Market Outlook

Transcription

1 Market Outlook

2 executive summary regional overview market forecast definitions a look forward trends and analysis by the numbers Market Outlook

3 What goes down must, eventually, come back up. Paulo Cesar Executive Vice President, Commercial 2

4 The reverse of the old saying is particularly true for commercial aviation, an industry characterized by irregular cycles of demand, profitability and the timing of new aircraft orders. Although it can be difficult to predict the magnitude and duration of each cycle, traffic volumes always recover and grow. A strengthening world economy needs a vibrant air transport network to satisfy the demand for more aircraft seats and cargo capacity. Since the prosperity of the airline industry correlates closely to GDP, several world regions are expected to lead the return to health. Already, we re seeing some remarkable evidence of that strength. In 2009, the number of intra-asia Pacific/China air travelers surpassed those of North America and became the world s largest market. Growth is also predicted to be strong in emerging markets where regional aviation will provide greater connectivity. Our twenty-year market outlook suggests order prospects are strong at the top end of the 30 to 120-seat aircraft capacity segment. Nearly half of the predicted volume of new aircraft will be needed to satisfy expected traffic growth and address rightsizing opportunities in established markets. The other half will replace the world s ageing fleet with more efficient, environmentally-friendly aircraft. We are continually studying new technologies, including research with renewable fuels, to ensure our products comply with the strictest noise and emissions standards. Companies, like people, often emerge from economic downturns with renewed perspectives. I believe airlines in countries that never had jet aircraft with fewer than 120 seats have a unique opportunity to re-examine their approach to capacity and seize the untapped potential of that category. As many of our more than 50 E-Jets customers can attest, their fleet decision years ago helped them weather today s economic turmoil. What goes down eventually comes back up. Paulo Cesar Executive Vice President, Commercial 3

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6 executive summary a look forward 5

7 Executive Summary Embraer s twenty-year forecast is determined by a combination of global economic, political, social, technological and economic forces. Economic Forces Emerging nations have been major drivers of the global economic recovery and traditionally strong countries like the USA and those in Western Europe are improving at much slower rates. This is a signal of a shift in the balance of global economic power following the worst post-war financial crisis in history. Within the new global landscape, the GDP of China is rivaling that of Japan and is destined to become the second largest world economy in Top 5 World Economies Nominal GDP (US$) Rank USA USA China 2 Japan China USA 3 China Japan India 4 Germany Germany Japan 5 France India Germany The Environment and New Technologies Environmental impact has become a fundamental component of any industry. Copenhagen 2009 raised awareness of the most pressing climate change issues. Strict government policies for high carbon emission rates were developed. The implications for aviation are enormous with engine and airframe manufacturers increasingly in the spotlight. Although aircraft CO 2 emissions account for only 2% of total global greenhouse emissions, the aviation industry is stepping up its efforts to develop products with new technologies that will reduce fuel consumption, increase efficiency and generate fewer emissions. Embraer has a long tradition of developing technology that promotes a cleaner environment. It was the first manufacturer to build a certified ethanol-fueled airplane. In November 2009, Embraer, Brazil s Azul Airlines, General Electric and Amyris of the USA agreed on a joint project to study the technical aspects and sustainability of a renewable jet fuel derived from fermented sugar cane. Source: The Economist Political/Social Economics Environment/New Technologies Air Transport System 6

