THE RULE OF 70 TO 110. A Strategy for Right-sizing from Embraer Commercial Jets

Transcription

1 THE RULE OF 70 TO 110 A Strategy for Right-sizing from Embraer Commercial Jets

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3 CONTENTS INTRODUCTION. THE STATE OF THE AIRLINE INDUSTRY. THE RULE OF 70 TO 110. THE ALL-NEW EMBRAER 170/190 FAMILY. CONCLUSION.

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5 FLYING IN THE FACE OF CHALLENGES. Commercial airlines today experience no shortage of challenges. Market dynamics are constantly shifting. Passenger demand fluctuates. And increased competition for fewer passengers is straining once successful business models to their breaking points. A less-than-sunny financial climate is making matters even more difficult. At Embraer, we are working with airlines to help confront and overcome these challenges. We spend countless hours studying historical data, analyzing industry trends, and identifying specific market obstacles in order to develop philosophies and products that help our customers respond to market conditions. During our close work with airline industry leaders, several issues continue to arise. Mainline aircraft with too many seats are increasingly flying smaller demand routes. Meanwhile, regional markets are still expanding, putting pressure on the current breed of regional jets to carry more passengers more frequently. Clearly, passenger demand is trending toward the 70 to 110 seat segment, a range for which an efficient aircraft family didn t exist until now. In other words, the industry is facing an acute equipment gap at the same time a relevant portion of the segment s fleet is approaching the end of its economic operational life. In the following pages, we present evidence that the 70 to 110 seat equipment gap exists, offer a strategy for profiting from the 70 to 110 seat market, and introduce you to the first aircraft family designed from the ground up to help you tap the gap. Full Service Low-Fare Carriers Regional Jets 70 to 110 Seat Jets 70 Years Ago 30 Years Ago 10 Years Ago Today Future

6 THE STATE OF THE AIRLINE INDUSTRY. FOUR CRITICAL ISSUES CONFRONTING TODAY S

7 COMMERCIAL AIRLINES.

8 THE STATE OF THE AIRLINE INDUSTRY. 1 THE FIRST ISSUE: THE GAP BETWEEN CAPACITY AND DEMAND IS GROWING. regional jets have been successful. However, market volumes requiring 70 to 110 seat jets are currently being served inefficiently due to the industry s lack of optimized aircraft. Commercial carriers have a limited number of options to right-size fleets for efficient operation in the 70 to 110 seat category. As we are about to show, neither current mainline aircraft nor regional jets are best suited to serve the emerging 70 to 110 seat market. The difficulty of matching aircraft capacity to market demand is intensified by continually evolving markets. Since no single aircraft perfectly satisfies passenger demand on every flight, every day of the week, throughout the year, maximizing passenger yield and minimizing operating costs for any market can be a delicate balancing act requiring right-sized equipment. Mainline jets with 120-plus seats are effective in serving large-market, highvolume city pairs. And on lower demand routes, 50-seat

9 THE 70 TO 110 SEAT CAPACITY GAP. Labor restrictive agreements (currently under revision), and the absence of a true 70 to 110 seat jet family, create a gap in optimized airline fleets resulting in the deployment of aircraft that are either too big or too small to remain competitive in intermediate-demand markets. Additionally, the gap between regional and narrow-body jets is expected to grow as older-generation 120-seat aircraft near the end of their economic operational lives and must be replaced. For airlines around the world, the following examples show that a capacity gap exists wherever regional aircraft are flying. NORTH AMERICAN REGION A319 B737 MD80 A320 B757 B737 MD80 B757 B737 A319 A320 B757 MD80 B737 B757 A300 B737 MD80 B757 B767 SOUTH AMERICAN REGION EUROPEAN REGION THE 70 TO 110 SEAT GAP DC9 B737 DC9 F100 B737 A319 A319 MD80 MD80 A319 MD80 A320 A320 A320 A320 A321 B757 A321 ASIAN REGION A320 A321 B737 MD80 B Source: BACK SEATING CAPACITY

