embraer market outlook 2014

7/21/2019 Embraer Market Outlook 2014

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Market Outlook2014-2033


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A Decade of Change

03

Ten years ago, the first Embraer E-Jet entered revenue service. It was amomentous occasion for the company and an equally important milestone for ourindustry. Since then, more than 1,000 E-Jets have been delivered to airlines onevery continent. Whether they are opening new markets, replacing older aircraft,helping airlines find the right balance of frequency and capacity, or bringingaffordable air travel to first time flyers, E-Jets will continue to offer carriers newopportunities to grow and prosper.

E-Jets are true agents of change. In just one decade, E-Jets have helped establish

the 70 to 130-seat jet segment as a permanent component of commercial aviation,filling the gap between smaller regional jets and larger narrow-body transports.The trends detailed in this market outlook highlight those regions of the worldwhere we expect new demand for 70 to 130-seat aircraft over the next twentyyears.

Change is also coming to emerging markets where personal disposable income isgrowing and a new middle class is fueling demand for air travel. For the first time,the volume of annual airline passenger movements in Asia is forecast to surpassthat of the USA. That shift in demand will, in turn, open more opportunities foraircraft in the 70 to 130-seat jet segment.

I look forward to what the next decade will bring.

Paulo Cesar de Souza e Silva

President & CEO,Commercial Aviation

July 2014


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RPK and GDP Growth Rates

North America

2014-2033 CAGR

RPK: 2.7%

GDP: 2.5%

Latin America

2014-2033 CAGR

RPK: 6.0%

GDP: 3.8%

Africa

2014-2033 CAGR

RPK: 5.3%

GDP: 4.6%

Europe

2014-2033 CAGR

RPK: 3.9%

GDP: 1.9%

China

2014-2033 CAGR

RPK: 6.8%

GDP: 5.5%

Middle East

2014-2033 CAGRRPK: 7.1%

GDP: 3.9%

CIS

2014-2033 CAGR

RPK: 5.2%

GDP: 3.2%

Asia Pacific

2014-2033 CAGR

RPK: 5.4%

GDP: 3.4%

2013 2033

Executive Summary

05

Over the past 40 years, worldwide air transport activity has been characterizedby strong growth rates. Despite ruptures in the system, air travel has proven tobe resilient to external shocks and always returns to its usual growth levels.

The main drivers that will support growth in the demand for air travel are:economic recovery in the USA and Europe; economic strengthening ofemerging markets; a surge in urban middle class purchase power; regulatoryliberalization and competition.

Embraer foresees 4.8% year-over-year revenue passenger kilometer (RPK)growth over the next 20 years. The Middle East will be the fastest-growingregion, with average annual growth of 7.1% followed by China, 6.8%; Latin

America, 6.0%; Asia Pacific, 5.4%; Africa, 5.3%; and the Commonwealth ofIndependent States (CIS), 5.2% over the next two decades. Developedeconomies will grow less due to the maturity of their markets: Europe, 3.9%;and North America, 2.7%. World air transport demand will increase 2.6 times by2033, reaching 13.6 trillion RPKs for all commercial aircraft segments.

By 2033, Asia Pacific and China will be the largest markets, accounting for 40%of world RPKs. Europe and North America will generate 36% of total demand.


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70 to 130-Seat Jet Segment

Turboprops

130 to 210-Seat Jet Segment

7

Executive Summary

06

Embraer foresees world demand for 6,250 new jets in the 70 to 130-seat segmentover the next 20 years, representing a total market value of US$ 300 billion.

By 2033, 44% of the projected deliveries will be added to support market growth andthe remaining 56% to replace ageing equipment.

By 2033, 2,300 70 to 90-seat jets will be delivered worldwide to sustain hub-and-spoke efficiency as those aircraft have the capability to link many lower-densitymarkets to major hubs and to develop regional aviation in emerging countries.

The 90 to 130-seat jet segment provides the opportunity to complement currentnarrow-body operations and to develop new markets with lower risk. Some 3,950

jets in the 90 to 130-seat jet segment will be delivered over the coming 20 years.

Short-haul operation will drive a worldwide demand for 2,050 turboprops with acapacity of 70 seats or more by 2033. Of these, 30% will support market growth and70% will replace ageing aircraft.

For mid and long-haul operations, jet aircraft will continue to be more attractivebecause overall operational efficiency and schedule compatibility with narrow-body

jets.

By 2033, 18,500 narrow-body aircraft will be delivered worldwide, 50% of which willreplace ageing aircraft. Jets at the top end of the capacity spectrum will continue todominate future demand, with an increasing focus on the largest aircraft.


