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Global fight for the skies

The global aviation market is dominated by four manufacturers, but new companies want to enter the contest

The air transport industry is growing rapidly. The number of passengers is expected to almost double within the next two decades, jumping from the current rate of 4 billion a year to 7.8 billion in 2036 according to projections by the International Air Transport Association (IATA), which involves the largest aviation companies on the planet. More people traveling means more planes in the air, which is great news for the aviation industry.

Boeing estimates that the market will require 41,000 new jet planes over the next 20 years. Demand is expected to be highest in the Asia-Pacific region. Embraer estimates a requirement for 10,500 aircraft of up to 150 seats, including turboprops, by 2036. Considering just jet planes, such as those produced by the Brazilian company, as many as 6,400 units could be sold in the period, worth a total of US$300 billion. It is with an eye on this prize that Boeing and Airbus have made their latest moves on the intricate board of the commercial aviation industry.

Historically, the aviation market has been dominated by two duopolies. On the one hand, American company Boeing, the world leader in aircraft sales, is battling with European manufacturer Airbus in the medium and large jet market, for planes that carry more than 150 passengers. On the other, Embraer and Canadian company Bombardier are rivals in the regional market, which is distinguished by smaller aircraft designed for shorter flights, often between secondary airports. Embraer is the industry leader for aircraft with up to 150 seats, with a 30% share of the market.

More on the possible deal between Boeing and Embraer
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But the landscape has been changed by Airbus’s acquisition of the Bombardier C Series in 2017. Embraer’s main competitor, Bombardier started work on the C Series in 2008 with the aim of retaking leadership in the regional market, having been surpassed by the Brazilian company after it launched the efficient E-Jets family in the early 2000s. The Canadian program encountered several problems, and the first unit only began operating in 2016—just 29 jets have been delivered to date. As a point of comparison, the E-Jets E2 family, Embraer’s newest series, carries 90–146 passengers and reached the market this year, less than five years after the program was launched (see Pesquisa Fapesp issue no. 265).

Analysts explain that aircraft sales negotiations are long and complex. Because airplanes are so expensive—E2 jets cost around US$60 million each, while a Boeing 737 MAX (138 seats) costs roughly US$100 million—airlines use long-term financing deals, usually supported by export credit agencies. Manufacturers with a varied portfolio and aircraft of different sizes have an advantage because they can sell multiple products as part of a package. Broader product lines also mean lower operating, maintenance, and training costs for pilots and airlines.

According to the Embraer Market Outlook 2017 report, the increasing demand for regional jets is greatest in North America (32% of the total) and the Asia-Pacific region (27%). The Chinese market is one of the most likely to grow over the next 20 years. In order to incentivize regional aviation, the Chinese government has encouraged the country’s airlines to invest primarily in airplanes with up to 100 seats, rather than larger aircraft.

It is no coincidence that Embraer has recently announced plans to build a factory in the Asian country. The company already dominates the regional aviation market in China, with almost 80% of the market. According to Embraer, establishing an industrial foothold in the country is reliant on two factors: finding the right conditions for a partnership with a local company, and selling a sufficient number of the new E-Jets E2 family to Chinese customers.

The Brazilian company operated in China for more than 10 years between 2003 and 2016 through a joint venture with Harbin Hafei Aviation Industry—the partnership ended when the Chinese company decided to start their own production line. During that period, the ERJ-145 regional aircraft and Legacy 650 executive jet were both produced in the country. Since 2008, Airbus has had an assembly line building the A320 in Tianjin, the fifth-largest city in China, and in partnership with the Commercial Aircraft Corporation of China (Comac), Boeing is building a plant to produce the 737 MAX in Zhoushan, in the east of the country.

Comac is state-owned and developed the first Chinese commercial aircraft, the 100-seat ARJ21 regional jet, which was launched in 2016. It is currently working on a larger model—the C919 has 160 seats—in an attempt to break the hegemony of the successful A320 and B-737. The ARJ21 program began in 2002, originating from a contract signed with American aerospace company McDonnell Douglas in the 1980s. According to Comac, 435 units of the new regional model have already been ordered by 21 customers.

Other competitors
Chinese manufacturer Comac is one of three companies trying to break the Embraer-Bombardier duopoly in the regional aviation market—the others are Russia’s United Aircraft Corporation (UAC) and Japan’s Mitsubishi Aircraft Corporation. The Russian company’s Sukhoi Superjet 100, which seats 98 passengers, made its first flight in 2008, and its first commercial passenger flight in 2011. Five years later, the model was temporarily grounded by the Russian aeronautical authority because of problems with the fuselage.

The Mitsubishi Regional Jet (MRJ), meanwhile, has faced its own problems. The program was launched 10 years ago, but so far not a single unit has been delivered. Numerous delays in development have led to order cancellations. The Japanese company has designed two models, with capacity for 70 to 90 passengers, and estimates that the first jet will begin operating in mid-2020, seven years behind the original schedule.

Experts say that the jets made by the Chinese and Russians are technologically inferior and are being produced to serve the domestic market in their respective countries. Little is known about the Japanese plane. It is therefore unlikely that any of these three new competitors will threaten Embraer’s dominance.