10 THE STATE OF THE AIRLINE INDUSTRY. 2 THE SECOND ISSUE: SOME OPERATORS USE AIRCRAFT WITH TOO MUCH CAPACITY. Providing competitive market frequency has always been the foundation of successful commercial airline strategy. In this age of evolving markets and aggressive new competitors, schedule frequency is playing a greater role than ever before. Striking the right balance between supply and demand is an age-old industry challenge and one further complicated as airline networks are redefined and regional jet limits. In order to maintain continual growth and develop new opportunities on longer, thinner city pairs or just to sustain competitive frequency many carriers operate large, narrow-body mainline aircraft in markets where seat supply far exceeds passenger demand. Maximizing the use of assets means deploying the right size aircraft for the right market. new market catchment areas reach beyond traditional

11 PERCENTAGE OF TOTAL DEPARTURES 2% 27% of flights depart with loads appropriate for seat aircraft 4% 9% 14% 34% of flights depart with loads appropriate for seat aircraft 17% 17% 13% 8% 7% 4% 2% 3% < >150 Source: US DOT/BACK Aviation Solutions Jan-Sept 2002 PASSENGERS PER DEPARTURE EXCESS CAPACITY HURTS THE BOTTOM LINE. More than half of all US domestic airlines operating narrow-body mainline aircraft have passenger loads better suited for 70 to 110 seat aircraft. Excess capacity translates to wasted seats, higher operating costs, and greater potential for unprofitability. CITY PAIRS % CITY PAIRS WITH FEWER THAN 2 AVERAGE DAILY FREQUENCIES 27% 20% 12% 7% Source: BACK/OAG AVERAGE DAILY FREQUENCY RIGHTSIZING AND FREQUENCY INCREASE. High frequency is one proven strategy to build market share. More than 5,000 markets around the world are now served with fewer than 2 daily flights by aircraft in the 91 to 175 seat category, flying up to 2,000 nm.

12 THE STATE OF THE AIRLINE INDUSTRY. 3 THE THIRD ISSUE: NEW MARKET OPPORTUNITIES ARE PUSHING THE LIMITS OF REGIONAL JETS. Many of today s airlines seek new growth opportunities or look to replace mainline jets with smaller equipment. Satisfying intermediate market demand with 70 to 110 seat aircraft requires higher standards in performance, mission range, and passenger comfort not currently found on today s regional jets. As regional city pair frequencies reach their schedule limits, fully-booked, prime-time 50-seat RJ flights can often spill passengers. With a growing need being pushed to build frequency in the drive to sustain revenue growth and market share. New longer distance missions require a greater focus on cabin comfort and passenger amenities with baggage and cargo capacities similar to those found on mainline jets. Like the large capacity narrow-body jet operators, regional airlines have few equipment options to serve emerging demand in the 70 to 110 seat market segment. to serve new long and thin markets, RJs are increasingly

13 400, , ANNUAL FLIGHTS 200, , ,100 1, ,100 1,500 1,900 2,300 MILES KM Source: OAG SECTOR DISTANCE IN MILES REGIONAL JET STAGE LENGTHS Since their introduction nearly a decade ago, the volume of regional jet frequencies in the domestic USA and European markets have increased steadily with significant growth on short-haul routes. Airlines are also deploying more RJs on longer sectors 1,000 miles and beyond to serve new market opportunities or to replace mainline narrow-body flying. Longer stage lengths will require aircraft to have the airfield performance, range, and cabin comfort characteristics associated with mainline jets. New market applications for aircraft in the 70 to 110 seat category mean the line between regional and mainline jets is blurred.

14 THE STATE OF THE AIRLINE INDUSTRY. 4 THE FOURTH ISSUE: THE COMMERCIAL FLEET IS AGEING. More than one third of the world s in-service fleet of 61 to 120 seat aircraft are more than 20 years old and approaching the end of their economic lives. Oldergeneration aircraft consume more fuel and become increasingly costly to maintain. Fleet planners are challenged with making the right decision for their airline in the existing operating environment while anticipating the airline industry s future. They face a tough choice when replacing ageing aircraft and planning capital expenditures for the coming decades. The decision is made even more complex when evaluating the need for aircraft versatile enough to navigate the uncertain skies currently facing the industry. However, there is some good news. Retiring older aircraft gives operators the opportunity to optimize fleets, right-sizing for profitability in the 70 to 110 seat market.