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77

70 to 90-Seat Jets

North

America

1,250

55%

Europe

300

13%

Latin

America

90

4%

Africa

70

3%

Middle

East

70

3%

Asia

Pacific

1406%

CIS

80

3%

China

300

13%

World

2,300

07


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North

America

760

19%

Europe

840

21%

Latin

America

610

15%

Africa

160

4%

Middle

East

180

5%

Asia

Pacific

38010%

CIS

300

8%

China

720

18%

World

3,950

90 to 130-Seat Jets

08


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North

America

2,010

32%

Europe

1,140

18%

Latin

America

700

11%

Africa

230

4%

Middle

East

250

4%

Asia

Pacific

5208%

CIS

380

6%

China

1,020

17%

World

6,250

70 to 130-Seat Jets

09


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North

America

350

17%

Europe

510

25%

Latin

America

260

13%

Africa

110

5%

Middle

East

30

2%

Asia

Pacific

68033%

CIS

70

3%

China

40

2%

World

2,050

Turboprops(70 or More Seats)

10


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North

America

4,410

23%

Europe

3,980

22%

Latin

America

1,420

8%

Africa

410

2%

Middle

East

1,070

6%

Asia

Pacific

3,72020%

CIS

740

4%

China

2,750

15%

World

18,500

Narrow-bodies(130 to 210-Seat Jets)

11


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Global Trends


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Economic Scenario

Emerging Urban Middle Class

Global Trends

Main Trends

United States Robust economic recovery (2013: 1.9%; 2014: 2.5%)

Strong consumer, business, housing and trade fronts

Europe

Eurozone economic recovery (2013: -0.4%; 2014: 1.1%)

Spain, Portugal and Ireland improving

Improved competitivenessin the Eastern countries

Emerging

Markets

Rising imports in USA, the Eurozone and Japan will boost

external demand

Rising disposable income willencourage spending

14

Global GDP is expected to rise 3.2% annually over the next 20 years. Emergingeconomies are projected to grow 5.0% per year while advanced economies willaverage 2.0% in the same period.

The fastest-growing regions will be China with 5.5%; Africa, 4.6%; the Middle East,3.9%; and Latin America, 3.8%. North America and Europe are projected to grow2.5% and 1.9% annually, respectively.

There are potential downside risks to the future economic scenario, including: afaltering U.S. economy resulting from monetary and fiscal tightening; re-intensification of the financial turmoil in the Eurozone; overheating of China'seconomy leading to austerity measures and credit restrictions; unresolvedinfrastructure bottlenecks in emerging markets; and conflicts leading to a majordisruption in oil exports.

More than half of the world's population lives in urban areas. It is expected that halfof the people in Asia Pacific and China will live in urban areas by 2020. Half of all

Africans will live in urban cities by 2035.

A surge in purchasing power of the global urban middle class correlates tosignificant wealth redistribution. Urbanization and a wealthier population will furtherboost global demand for transportation.


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Air Transport Liberalization

Competition

Environment

15

Global Trends

15

In most regions, market access is still concentrated in links between large cities.Liberalization benefits are still to be realized in low and mid-density markets whichare integral in developing connectivity with non-trunk routes.

Fierce competition is leading to business model convergence with a focus on costreduction and additional sources of revenue. In that sense, differentiation ofservices to attract business passengers and expansion into lower density marketsare options for further development.

Air transport growth has been directly linked to low cost carrier expansion. Nearly30% of current worldwide capacity generated by flights up to 2,000 nm are offeredby LCCs, two times higher than the level of 2000. In ASEAN and SAARC, LCCsaccount for nearly 50%, and in Europe 40% of capacity. However, the LCC modelhas been showing some signs of maturity fewer high-density markets are beingadded. LCCs may need to consider new strategies by accessing lower-densitymarkets to sustain growth.

Network carriers are restructuring their businesses to compete with the LCCs inintra-regional point-to-point operations. In the hub-and-spoke system, regionalairlines have been essential in providing network capillarity that global connectivityrequires.

According to IHS Global Insight, rising shale oil production in the United States,softer demand growth from emerging economies and continued strength in non-OPEC supply are factors that will sustain crude oil prices in the US$ 80-100 per bblrange over the next few years.

New aircraft and engine technologies will offer greater fuel efficiency, emissions

mitigation and noise reduction which will facilitate the replacement of old-generationaircraft.

By 2050, the industry has committed to reduce its net carbon footprint to 50% belowthe 2005 level. The use of alternative fuels, carbon-neutral biofuels, specifically, willhelp the aviation industry meet its targets.


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Casablanca, Morocco

Africa

18

Africa is the second most populous continent on earth with an estimated 1 billionpeople in 2013 spread across a vast area with a poor ground infrastructure. Theeconomy is rapidly advancing with wealthier people and more stable governance.The continent has the fastest growing middle class in the world. Domestic demand isincreasing and there is reduced reliance on commodity exports. The socio-economic changes are leading to a projected GDP growth of 4.6% annually over thenext 20 years.

Intra-regional trade and nontraditional industries, such as financial services andtourism, are also growing rapidly. Air transport connectivity is critical for Africangrowth and development. Economic expansion and regional integration will be themain drivers of air transport demand which is estimated to grow 5.3% per year by2033.

African air carriers have not taken full advantage of liberalization within the continentwhich has led to foreign airlines increasing their market presence. Local carriersneed improved network connectivity in order to attract more passengers andstimulate intra-regional integration.

