of aircraft, flying with the right capacity for the right destinations. Mark Dunnachie (Mark): We applaud the Indian Government’s initiative to consult with various aviation players – from airlines to OEMs – and get their feedback on the Regional Connectivity Scheme (RCS) draft. It is also great that they listen to the feedback from the leasing community to understand how they view the country’s risk element and what is needed to raise the confidence level in the market. We are very bullish on this market. We think that our E-Jets are a great fit, particularly the 100-seater jet fits in the current sweet spot, and there are abundant opportunities in the region for our aircraft to go to underserved destinations where larger narrow-bodies simply offer too much capacity. In parallel to this initiative on the RCS it is very clear that India is on a wonderful trajectory to growth. The government’s focus on a business friendly environment is evident in many areas, not just aviation, and there is no question this will pay off for all the stakeholders.
JB: Can you please tell me a little bit more about the ‘Red Ocean’ and ‘Blue Ocean’ theory you often talk about?
Mark: Yes, this is based on the familiar marketing concept of ‘Red Ocean’ and ‘Blue Ocean’. A ‘Red Ocean’ is where many players are fighting for a share of the pie, making the market
very saturated and yields low. ‘Blue Ocean’ is where you want to be. This can be underserved markets or markets that to date do not even exist. We will talk later in more detail about our ‘Fleet Smart’ initiative but this lies at the heart of our pitch.
In the 70/130-seat market segment, we estimate an industry demand in India of 250 to 500 units over 20 years, depending on how the market evolves, which would enable the country to enhance its regional connectivity. These jets would be used to grow secondary and tertiary markets and with the option of bypassing the major metro airports to avoid air traffic congestion.
According to our studies, in India today there are unserved routes that can accommodate at least 40 E-Jets in the market, and those can be captured by current generation E175s or E190s for instance.
The main reason why these routes are not being served is that they are often too long for turboprops and demand is too thin for the larger narrow-bodies such as the Airbus A320 or B737s.
JB: The Secretary of the Ministry of Civil Aviation (MoCA) had come to your chalet at the Farnborough Airshow and you had some good discussion. What was the discussion about?
Mark: We talked about the Regional Connectivity Scheme and I think the receptiveness of the MoCA to listen to the inputs is really encouraging and we think anything that can improve the policy is to the benefit of India. The objective of the Regional Connectivity Scheme is to get people moving and connecting regions. Greater connectivity brings jobs, tourism and numerous other spin-off benefits.
JB: According to you, how can leasing of aircraft be made attractive?
Mark: I think firstly the enforcement of the Cape Town treaty is obviously essential with preferably no caveats. We have to make sure it’s as simple as possible. Eventually, maybe with some form of government guarantees in certain quarters perhaps on the thinner routes with regional connectivity. For the lessors the assessment is pretty straightforward. It is a balance of opportunity against risk. The fundamentals are simple. They are asking: Will I get paid? Will I get paid on time? What is my risk, and ease of asset exit if it goes sour? Can I get my assets out easily and quickly? Will the records be current? And once you start to check these boxes, you get the benefits of a willing supplier of assets. Everyone then benefits.
JB: What kind of conversations have you had already with some of the large airline operators in India?
Mark: For obvious reasons, we cannot mention specific airlines we are talking to, suffice to say we are covering the whole market. I think a lot of people have noticed the exceptionally high reliability of our aircraft and the high utilisation being achieved from the Air Costa shop window. People see that the 100-seater jet is truly occupying a sweet spot in the market. Whilst we are of course not denying there will be a niche market for turboprops. The turboprop remains speed restricted, range restricted and cargo limited so will be largely constrained to the short thinner network. We think the jet brings the potential advantage of an extra cycle per day and if given a choice, passengers will always have a clear preference for jets. Our job is to put together a package for the airlines that really reflects an aggressive cost structure where they can reap all the benefits of the jet. We are spending a lot of time focusing on enhancing the package solutions, this of course covers a multiple of elements but key will be pilots and maintenance. This is the direction the industry is pushing to take. In the E-Jet, you can also typically carry up to two tonnes of cargo capacity after loading all the bags and everyone can carry on their hand luggage for storage in the large overhead bins. This cargo capacity represents substantial extra revenue generation.
JB: Our Minister of Transport is aggressive in creating road infrastructure and once these set of roads come up travellers will have the option of choosing between good roads and airplanes at very low cost? The good road vs air connec-
tivity as in the latter there is minimum 90 minutes to enter the airport and 90 minutes to exit the airport. The flight time may be short. How do you perceive this scenario?
Mark: Infrastructure will take time to put in place but once the infrastructure is there, in terms of a good network of highways and roads, people will still make that calculated decision. The benefits we see as an OEM is that India is a huge country with long distances, so there is a clear need to grow domestic air connectivity in tandem.
An enhanced road system also tends to impact those very short air routes which are more typically flown by turboprops. From experience the arrival of a high speed rail network will also impact the short air routes. In contrast, given the geographic size of India the longer routes, whether thin or trunk, will still demand the speed and convenience of air travel.