15 NUMBER OF AIRCRAFT AIRCRAFT OLDER THAN 20 YEARS 34% of total fleet in service Source: BACK/Fleet PC AIRCRAFT AGE (YEARS) FLEET IN SERVICE (61 TO 120 SEAT SEGMENT DEC. 2002) More than one third of the world s jet fleet serving the 61 to 120 seat segment is greater than 20 years old and should be retired in the coming years.

16 THE RULE OF 70 TO 110. MAXIMIZE PROFITS BY RIGHT-SIZING YOUR FLEET

17 IN THE UNTAPPED 70 TO 110 SEAT MARKET.

18 THE RULE OF 70 TO 110. OPTIMIZE FLEET CAPACITY TO OPTIMIZE EFFICIENCY. The logic behind The Rule of 70 to 110 is easy to understand. Put simply, The Rule suggests ideally that a carrier match aircraft capacity to passenger demand precisely. Currently, some flights don t carry enough revenue passengers to cover operating costs. Yet other flights spill demand to competitors because aircraft are too small. Neither case is optimal. But a range of load factors from breakeven to the spill point can generate positive returns. Regularly turning away customers to the competition means losses in revenue and may also strengthen a rival s market hold. Having incrementally larger aircraft retains those passengers and keeps an airline competitive. And more profitable. At Embraer, we continually analyze the industry s performance and interpret trends to understand the future need for aircraft, the markets in which they are deployed, and the economic motivations that drive passenger demand. Today s shifting market dynamics led us to the principle of fleet capacity optimization and The Rule of 70 to 110. Applied correctly, The Rule helps airlines achieve operating efficiency without compromising performance or passenger comfort.

19 AIRCRAFT SEAT CAPACITY Seats 50 Seats 70 Seats 100 Seats 120 Seats THE MECHANICS OF FLEET OPTIMIZATION The spill-point load factor of one aircraft should approximate the break-even load factor of the next largest aircraft. The area between spill point and breakeven is the optimal profit range. When demand exceeds the spill point, a higher capacity aircraft should be utilized.

20 HOW THE RULE ADDRESSES THE ISSUES. For both mainline operators and regional carriers, following The Rule of 70 to 110 can mean matching capacity to demand, increasing frequency, right-sizing fleets, and maintaining existing markets while growing new business. 1 ANSWERING THE FIRST ISSUE: CAPACITY/DEMAND GAP The Rule suggests airlines right-size fleets and match capacity to demand to optimally serve the growing 70 to 110 seat segment. 2 ANSWERING THE SECOND ISSUE: EXCESS CAPACITY The Rule states that by incorporating efficient right-sized aircraft, airlines can increase frequency of 70 to 110 seat flights to capture market share. And while providing customers with more choice, they can keep 120-plus seat aircraft on high-demand routes. 3 ANSWERING THE THIRD ISSUE: EXPANDING REGIONAL The Rule proposes that aircraft in the 70 to 110 seat capacity category, with narrow-body jet type cabin comfort and mission performance, will blur the line between mainline and regional aircraft and optimally serve new market opportunities. 4 ANSWERING THE FOURTH ISSUE: AGEING FLEETS With nearly 700 aircraft reaching the end of their economic lives, airlines can apply The Rule to right-size fleets with new-generation aircraft that are built to last, employ the latest technology, and are specifically designed for the 70 to 110 seat segment.

21 THE RULE OF 70 TO 110. NATURAL GROWTH EVOLUTION High-Load Factor Flights RIGHT-SIZING CAPACITY TO DEMAND Low-Load Factor Flights 50 Seats Seats Seat Jet Seats 37 Seat Jet Seats Seat Jet HOW THE RULE HELPS YOU TAP THE GAP. When equipment is optimized, The Rule allows airlines to grow capacity from the bottom up, right-size fleets from the top down, and match capacity more accurately following it are two different things. No aircraft family has been available to take full advantage of the untapped 70 to 110 seat segment. Until now. to market demand. Of course, knowing The Rule and