Africa's air travel demand profile is comprised mainly of low and mid-densitymarkets. Some 93% of city pairs have traffic volumes of up to 300 daily passengers.Nearly 55% of intra-regional markets do not have direct flights and around 65% of allnon-stop markets within the region are served with fewer than one daily frequency.

Despite historical traffic growth, the number of markets served has decreased.Traffic is concentrated among the largest cities. African airlines provided directservices in some 900 markets in 2000. They now link fewer than 800. During the

same period, the average aircraft size increased from 101 to 118 seats.

Economy

Real GDP: 4.6%

Fleet2013: 600

2033: 980

New Deliveries750

Air Transport DemandRPK: 5.3%

Chart 1Africa Market Profile

64%

24%

12%

< 1 1-2 > 3

Source: Sabre (2013)

Daily Frequency

93%

7%

< 300 > 300

Market Density (PDEW)

Growth: 2014-2033 CAGR


Aircraft up to 200 seats


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-

10

20

30

40

50

60

60 70 80 90 100 110 120 130 140 150 > 150

Flights

(000)

Passengers per Departure

Chart 2

Passengers per Departure (130 to 180-Seat Jets)

Casablanca, Morocco

205,000 Flights

(75% of total)

Source: Sabre (2013, up to 2,000 nm)

Africa

19

Although the majority of intra-regional markets are low and mid-density, the currentfleet in service is comprised of large capacity aircraft. Around 65% of the aircraft inthe single-aisle jet fleet has more than 130 seats which creates an imbalancebetween aircraft capacity and market demand. Nearly 200,000 intra-Africa flightswith 130 to 180-seat jets (75% of the total) depart to African destinations with anaverage of fewer than 120 passengers. The mismatch between capacity anddemand represents an opportunity for 70 to 130-seat jet aircraft to address thenetwork deficiency. With right-sized aircraft, such as the E-Jets family, Africancarriers would be able to offer a better combination of capacity and frequency in lowand mid-density markets.

Airlines on the continent have recognized the benefits of replacing ageing fleets with

new-technology aircraft. The share of new aircraft added to their fleets has morethan doubled in the last five years (around 30% of all deliveries). Further opportunitylies in replacement of the over 170 jet aircraft with fewer than 130 seats 80% ofthe current fleet in service that is older than 10 years (Ascend data).


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Projected New Deliveries Fleet in Service

Seat Capacity Segment 2014 -2033 2013 2033

Jet 70-90 70 40 70

Jet 90-130 160 70 180

Jet 70-130 230 110 250

TP 70+ 110 80 150

Jet 130-210 410 290 500

Africa

Casablanca, Morocco

20

70 to 130-Seat JetsBy 2033, 230 new aircraft will be delivered. The 70 to 130-seat jet fleet will increasefrom 110 units in 2013 to 250 by 2033. 57% of these units will support growth and43% will replace older-generation aircraft (including 50-seat jets).

Turboprops (70 or More Seats)Some 110 new turboprops will be delivered. The in-service turboprop fleet isprojected to increase from 80 to 150 aircraft by 2033. 36% will support marketgrowth and 64% will replace old aircraft (including 30 to 50-seat turboprops).

Narrow-bodies (130 to 210-Seat Jets)In this segment, 410 new aircraft will be delivered: 49% to replace old aircraft and51% to sustain growth. The narrow-body commercial jet fleet will grow from 290 to500 aircraft by 2033.


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Asia Pacific

Tokyo, Japan

21

The economic outlook in Asia Pacific remains robust over the long term, anchoredby the steady rise in domestic demand, and will contribute to the regions projectedannual GDP growth of 3.4% over the next 20 years.

Changing demographic patterns led by a rapid urbanization will further increasehousehold incomes, discretionary spending and the propensity to travel. A positiveeconomic outlook and intra-regional liberalization will drive Asia Pacific air transportdemand to increase 5.4% annually by 2033.

As the region becomes more liberalized and trunk routes mature, airlines will befurther encouraged to look to secondary markets as the next frontier of expansion.Those city pairs will require 70 to 130-seat aircraft to sustain carrier growth.

Asia Pacific intra-regional flying is comprised mostly of low and mid-densitymarkets. Some 72% of city pairs have volumes of up to 300 daily passengers. Incontrast, around 90% of single-aisle jets are configured with more than 130 seats.

Additionally, there is an order backlog of more than 2,000 narrow-body aircraft forscheduled airlines, 92% of all single-aisle jets on order. There is a mismatchbetween aircraft capacity and market demand, a sizeable number of 130 to 180-seat

jet flights depart with fewer than 120 passengers. The imbalance between marketdensity and aircraft size limits an airline's ability to add frequency and improveservice quality in existing markets.

Some 60% of intra-regional markets have no nonstop flights and only half of all citypairs have same-day return travel schedules.