JB: The very advantage of the E-Jets basically lie in the fact that ‘don’t waste your assets, keep your assets’ in such a manner that for point 1 to point 2 you are fully loaded without compromising on the seat load and so on. Because too much over capacity would be killing after sometime, is it that?
Mark: We believe strongly in rightsizing and offering the right capacity. We feel that in many ways the 70-seat level of the market will grow very fast so there is even a case to say that niche may be outgrown very quickly and that is where we think our 100-seater E-Jet hits the sweet spot. We are already seeing the clear impact of competition on key routes in India where yields are eroding because too much capacity is being offered. The smart decision is to match the balance between demand, capacity and yield. Where those points converge is where you maximise return.
JB: Can E-Jets also be utilised for cargo business? Government is very bullish about that and it’s very close to the heart of Civil Aviation Minister P. Ashok Gajapathi Raju.
Mark: Absolutely, look at how the Indian business market is evolving, the IT industry needs to move high value, lightweight small parts, to be taken by air cargo and parcel services, for example. All the airlines are factoring this into their calculations, and that is another big advantage of the jet over the existing turboprops. The turboprops have limited cargo space, particularly as OEMs try to squeeze in more seats to the detriment of the available space. The cargo bays on these aircraft, which were already restrictive are consequently getting smaller and smaller, so the ability to carry up to two tonnes of cargo on an E-Jet after you have loaded everyone’s checked baggage is a huge selling point. We are finding that many of the airlines are latching on to this idea because even with the most conservative assumptions on space sold and cargo rates you are talking millions of dollars in additional revenue per year on top of just flying your passengers. Many of the Indian airlines are recording increasingly strong ancillary revenues and this often captures the cargo benefit.
JB: There is tough competition among airlines to lower fares as much as possible which may not be low if one buys a ticket in the last moment, they are expensive. What is your perspective on the fare-wars?
Mark: We are great believers in the force of the market, and at the end of the day the market really determines the price point. From an airline perspective we bring, in the E-Jet, a platform which allows them to maximise the yield opportunity by minimising some of the extreme fare dilutions we are witnessing today in the Indian market. In addition, if it is just about the selling of ancillary services on your flight to make that profit margin, it may work in the lower fuel cost environment, but what if fuel goes up again? You very quickly flip to the wrong side of the line and this is where the E-Jets E2 will have a good role to play. If you take a general example throughout Asia, we estimated that by enhancing those ‘Blue Ocean’ markets not properly served, and by passing the major airports and flying direct from point A to point B with a balanced capacity vs demand, there is a premium fare to be achieved of up to 15 per cent to 16 per cent. Not everyone will of course opt to pay this premium, particularly in the highly price sensitive Indian market, but the top yield passenger will always want that direct connectivity for business or tourism. Factor in that barely 1 per cent of the population currently fly and the exceptional growth anticipated in this market will ensure this sector grows.
JB: What exactly does the ‘E’ mean in E-Jets? Mark: Embraer! JB: Don’t tell me...
Mark: But, Jayant, we can also assign many positive characteristics to the E, such as excellent, exceptional, economic and engineered! When you look at the aircraft we build I think they are, arguably, designed and built by one of the best, if not the best, engineering teams in the global aerospace industry today, led by one of its top engineers in Luis Carlos Affonso, our Chief Operating Officer. We are proud to design very good aircraft and if we look, for example, at the first flight of the E190-E2 on May 23 of this year, which recorded 3 hours 20 minutes, reaching 41,000 feet, touching Mach 0.82, and in fly-by-wire standard mode, the landing gear was retracted and we had time for a fly by for the employees. As if this was not ground-breaking enough, within approximately 40 days after this first flight, we then flew across the Ocean to show the aircraft at Farnborough for the Airshow. When you consider this is a radically different aircraft to the E1, namely new wing, new empennage, new engine, upgraded avionics, full fly-by-wire and an award-winning new interior, which shows true aerospace pedigree!
We now have 3 E190-E2s flying in the test programme and the programme is developing very well.
I know it sounds strange when an OEM says we are on track, particularly these days where some of our competitors have shown multiple slippages, but the fact is we are. We have a great track record of delivering our programmes on time. Another important factor for the Indian market is the ability to go from the E1 to E2, where we will have common pilot type rating with just three days ground school transition. So you can have the pilot pool fly the E1 in the morning and the E2 in the afternoon. So when you think of the smooth transition from the incumbent E1 to the E2 combined with the benefits of the E2 fuel savings, we really offer a substantial solution. Another factor is that the E195-E2, in high density layout with slim seats, will accommodate 146 seats. This will almost match the seat mile cost of the Airbusneo—and the Boeing MAX whilst delivering approximately 30 per cent lower trip cost. So where we are going with the argument is simple, flying the right capacity, flying smart capacity. This new concept is now reflecting in our marketing where we will be increasingly highlighting what we call ‘Fleet Smart’, namely flying the right capacity to maximise the return, we think that is smart. So in the existing E1, and the soon to be delivered E2, we believe we have a winning product solution, and whilst we would not argue that we replace the larger narrow bodies or even some of the short hopping niche turboprop routes, we think the E-Jets will have a substantial role to play in the fast developing Indian aviation scene and filling the substantial market opportunity in the 70/130-seat sector.