22 THE ALL-NEW EMBRAER 170/190 FAMILY. PRESENTING FOUR JET AIRCRAFT DESIGNED FOR

23 THE 70 TO 110 SEAT SEGMENT.

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25 THE ALL-NEW EMBRAER 170/190 FAMILY. THE NEW EMBRAER JET FAMILY. The EMBRAER 170, 175, 190, and 195 are a new-evolution family of aircraft, each engineered from the ground up to be comfortable, efficient, and cost-effective. From the earliest planning stages, our engineers understood the need for a new platform, an airframe created specifically for the 70 to 110 seat segment. The result incorporates new technology on the flight deck and proven design elements in the cabin, making the new airframe both pilot and passenger friendly. The 170/190 family offers high-end performance with spacious comfort only found on much larger mainline aircraft. The result is a remarkable combination of superior airfield performance, impressive range, and low operating costs with the ability to carry customers in a cabin providing more personal and stowage space per passenger than some current main-line equipment. The design philosophy of no compromises is evident in each of the four aircraft that make up our new jet family. Now virtually every mission is possible. Short-range, high-frequency hub and spoke missions. Medium-range flights to complement time-of-day peak and off-peak demand schedules. And new frequencies on long and thin markets to access cities beyond the usual catchment area. The 170/190 family fills the gap perfectly to blur the line between mainline and regional. BUILT FOR THE MISSION.

26 BUSINESS EXPANSION IS NOW WITHIN RANGE. Airlines are continually looking for new ways to grow their businesses while maintaining a strong presence in current markets. But the available portfolio of 70 to 110 seat aircraft makes serving the segment an unappealing strategy. Here, the new 170/190 family proves most beneficial. Now airlines can tap the capacity gap with an entire family of right-sized lengths to complete missions out of reach for many regional jets and below mainline aircraft operating cost. No excess seat capacity, no wasted fuel, no excessive weight-related charges, and no compromises in performance or cabin comfort. With the 170/190 family, operating in the 70 to 110 seat market can make better economic sense. aircraft. The Embraer jets are capable of flying longer stage PAYLOAD X RANGE. Mission versatility a primary objective for the next-generation family of Embraer commercial aircraft. Our 70 to 110 seat jets can easily open new long and thin markets currently beyond the range of traditional RJs. 20,000 18,000 16,000 MAINLINE NARROW-BODY JETS 40,000 35,000 14,000 30,000 PAYLOAD (KG) 12,000 10,000 8,000 6,000 4,000 2,000 EMBRAER 170/190 FAMILY REGIONAL JETS 25,000 20,000 15,000 10, PAYLOAD (LB) ,000 1,500 2,000 2,500 3,000 Source: Embraer RANGE (NM)

27 THE ALL-NEW EMBRAER 170/190 FAMILY. EMBRAER 190 2,200 NM EMBRAER 170 2,000 NM NEW EMBRAER JETS GO THE DISTANCE. With the mission performance, baggage/cargo, and cabin comfort characteristics of long-haul, mainline aircraft, the EMBRAER 170/190 aircraft deliver range that opens up new market opportunities. EMBRAER 190 2,200 NM EMBRAER 170 2,000 NM Range for: LRC, ISA, 85% annual winds, pax at 100 Kg (220 lbs.)

28 THE 170/190 JET FAMILY: FORM FOLLOWS FUNCTION. Without shrinking or stretching an existing platform, our design philosophy allowed us to create the most efficient structural airframe in the 70 to 110 seat category. In fact, we are building the first family of commercial jets on the market actually designed to carry 70 to 110 passengers. The structural design efficiency and the value of payload highest among our established competitors. That translates directly into weight-related cost savings for fuel, landing fees, and air navigation charges. Teamed with streamlined maintenance programs, a high degree of parts commonality among the family, and fast turn-around times, utilization and efficiency increase while unit costs go down. per pound/kilo of operating empty weight per seat are the STRUCTURAL DESIGN EFFICIENCY COMPARISON. Designed as new-generation aircraft, the EMBRAER 170/190 jets have structural design efficiency comparable to that of stretched-to-the-limits versions of smaller regional aircraft, yet significantly less operating empty weight per pound/kg than our competitor s shrunken platform. MAXIMUM PAYLOAD OPERATING EMPTY WEIGHT SDE= MAXIMUM PAYLOAD OPERATING EMPTY WEIGHT kg (lb) kg (lb) EMBRAER 170 CRJ700 8,660 (19,092) 20,940 (46,165) 8,288 (18,272) 19,971 (44,028) EMBRAER 175 CRJ900 9,890 (21,804) 21,810 (48,083) 9,895 (21,815) 21,856 (48,184) 12,720 (28,043) 28,080 (61,906) 13,530 (29,829) 28,970 (63,868) 17% 21% 30% EMBRAER EMBRAER B717 B A318 12,191 (26,877) 30,444 (67,124) 14,379 (31,700) 37,104 (81,800) 14,022 (30,913) 38,978 (85,932) Source: Embraer MAINTENANCE COST COMPARISON. Direct maintenance costs per flight hour for the EMBRAER 170/190 aircraft are by far the lowest among our competitors. DIRECT MAINTENANCE COST % EMBRAER 170 CRJ700 31% EMBRAER 175 CRJ900 EMBRAER % 23% EMBRAER 195 B B A318 (CFM56) FOKKER 100 Source: Embraer