Economy

Real GDP: 3.4%

Fleet2013: 2,480

2033: 5,420

New Deliveries4,920


Chart 3

Asia Pacific Market Profile

50%

26%

24%

< 1 1-2 > 3


Daily Frequency

72%

28%

< 300 > 300






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-

100

200

300

400

500

600

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

NumberofMarkets

Chart 4LCC Markets Served

CAGR 2004-2010:33%

CAGR 2011-2013:10%

Source: Sabre

Asia Pacific

Tokyo, Japan

22

The LCC model in Asia Pacific is showing some signs of saturation a slower paceof year-over-year expansion and a higher rate of service cancellations in less densemarkets. In some cases, demand stimulation has not been sufficient to sustain high-capacity narrow-body operations. In 2004, LCCs opened 13 markets for eachmarket they cancelled. In 2013, that ratio decreased to only two markets opened forevery one cancelled. Some 80% of all markets cancelled by LCCs in 2013 had trafficvolumes of up to 300 daily passengers each way. In order to maintain their growthrates, LCCs could consider aircraft with 90 to 130-seat capacity. Those jets couldeffectively allow the carriers to access a wider range of markets, not only thehighest-density.

The region's existing fleet is ageing. According to Ascend, around 120 jets with up to130 seats (38% of the total) are now older than 10 years and will need to be replacedover the next 20 years. Australia, Indonesia and Japan have a sizeable fleet ofFokker 100s, Boeing 717s and B737-500s that will be retired during the forecastperiod.

In addition, around 45% of intra-regional turboprop capacity, measured by availableseat-kilometers, is deployed on routes longer than 250 nm. Those city pairs areoften better-suited to jet operations that increase overall network productivity andhave greater passenger appeal.


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Asia Pacific

Tokyo, Japan

23


Jet 70-90 140 40 150

Jet 90-130 380 130 400

Jet 70-130 520 170 550

TP 70+ 680 290 750

Jet 130-210 3,720 1,750 3,950



Narrow-bodies (130 to 210-Seat Jets)In this segment, 3,720 new aircraft will be delivered: 41% to replace old aircraft and59% to sustain growth. The narrow-body commercial jet fleet will grow from 1,750 to3,950 aircraft by 2033.



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China

Shanghai, China

24

The long-term outlook for China remains strong as continued gains in productivityand investment will sustain a 5.5% annual economic growth over the next 20 years.China will become the largest economy in 2014 (in Purchasing Power Parity),according to the World Bank.

Economic growth, urbanization and a noticeable rise in the country's middle classare the pillars that will make China one of the fastest-growing markets in the world.

Air transport demand will grow 6.8% over the next 20 years.

A growing economy and stronger demand for air transport will generate a need toimprove air services. Although China's east coast markets account for 70% ofpassenger movements in the region, their share is becoming smaller according tothe CAAC. China's domestic expansion will see more focus on western cities whereinfrastructure is readily available and economic output is growing. China's "GoWest" strategy, designed to develop the economies of the west, remains thegovernment's top priority.

Regional aviation will not be limited to regional airports. The development andexpansion of large gateways hubs will also spur regional aviation growth as thesehubs will require feeder routes to be linked to them.

Government policies, through allocation of slots, control of terminals, and lower feeswill spur LCC expansion from its current limited penetration. In addition, 25 of 30provinces have start-up airlines in development that will likely benefit fromgovernment policies.

There are also government initiatives to reduce taxation on regional aircraft since

most of the nation's routes are low and mid-density. Some 80% of markets have upto 300 daily passengers yet around 55% of all markets do not offer options for sameday return travel.

Economy

Real GDP: 5.5%

Fleet2013: 1,860

2033: 3,870

New Deliveries3,810


Chart 5

China Market Profile

< 1 1-2 > 3

Source: Innovata, Airport-IS (2013)

Daily Frequency

< 300 > 300


55%

26%

19%

80%

20%





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7%

22%

38%

93%

78%

62%

China Europe USA

ShareofFleetinService(%)

Narrow-bodies

Up to 130-Seat Jets

Source: Ascend (2013)

Chart 6

Fleet Composition

China

Shanghai, China

25

China's civil aircraft fleet is almost exclusively comprised of narrow-bodies whichare not optimal for serving low and mid-density markets. Although the geography isvast and there is a growing need for greater air transport connectivity, the country'sregional fleet accounts for only 7% of all single-aisle jets in service. In the maturemarkets of the USA and Europe, up to 130-seat jets make up 38% and 22% of thesingle-aisle jet fleets, respectively.

The importance of regional aviation to China's socio-economic development isrecognized by the Chinese government. One of its top priorities is to encourageairlines to optimize the efficiency of their fleets by increasing the number of regional

jets. This is consistent with the central government's drive to reduce regulation asthe Chinese market evolves which, in turn, should further stimulate airlines to reviewtheir fleets.


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China

Shanghai, China

26


Jet 70-90 300 10 300

Jet 90-130 720 80 720

Jet 70-130 1,020 90 1,020

TP 70+ 40 0 40

Jet 130-210 2,750 1,700 2,790

70 to 130-Seat JetsBy 2033, 1,020 new aircraft will be delivered. The 70 to 130-seat jet fleet willincrease from 90 units in 2013 to 1,020 by 2033. 87% of these units will supportgrowth and 13% will replace older-generation aircraft (including 50-seat jets).

