- The size of the market between 70-130 passengers is adequate to the production rate of the E1 / E2 line (8-10 aircraft/month);
Nean1, first a well written post. Unfortunately, I argue that Embraer doesn't have enough of a backlog. Aerospace production requires a certain rhythm to work:
1. Start of production (1st year)
2. Ramp year (or two or three) to full time production
3. Require a minimum of 3 years at full production rate or pay vendor penalties (there are ways to get around this, but it requires upfront investment where the airframer buys the machine tools and removes them from the vendor).
4. Minimum 1 year and 50% production as part of 'tail' for vendors to ramp down and put staff on other projects.
Basically, take the backlog and divide by 5 and that is the maximum production rate an airframe can ramp to.
Embraer does have 141 of the E1 jets in the backlog, so they have production as vendors ramp up E2 production.
What Embraer doesn't have is a large firm E2 backlog. They have 63 firm orders for the E2-190 and 65 for the E2-195. So basically in process to ramp to 2/month? Embraer should have zero trouble doing that. Unfortunately, Skywest's HUGE order requires scope change to proceed. Now, I could be a pessimist, DALPA is going to set the terms (they are negotiating with DL right now). If DALPA allows heavier RJs, then the E2-175 receives a reprieve, if DALPA does not allow higher MTOW outsourced RJs... the unions at AA and UA will likely follow, and that is over half the potential market.
There was a market for the 717, but it didn't happen. I hope the Embraer E2s break out. Unfortunately, this Farnborough is make or break for the E2.
JetBlue is looking wise, if Embraer doesn't have a good Farnborough, they should be able to extract *outstanding* terms. If Embraer does well at Farnborough, they will still be a tough customer. I'm curious if Spirit has the same strategy?
Aerospace has brutal economics of scale. In general, if you double production, cost per unit drops 13% or so. The minimum production lot is 25 per year. Now, most items are built in multiples (e.g., engine pylons), but it will be tough for Embraer (and Bombardier) if they allow Airbus and Boeing to have such better economics of scale. e.g., Boeing is ramping to 57/month on the 737. Airbus has such an incredible production rate that they were able to start a new highly automated production line in Hamburg which will cut unit costs (although I'm highly impressed with what I've seen with the automation for the E2 production).
I hope you are right and I'm being pessimistic. I simply have concerns on economy of scale and resale market (which impacts financing).
You know nothing John Snow.