29 LESS DOWNTIME MEANS MORE FLIGHT TIME. Compared to some of our competitor s two-door jets, the EMBRAER 170/190 s two forward and two aft doors allow uncongested, simultaneous servicing. Single-point refueling, easily accessible maintenance compartments, and under-wing engines that can be serviced from the ground all help turn low downtime into higher utilization. SEAT AND TRIP COST COMPARISON. The EMBRAER 170/190 family enjoys substantially lower cash operating seat and trip costs than the competition. CRJ 700 (31") NM SECTOR EMBRAER 170 (31") FOKKER 100 (32") 5 CRJ 900 (31") EMBRAER 190 (32") COC* / SEAT (%) EMBRAER 175 (31") 0 EMBRAER 190 (31") A318 (32") B717 (32") B (32") -5 EMBRAER 195 (32") -10 EMBRAER 195 (31") -15 Source: Embraer European Environment (*) Cash Operating Costs; single-class configuration and seat pitch as stated. COC* / TRIP (%)

30 WELCOME TO THE FAMILY. Maintenance staff, flight crews, and schedule planners will appreciate the flexibility built into our entire 170/190 family. The 170, 175, 190, and 195 offer up to 95% LRU commonality reducing inventories and streamlining procedures so maintenance tasks are even easier. Aircraft with less compatibility make flight crew transition training from one aircraft type to another an expensive process. But with the cross crew qualification of the 170/190 jets, differences training is one of the simplest in the industry. As a result, pilot productivity increases and re-qualification costs decrease as aircraft are added to the fleet. Now aircraft deployment is not limited by dedicated fleet domiciles, and last-minute equipment changes are easily accommodated, saving both LRU COMMONALITY Designed to share parts and operational characteristics, the 170/190 family has a high level of systems commonality, including 100% cockpit commonality and the Fly-by-Wire system. Common Pilot Type Rating High Level of Systems Components Commonality 100% Cockpit Commonality 100% Flying Qualities Commonality with Fly-by-Wire Systems time and money while enhancing the potential for profit.

31 NEW STANDARDS IN COCKPIT TECHNOLOGY. Our new family of Embraer commercial jets introduces standards in mission performance, pilot comfort, and operating economics for aircraft in the 70 to 110 seat category. The use of virtual reality technology throughout the design phase allowed us to achieve outstanding benefits in systems, engineering, and fuselage design while reducing development costs. family are ergonomic and technologically advanced controls. The five 8- x 10-inch liquid crystal displays present information in a clean, simplified arrangement that reduces pilot workload while increasing comfort and performance. And with robust Fly-by-Wire technology and cross crew qualification, this is one family of jets created to carry airlines well into the future whatever the future may bring. Inside the cockpits of every member of the 170/190

32 AIRCRAFT BUILT TO MEET EACH AIRLINE S NEEDS.

33 member of the 170/190 family provides a wider aisle, larger seats, greater stowage capacity, more personal product standards. Or choose a higher density seating configuration to meet new, aggressive competitors head-on. space, and two generous under-floor The 170/190 family s double-bubble fuselage offers wide-ranging options in cabin comfort and versatility. The curvature of the fuselage provides maximum cross-section width and a more vertical sidewall at shoulder level. In turn, each compartments for baggage and revenuegenerating cargo. Four-abreast seating eliminates the undesirable middle seat, facilitating access to overhead bins and making boarding and deplaning easier and faster. The 170/190 family gives airlines a choice in configuration as well. A wide choice of galley arrangements allow for light or high-level catering services. The double-bubble design allows for more checked baggage and added space for revenue-generating cargo. The 170/190 s large cabin volume provides for additional amenities, such as generous standup wardrobes. Full-service galleys and amenities are able to accommodate light or high-level catering. A variety of dual-class options lets airlines carry premium-fare customers in comfort with the mainline Advanced seating choices give you the option between dual-class and alleconomy cabin configurations.