Turboprops (70 or More Seats)Some 40 new turboprops will be delivered. The in-service turboprop fleet isprojected to increase from 0 to 40 aircraft by 2033. 75% will support market growthand 25% will replace old aircraft (including 30 to 50-seat turboprops).

Narrow-bodies (130 to 210-Seat Jets)In this segment, 2,750 new aircraft will be delivered: 60% to replace old aircraft and40% to sustain growth. The narrow-body commercial jet fleet will grow from 1,700to 2,790 aircraft by 2033.



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Moscow, Russia

27

CIS

The CIS region is forecast to follow the world average economic growth rate of 3.2%over the next 20 years. This is mainly due to resilience of consumption from a stronglabor market, rapid wage growth and moderate inflation. Although solid, economicgrowth will be well below the 5.1% average between 2000-2012 because of weakerdemand for commodities resulting from the economic slowdown.

Oil and gas revenues accounted for 52% of federal budget revenues and over 70%of total exports in 2013. Economic growth continues to be driven by energy exportsalthough the region is seeking to diversify its economy, in which aviation will play akey role.

Embraer projects that air transport demand in the CIS, measured by RPKs, willincrease 5.2% annually over the coming 20 years. A growing middle class withgreater consumer purchasing power combined with liberalization of air transport willbe the main contributors to regional development and integration.

The profile of the current CIS fleet in service is dominated by old technology andinefficient aircraft which suggests strong demand for equipment replacement. Theregion is home to one of the oldest fleets in the world. The average age of the single-aisle jet fleet is 13 years with 470 units 65% of the fleet in service older than 10years. Some models need urgent replacement, particularly aircraft types withsmaller seating capacity. The average age of jets with up to 130 seats is now over 16years with 82% of the fleet in service 225 units older than 10 years.

Economy

Real GDP: 3.2%

Fleet2013: 920

2033: 1,420

New Deliveries1,190


15%25%

31%

49%

54%

26%

Up to 130-Seat Jets Narrow-bodies

ShareofFleetinService(%)

15+ years

5-15 years

0-5 years

Chart 7

Fleet Age Profile

Source: Ascend (2013)





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-

20

40

60

80

100

120

60 70 80 90 100 110 120 130 140 150 > 150

Flights

(000)


240,000 Flights

(72% of total)


Chart 8

Passengers per Departure (130-180 Seat Jets)

CIS

Moscow, Russia

28

The CIS has plenty of room to improve operational efficiency and profitability withinthe air transport sector since the region is mostly comprised of low and mid-densitymarkets. Some 91% of intra-regional markets have volumes of up to 300 dailypassengers, yet large-capacity jets dominate carrier fleets. Approximately 70% ofin-service and on-order single-aisle jets 720 aircraft are narrow-bodies. Notsurprisingly, around 60% of intra-regional markets have no nonstop flights. Seventy-five percent of all non-stop city pairs markets are served with fewer than one dailyflight. Weak connectivity is directly related to market density and the high capacityprofile of the fleet.

The discrepancy between market density and optimal aircraft size limits an airline'sability to find the most profitable combination of capacity and frequency to serve lowand mid-density markets. In 2013, nearly 240,000 intra-CIS flights flown by 130 to180-seat jets (72% of all movements) departed, on average, with fewer than 120passengers. Those loads suggest that the flights could have been more profitablyflown with 70 to 130-seat aircraft.


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CIS

Moscow, Russia

29


Jet 70-90 80 30 90

Jet 90-130 300 160 320

Jet 70-130 380 190 410

TP 70+ 70 30 90

Jet 130-210 740 460 770



Narrow-bodies (130 to 210-Seat Jets)In this segment, 740 new aircraft will be delivered: 58% to replace old aircraft and42% to sustain growth. The narrow-body commercial jet fleet will grow from 460 to770 aircraft by 2033.



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3131

Paris, France

Europe

30

After a prolonged recession, the Eurozone economy is growing again but fullrecovery is not expected before 2016. Western Europe will gradually recover withcountries in the north leading those in the south. Eastern Europe will benefit from animproved Eurozone economy. In this scenario, the region's economy is projected togrow 1.9% annually over the next 20 years.

European airlines are still vulnerable due to some weak home markets in theEurozone however improving fundamentals and growth in air travel indicate theregion is recovering.

In air transport, restructuring efforts are continuing. Network carriers have beenimpacted by LCC expansion within Europe and by Middle Eastern carrierscompeting for long-haul international traffic.

Hub efficiency is critically important to network carriers that rely on connecting trafficand 70 to 130-seat jet aircraft play a key role feeding those hubs. E-Jets, forexample, provide global and intra-region connectivity with capacity that is conduciveto regular frequencies at Europe's most important hubs. Around 60% of E-Jetpassengers travelling to/from Paris CDG, Amsterdam, Frankfurt and Munich areconnecting.