8 There will be greater pressure to accelerate the retirement of oldgeneration aircraft and replace them with more fuel efficient models that will help reduce carbon emissions. Political and Social Forces The commercial air transport industry has become stronger. Market liberalization in Asia, Latin America and, mainly, the Open Skies agreement between the USA and Europe has allowed more airlines to seize opportunities to grow their networks. Consumers are becoming more aware of their influence on airlines to deliver value for service (Embraer identified the rise of the empowered passenger in The PAX Factor.) Communication technology has made information more transparent and travelers are more aware of the mechanics of pricing, scheduling, on-board products and, naturally, aircraft type. Economic performance influences air transport growth. According to IATA, the number of 2009 of intra-asia-pacific air travelers surpassed those of North America to become the world s largest market. Low cost carrier expansion, increased competition and consolidation will help build a more efficient industry. Differentiated products will ensure air travel is affordable for a wide range of consumers. Embraer forecasts that world air transport demand in 2029 will be almost 2.7 times higher than in 2009, reaching more than 12 trillion revenue passenger kilometers (RPK), with average annual growth of 4.9% and 3.1% annual GDP growth. China will lead over the next 20 years with an average annual RPK growth rate of 7.3% followed by Latin America, Asia Pacific and Russia/CIS, each with rates of 6% per year. Africa will grow around 5% and mature economies, such as North America and Europe, around 3.5%. (Chart 1) Mature markets will register a decrease in their share of world traffic from 57% in 2009 to 44% in Asia-Pacific and China will represent more than one third of world air traffic by executive summary a look forward Chart 1 Projected Traffic and Economic Growth ( ) RPK (Billion) by Region 2009 Traffic Additional Traffic Annual Growth Rate RPK GDP North America Europe Asia Pacific China Middle East Latin America CIS Africa % 2.6% 4.2% 2.0% 5.7% 3.2% 7.3% 6.7% 6.5% 4.0% 6.0% 4.0% 6.0% 3.3% 5.1% 4.4% World 4.9% 3.1% Source: Global Insight, The Economist, Embraer 7

9 Traffic Share (RPK) by region Africa 2% 2% Asia Pacific 18% 21% China 10% 15% Europe 26% 22% Latin America 5% 6% Middle East 6% 9% North America 31% 22% Russia/CIS 2% 3% Source: ICAO, Embraer 30 to 120-Seat Jet Segment Embraer forecasts a requirement for 6,875 new jets in the 30 to 120-seat capacity segment over the next 20 years with a total market value estimated around US$200 billion. The company projects that 2,895 aircraft will be delivered between 2010 and 2019 with the remaining 3,980 units to be delivered between 2020 and Market Segment (Seats) ,140 1,375 2, ,705 2,180 3, ,895 3,980 6,875 The 30 to 120-seat segment is an essential component of world aviation that supplies a range of capacity to low and medium-density markets. The value of its contribution is evident when demand contracts as well as when carriers want to open new routes without adding a large number of seats. The market for 50-seat regional jets has reached maturity. The aircraft will continue to feed hubs in the USA and Europe and will support regional aviation development in Russia/CIS, Mexico, Africa and South America. Aircraft in the 61 to 120-seat category are improving overall industry efficiency by right-sizing larger narrow-body jets, replacing old equipment, developing new markets and helping airlines grow gradually from smaller regional jets. The segment has also become a strategic category that helps airlines remain competitive in the face of reductions in demand. Like the period following September 2001, the 2009 financial crisis forced carriers to cut capacity to match lower traffic volumes. Aircraft in this category, like Embraer E-Jets, allowed airlines to maintain market presence and proved effective in a range of business 8

10 models. E-Jets complement mainline aircraft, fly with low cost carriers, and are deployed on regional missions. Commercial Jet Delivery Forecast 30 to 120-Seat Segment, by region ( ) Region Total Deliveries Share Africa 220 3% Asia-Pacific 575 8% China % Europe 1,510 22% Latin America 575 8% Middle East 240 4% North America 2,400 35% Russia/CIS 405 6% Turboprops The focus on environmental issues is helping renew turboprop demand even though that aircraft type typically operates on short-haul and niche markets. Jet aircraft, however, will continue to dominate medium and longhaul markets. Assuming an average future oil price of around US$80 per barrel, the total number of new turboprop deliveries (with a capacity 30 seats and greater) from 2010 to 2029 will be 2,260 units. 58% will replace old aircraft and 42% will support demand growth. The capacity segment of 60 seats and greater will represent about 80% of total demand. Total 6,875 The world fleet of 30 to 120-seat jets will increase from 4,285 aircraft in 2009 to 7,780 by In this period, 51% of new deliveries (3,495 units) will be added to support current demand growth and 49% (3,380 units) to replace ageing equipment. By 2029, 21% (905 jets) of the current fleet will still be operating. (Chart 2) Market Segment (Seats) ,045 1, ,325 2,260 The world total turboprop fleet will increase from 2,130 units in 2009 to 3,085 by (Chart 3) executive summary a look forward Chart 2 World Jet Fleet Evolution Number of Aircraft (30 to 120-Seat Segment) Chart 3 World Turboprop Fleet Evolution Number of Aircraft (30+ Seat Segment) 7,780 3,495 4,285 3, ,130 3, , Growth Replacement Retained Source: Embraer Source: Embraer 9