34 BLURRING THE LINE BETWEEN MAINLINE AND REGIONAL. EMBRAER 170 SINGLE CLASS CONFIGURATION INCH PITCH EMBRAER 170 SINGLE CLASS CONFIGURATION INCH PITCH EMBRAER 170 DUAL CLASS CONFIGURATION 6 F/C 36 INCH PITCH/60 Y 32 INCH PITCH With no over-wing exits to restrict configuration on the Embraer 170, airlines have maximum flexibility to operate single-class, dual-class, or higher density seating aircraft. Similar configurations are available for the 175, 190, and 195.

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37 OVERHEAD BIN VOLUME PER SEAT. Measured per seat, the 170/190 aircraft offer up to 28% more stowage volume compared to other aircraft in the same category, and even greater volume per passenger than some larger, narrow-body mainline jets CUBIC FEET CUBIC METERS CRJ CRJ B717 B A seats 70 seats 86 seats 86 seats 98 seats 110 seats 117 seats 120 seats 117 seats 0.00 Source: Embraer Single Class Standard Configuration TOTAL CARGO AND PASSENGER BAGGAGE STOWAGE VOLUME. Under-floor baggage and cargo capacity is maximized with forward and aft compartments. The 170/190 family can accommodate up to 13% more revenuegenerating payload than its nearest competitors. 1, , CUBIC FEET CUBIC METERS CRJ CRJ B717 B A Source: Embraer

38 WITH EMBRAER, DEMAND MEETS ITS MATCH. At Embraer, we have spent more than 33 years designing and manufacturing some of the industry s finest aircraft. Our desire to be the best has helped us become one of the world s leading airplane manufacturers, delivering more than 3,000 aircraft to date. Now we have a new, versatile fleet option for you to consider in the 70 to 110 seat segment. We have created the impressive Embraer 170/190 family a line of jets unlike any aircraft on the market. Our new jets provide an option that has never truly existed. Four aircraft designed precisely for the 70 to 110 seat segment that allow you to match capacity to demand. Increase frequency. Cut operational costs. And maximize profits. By incorporating the 170/190 family, you will have the seat capacity available for any demand level. If you would like more information about the all-new Embraer jet family and how Embraer can assist you in right-sizing your fleet to make the most of the latest market prospects, give us a call. We will gladly give you a thorough presentation of how the 170/190 aircraft family can generate additional revenue by tapping the current gap. Change is in the air. And the uncompromising Embraer 170/190 family can help you take advantage of it.

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40 Embraer Empresa Brasileira de Aeronáutica S.A. Av. Brig. Faria Lima, São José dos Campos SP Brazil Phone: (55 12) Fax: (55 12) Embraer USA 276 S.W. 34th Street Fort Lauderdale, FL U.S.A. Phone: (1 954) Fax: (1 954) Embraer Europe Le Rameau Paris Nord 2 22 avenue des Nations BP Villepinte Roissy CDG Cedex France Phone: (33 1) Fax: (33 1) Embraer Australia Melrose Court Tullamarine, Melbourne Victoria 3043 Australia Phone: (61 3) Fax: (61 3) Embraer Singapore 391B Orchard Road #15-01 Ngee Ann City - Tower B Singapore Phone: (65) Fax: (65) EAMS Embraer Aircraft Maintenance Services 10, Airways Blvd. Nashville, TN U.S.A. Phone : (1 615) Fax: (1 615) ELEB Embraer Liebherr Equipamentos do Brasil S.A. Rua Itabaiana, São José dos Campos SP Brazil Phone: (55 12) Fax: (55 12) Indústria Aeronáutica Neiva S.A. Av. Alcides Cagliari, Botucatu SP Brazil Phone: (55 14) Fax: (55 14) Embraer China 1, Jian Guo Men Wai Avenue Suite 3617 China World Tower I Chaoyang District Beijing People's Republic of China Phone : (86 10) Fax: (86 10)