In addition to hub feeding, there are opportunities to address over capacity in intra-European markets served by 130 to 180-seat jets by network carriers. In 2013,nearly 1.2 million flights (76% of all movements) departed, on average, with fewerthan 120 passengers. Flights with those loads are best suited for aircraft with fewerthan 130 seats.

Economy

Real GDP: 1.9%

Fleet2013: 3,500

2033: 6,570

New Deliveries5,630


Chart 9

-

50

100

150

200

250

300

60 70 80 90 100 110 120 130 140 150 > 150

Flights

(000)


1.2 mi Flights(76% of total)



(130-180 Seat Jets, Network Carriers Only)





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Source: Sabre

Chart 10

LCC Markets Served

0

500

1,000

1,500

2,000

2,500

3,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

NumberofMarkets

CAGR 2004-2010:32%

CAGR 2011-2013:9%

3131

Europe

Paris, France

31

Countries in Western Europe provide a broader range of air travel servicescompared to Eastern European countries where air transport is less mature. Thisdiscrepancy is changing. Poland, Bulgaria, Montenegro, Lithuania and Estonia arediscovering the potential of 70 to 130-seat jet aircraft to build domestic and intra-regional network connectivity. E-Jets are linking the largest cities in those countrieswith small and medium communities and also connecting them with westerncountries.

Sustained LCC expansion in Europe is weakening. The LCC model grewconsiderably in 2010 but it has shown signs of maturity since then. Traffic stimulationby LCCs in some new markets has not been enough to justify operation of highcapacity narrow-body jets. In 2007, LCCs opened 9.5 markets for each market theycancelled. Half of all markets opened were mid-density (50-300 daily passengers).In 2013, LCCs opened only 1.5 markets for each market cancelled. Some 85% of allmarkets cancelled were low-density (10-50 daily passengers). Smaller 90 to 130-seat aircraft could provide sustainable growth for LCCs in low and mid-densitymarkets and in off-peak hours.

In Europe, nearly 320 jet aircraft with up to 130 seats are older than 10 years (48% ofthe fleet in service). Western Europe has the majority of the region's ageing aircraftthat will need to be replaced in the next 20 years.


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Europe

3131

Paris, France

32


Jet 70-90 300 230 320

Jet 90-130 840 350 880

Jet 70-130 1,140 580 1,200

TP 70+ 510 230 540

Jet 130-210 3,980 2,380 4,800



Turboprops (70 Seats or More)Some 510 new turboprops will be delivered. The in-service turboprop fleet isprojected to increase from 230 to 540 aircraft by 2033. 25% will support marketgrowth and 75% will replace old aircraft (including 30 to 50-seat turboprops).



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Latin America

Rio de Janeiro, Brazil

33

The region will report solid economic annual growth of 3.8% over the next 20 yearsbased on a favorable external environment, political and macroeconomic stability,and more equitable income distribution. Per capita GDP will increase by 2.9%annually from US$ 9,050 to US$ 15,960 in the next two decades.

While China's top ten cities contribute less than 25% of the nation's GDP, the tenlargest Latin American cities generate more than 40% of the region's GDP. Thatgeographical concentration is changing. According to the McKinsey Global Institute,65% of Latin America's economic growth will come from small and middleweightcities by 2025. That in turn, will lead to greater regional integration and air travelexpansion. Consequently, investment in infrastructure is key to continued growth ofthe airline industry. Among other investments, the Brazilian government announceda plan to expand regional aviation with the goal of having 95% of the populationliving within a 100 km range of an airport.

There has been considerable consolidation among Latin American airlines but moreis expected. Fleet optimization is key. As secondary markets are poised to lead thedemand for new air travel, carriers will continue to acquire newer and more efficientaircraft to serve low and mid-density markets and to maintain network connectivity.

The annual growth in demand for air transport has been robust over the last fiveyears at 7.0%. The trend is expected to continue over the next 20 years, when themarket will grow 6.0% annually.

Economic growth and investments are leading to regional integration. While in theUSA there are 1,890 regional aircraft serving 1,780 markets, Brazil (with its similargeographic area), has only 180 regional aircraft serving 350 markets. Because it is a

highly developed country, USA GDP per capita will still be three times higher thanBrazil's in 2033 yet there is tremendous potential for growth in Latin America.Countries with the largest air travel markets, namely Brazil, Mexico, Chile, Peru andColombia, have an average of 0.36 enplanements per capita, 5.6 times fewer thanthe USA.

Economy

Real GDP: 3.8%

Fleet2013: 1,390

2033: 2,840

New Deliveries2,380


Source: OAG (2013; Brazil: 30-130 seats; USA: 30-90 seats)

Chart 11

Regional Air Transport Brazil x USA





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Source: Ascend, OAG

Chart 12

Market Penetration

320

739790

712

Fleet in ServiceDecember 2013

Markets Opened2008-2013

Up to 130-Seat Jets

Narrow-bodies

Latin America


34

The profile of the Latin America jet fleet is skewed to single-aisle transports.Seventy percent of the fleet in service (790 units) is composed of narrow-body jets.Moreover, 94% of the current order backlog in the region (510 units) is for aircraftwith more than 130 seats. Even though jet aircraft up to 130 seats represent nearly40% of the narrow-body fleet in service, the number of new markets opened byboth categories of aircraft since 2008 is the same.