11 Narrow & Wide-Body Aircraft New-generation aircraft will bring greater economic and environmental benefits. By 2029, airlines will require 20,000 new jets greater than 120 seats with 72% of all deliveries being narrow-bodies. Market Segment (Seats) NB ( ) 6,390 8,045 14,435 WB (210+) 2,520 3,045 5,565 NB+WB (120+) 8,910 11,090 20,000 Of the 20,000 aircraft, 54% will be delivered to support market growth and 46% to replace ageing aircraft. In this category, the world fleet in service will increase from 11,870 aircraft in 2009 to 22,645 units in (Chart 4) Industry Outlook 4.9% from 2010 to 2029 following the global economic crisis greater efficiency by the advent of new technologies the short-term Chart 4 World Narrow & Wide-Body Fleet Evolution Number of Aircraft (120+ Seat Segment) 22,645 10,775 11,870 9,225 Growth 2, Replacement Retained Source: Embraer 10

12 World Projected New Deliveries Seat Capacity Segment Share Turboprop % 60+ 1,810 6% Total Turboprops 2,260 8% % ,515 9% ,885 13% Jets Total ,875 24% NB ,435 49% WB >210 5,565 19% Total ,000 68% Total Jets 26,875 92% Total 29,135 World Fleet In Service Evolution Seat Capacity Segment Turboprop , ,190 Total Turboprops 2,130 3,085 Jets , ,065 2, ,445 4,205 Total ,285 7,780 NB ,815 16,085 WB >210 3,055 6,560 Total ,870 22,645 Total Jets 16,155 30,425 executive summary a look forward Total 18,285 33,510 11

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15 Africa Key Figures (2009) Real GDP Population Passenger Demand Passenger Scheduled Airlines US$ 1.2 trillion 4.4% annual growth ( ) 978 million 100 billion RPKs 5.1% annual growth ( ) 62 million Fleet in Service 635 Airports 345 Regional economic integration is key to Africa s air transport development. The slow progress of regional integration in Africa and the long-standing structural weakness of African economies have postponed the development of a global competitive airline industry and its better positioning in the world economy. The absence of adequate transport and communication networks, limited skilled manpower, and weak intra-regional economic and investor ties are the main impediments to trade among African countries and Africa with other continents. 98 The diversity of Africa s commercial air transport frequency, fleet, connectivity and competitiveness is a reflection of these economic obstacles. Some countries lack developed economies yet have strong flag carriers due to tourism and strategic locations that are gateways to other regions. (Figure 1) Concentration of Air Transport In southern and eastern Africa, market growth is consistent and steady, with three main hubs (Johannesburg, Nairobi and Addis Ababa), which are natural gateways to the continent. Geographical position is one of the main advantages in the development of air transport. South Africa leads with the strongest economy that has produced the most develop air transport network. Addis Ababa, for example, works as a gateway to the Middle East, capturing south and eastern African passengers. The regional airline industry in this sub-region has been developing rapidly and will continue to see traffi c grow in the mid to long term. Figure 1 Concentration of Air Transport Casablanca Algiers Tripoli Intra-Africa Airports Lagos Abuja Addis Ababa Nairobi Nominal GDP per Capita (USD) More than 100 Daily Movements Dar Es Salaam Higher than US$ to 100 Daily Movements US$ 1000 to US$ to 50 Daily Movements Johannesburg US$ 500 to US$ to 10 Daily Movements Cape Town Durban Pt Elizabeth Lower than US$ 500