Despite the dominance of larger aircraft, Latin America is mostly composed of lowand mid-density markets 80% have traffic volumes up to 300 daily passengers.This imbalance of capacity and demand can create inefficiency. Large jets tend to bedeployed on routes where there is sufficient demand to justify the capacity yet thesame aircraft cannot offer frequent service in secondary markets. In 2013, over 50%of all intra-regional markets has one or fewer daily flights using narrow-body jets.Carriers responded to the capacity/demand mismatch and financial losses byreducing frequency and withdrawing from markets. This adversely affected networkconnectivity and exposed them to new competitors.

Aside from the development of low and mid-density markets, the opportunity to add

more frequencies in existing markets is limited because of the high number of large-capacity jets in carrier fleets. An efficient regional integration requires both smalleraircraft and a fleet that is flexible to serve a range of missions. Jets in the 70 to 130-seat segment can effectively improve connectivity in low and mid-density marketsand complement narrow-body flights during off-peak hours on trunk routes. Overall,the aircraft serve to improve operating efficiency and profitability.


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Latin America


35


Jet 70-90 90 30 100

Jet 90-130 610 250 650

Jet 70-130 700 280 750

TP 70+ 260 90 260

Jet 130-210 1,420 820 1,700




Narrow-bodies (130 to 210-Seat Jets)In this segment, 1,420 new aircraft will be delivered: 38% to replace old aircraft and62% to sustain growth. The narrow-body commercial jet fleet will grow from 820 to1,700 aircraft by 2033.


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Middle East

Dubai, United Arab Emirates

36

The Middle East is a region of contrasts. Some countries have fast growing GDPwhile others are distressed with continuing geopolitical conflict and social unrest.Several countries, especially in the Gulf region, are strengthening their tourismindustries to diversify their economies. GDP for the region is projected to grow 3.9%annually over the next 20 years.

The efforts have had a domino effect by bringing visitors to the region, boostingbusiness and fostering air transport. The unique geographic position allowedcarriers to build global networks via the efficient transfer of passengers at their hubs.The remarkable 11.4% traffic growth in 2013, according to IATA, identified the regionas one of the fastest-growing markets in the world, a trend that is expected tocontinue. Embraer forecasts 7.1% annual RPK growth for the next 20 years.

Middle Eastern intra-regional air travel markets are most of low and mid-densitydemand. Some 84% have volumes of up to 300 passengers daily. With a strong andefficient regional network, carriers will be able to keep growing their intercontinentaltraffic profitably.

The Middle East fleet is mostly comprised of large-capacity aircraft. Narrow andwide-bodies account for 87% of the current fleet in service. Given the highproportion of aircraft with more than 130 seats, it is not surprising that nearly 60% ofall non-stop intra-regional markets within the region are served with fewer than onedaily frequency.

Economy

Real GDP: 3.9%

Fleet2013: 510

2033: 1,250

New Deliveries1,350


Chart 13Middle East Market Profile

57%24%

19%

< 1 1-2 > 3

Daily Frequency

84%

16%

< 300 > 300







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2000 2013

Source: OAG

Chart 14

Middle East Intra-Regional Network

Middle East


37

Up to 130-Seat Jets

An efficient traffic feed system is essential to serve local and connecting passengersat global hubs. There is still room to improve links between Middle Eastern cities.

Despite the strong traffic growth, the number of markets served in the region hasbeen stable over the last few years. In 2009, airlines in the Middle East served 580intra-regional markets compared to 600 in 2013. During those four years, 470aircraft were delivered to carriers in the region. More than 90% of those deliverieswere for aircraft with more than 150 seats. Consequently, the average aircraft sizerose from 187 to 195 seats, limiting airlines' ability to expand within the region.

Available seat-kilometers for intra-regional 70 to 130-seat jet operations increased10% annually in the last five years. Aircraft in that capacity category have beencrucial in improving connectivity with more flights for local traffic and more optionsfor intercontinental connections at hubs.

In 2013, half of all intra-regional flights operated by 130 to 180-seat jets (220,000departures) had passenger loads better suited for aircraft with fewer than 130 seats.

The mismatch between aircraft capacity and market demand creates an opportunityfor 70 to 130-seat jets to capacity utilization. The continued imbalance limits anairline's ability to open new markets and add frequencies in current markets.


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Middle East


38


Jet 70-90 70 40 70

Jet 90-130 180 60 180

Jet 70-130 250 10 250

TP 70+ 30 10 30

Jet 130-210 1,070 390 970




Narrow-bodies (130 to 210-Seat Jets)In this segment, 1,070 new aircraft will be delivered: 46% to replace old aircraft and54% to sustain growth. The narrow-body commercial jet fleet will grow from 390 to970 aircraft by 2033.


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North America

New York, United States

39

The North American economy is picking up. The region's economic outlook hasimproved with signs of stronger job growth, gains in personal income and animproving housing market. These will contribute to GDP growth of 2.5% annuallyover the next 20 years.

As the most mature market worldwide, air transport demand presents a RPK/GDPratio close to one. Embraer expects North American demand for air transport to grow2.7% per year until 2033.

Declining yields and increased costs led the industry through a series ofrestructuring efforts in the past decade. Aiming for greater efficiency, the USA airlineindustry consolidated around four large carrier groups that now account for morethan 85% of offered capacity. Consolidation is allowing airlines to manage capacityby reducing redundancies and enhancing synergies which, in turn, translates intocost reductions, improved pricing power and revised passenger demand throughmain hubs.

This trend is driving hub-feeder services toward the use of larger aircraft. Jetproductivity has been essential to sustain efficient network connectivity since 70%of regional jet flights are longer than 500 km. Some 600 50-seat jets will be replacedby 76-seat jets in the short term and the remaining 450 units later this decade andearly into the next one. Additionally, there are 600 J80s (70/76-seat jets) in servicewith an average age of 7 years that will require replacement in the second decade ofthe forecast.

Over the coming years, there will be some relief to the expected shortage of pilots asregional airlines replace their 50-seat jets with a fewer number of 76-seat jets.

Economy

Real GDP: 2.5%

Fleet2013: 5,710

2033: 7,280

New Deliveries6,770





Chart 15

Retirement Profile

Source: Ascend, Embraer

0

100

200

300

400

500

600

2014-2018 2019-2023 2024-2028 2029-2033

NumberofAircraft

J50 J80

Regional Jets


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-

200

400

600

800

1,000

1,200

60 70 80 90 100 110 120 130 140 150 > 150

Flights

(000)


2.4 mi Flights

(68% of total)


Chart 16

North America


40


(130-180 Seat Jets, Network Carriers Only)

Regional carriers also play an important role in the capacity management of existingnarrow-body mainline operations. Shuttle business markets, like Boston-LaGuardiaand San Francisco-Los Angeles, are the perfect match for the 70 to 90-seatsegment that combines the comfort of a mainline aircraft with better economics than50-seat jets.

Better seat inventory control allows a continuous search for superior yields andefficiency. But there is still room for improvement. Some 68% of network carrierintra-regional narrow-body flights depart with fewer than 120 passengers. Thoseloads are more appropriate for 90 to 130-seat jet aircraft. Additionally, airlines cancomplement prime-time narrow-body flights with jets up to 130 seats in non-peakhours to match aircraft capacity to normal variations in demand during the day.

The region will also require new aircraft deliveries in the 90 to 130-seat jet segmentto replace the current ageing fleet. Approximately 140 aircraft are older than 10years and will need to be replaced in the next 20 years.


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North America


41


Jet 70-90 1,250 650 1,280

Jet 90-130 760 300 770

Jet 70-130 2,010 950 2,050

TP 70+ 350 150 360

Jet 130-210 4,410 3,230 4,850



Turboprops (70 or More Seats)Some 350 new turboprops will be delivered. The in-service turboprop fleet isprojected to increase from 150 to 360 aircraft by 2033. All new deliveries will replaceold aircraft (including 30 to 50-seat turboprops).



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Definitions

Definitions


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Definitions

70+ Seat Turboprops 70 to 90-Seat Jets

ATR-72

Q400

Ilyushin Il-114

BAe ATP

EMBRAER 170, 175

CRJ700, 900

Antonov An-148

TU-134

BAe 146-100, -200,

AVRO-RJ70, -RJ85Fokker F28, F70

DC9-10, -20

EMBRAER 175-E2

ARJ-21

Mitsubishi MRJ90

90 to 130-Seat Jets 130 to 210-Seat Jets

EMBRAER 190, 195

CRJ1000

Superjet 100

A318

B737-600

Fokker F100

BAe 146-300, AVRO-RJ100

DC9-30, -40

B717, 727-100, 737 -100, -200, -500

MD87

YAK-42, BAC-111

EMBRAER 190-E2, 195-E2

CS100

A319, A320, A321

B737-700, -800, -900

B707, 757, 727-200, 737 -300,

-400

DC9-50

MD-80, -81, -82, -83, -88, -90

Tupolev TU-154, -204

Ilyushin IL-62

A320neo Family

B737 MAX FamilyCS300

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Regional Definitions

Sources

Global Insight

The Economist

World Bank

OECD, McKinsey Global Institute

ICAO, IATA, A4A, CAAs

Eurocontrol

Ascend

Sabre

Airport-IS

OAG

Innovata

Embraer Market Intelligence

Airlines

North America (USA and Canada)

Latin America and the Caribbean (includes Mexico)

Europe (includes Israel and Turkey)

Russia/CIS

Africa (excludes Egypt)

Middle East (includes Egypt)

Asia Pacific

China (includes Hong Kong, Macau and Mongolia)

45

Definitions

45


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Contact Information

We welcome your feedback and comments to:

[email protected]

The Market Outlook Commercial Aircraft Forecast (10th Edition)

is also available online at:

www.embraercommercialaviation.com

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embraer market outlook 2014

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