16 In central and western Africa, however, continuing political conflict has cause air transport to stagnate. No new regional airlines have emerged to replace those that have ceased operating. In northern Africa, the airline industry is developing at a different pace because of strong links to the growing economies of countries in the Middle East and, more recently, with Europe. A newly-signed open skies agreement between Morocco and Europe is the fi rst for any African country. The arrival of low cost carriers in Morocco may stimulate new traffi c in the region and beyond. Development in the region should be viewed as long term. As regional links evolve, they will demand a new airline industry profile that is customer and profitoriented, delivering sufficient frequency and affordable fares. The prospects for air transport development are still positive despite labour, capital access, regulation, and infrastructure shortcomings. Embraer forecasts that the demand for air transport will increase by 5.1% per year in association with an expected annual GDP growth of 4.4% from 2010 to Despite the urgent need to modernize the air transport system given the demand for more air service, there is still lack of high-frequency, nonstop network connectivity. Implementing the 1999 Yamoussoukro Decision, which called for open skies across the continent, has been slow. The distance between theory and practice is narrowing through various liberalization initiatives within member countries in the African sub-regions. regional overview trends and analysis 15

17 Fleet Profile Regional airlines are strengthening their networks but the current fleet, with an average age of 13 years, does not provide the necessary operational efficiency to sustain future growth. The 61 to 120-seat jet segment is an important component of the fleet profile and will be essential for the urgent need for sub-region connectivity. In the long term, aircraft in that segment will continue to link the continent as the policies from the Yamoussoukro Decision are implemented. Overcapacity in the 121 to 145-seat jet segment will encourage fleet rightsizing with 61 to 120-seat aircraft. This will improve schedule frequency and financial results. Turboprop aircraft will maintain their presence in the African fl eet. They are a critical part of commercial service in markets with low-demand and at airports with operational limitations. (Chart 5) Market Forecast The 30 to 120-Seat Jet Segment Embraer forecasts a requirement for 220 new jets for Africa in the next 20 years. 67% will be needed to support growth and 33% to replace old aircraft. The 30 to 120-seat jet fleet will increase from 165 units in 2009 to 280 by 2029, with 25% of the current fleet in service by then. Turboprops In the next 20 years, 130 new aircraft will be required. 44% of these will replace old fleets and 56% will support growth. The current fleet in service will increase from 120 to 210 aircraft. By 2029, 23% of the existing fleet will be in service. Narrow and Wide-Bodies Over the next 20 years, 420 new units will be delivered: 28% will be needed to replace old aircraft and 72% to sustain growth. The narrow and wide-body commercial jet fleet will grow from 350 aircraft in 2009, to 720 by 2029, when 20% of the current fleet will be in operation. Chart 5 Africa Fleet in Service Number of Aircraft by Average Age (Years) NB ( ) Aircraft #Acft Avg Age TP WB (210+) TP 30+ Jet Jet Jet Jet NB ( ) WB (210+) Jet Jet Total Source: OAG 16

18 Africa Projected New Deliveries Seat Capacity Segment Turboprop Total Turboprops Jets Total NB WB > Total Total Jets Total Africa Fleet In Service Seat Capacity Segment Turboprop Total Turboprops Jets Total NB WB > Total Total Jets 515 1,000 regional overview trends and analysis Total 635 1,210 17

19 Asia Pacific Key Figures (2009) Real GDP Population Passenger Demand Passengers Scheduled Airlines US$ 9.2 trillion 3.2% annual growth ( ) 2.54 billion 804 billion RPKs 5.7% annual growth ( ) 375 million 160 Fleet In Service 2,825 Airports 815 Leading Long-Term Growth The Asia Pacific region has weathered the economic turmoil and led the global recovery. Although affected badly by its high exposure to world trade, several Asian economies, such as South Korea, Japan, Taiwan, Singapore, Thailand, Vietnam and Australia, implemented some of the most extensive fiscal stimulus packages. For others, like Indonesia and India, economic recovery is supported mainly by resilient domestic demand. Japan faces the biggest challenge in the region; its recovery remains weak and heavily dependent on government stimulus and strengthening economic activity in Asia. In the medium to long term, Asian countries will remain among the fastest-growing economies in the world. The region is home to one third of the world s inhabitants. A continuous rise in disposable income within the middle class will create greater demand for goods and services and more liberal air service agreements will promote more demand for travel. A comparison of propensity to travel suggests there is huge potential for growth in air services in Asia. (Chart 6) In 2009, the Asia Pacific region represented 18% of world air transport demand. By 2029, that number will rise to 21%. The region s airlines have been preparing for the expected growth in demand by increasing orders for new aircraft. The additional capacity, however, is comprised primarily of narrow-body jets that, in turn, produce an imbalanced fleet. This results in less deployment flexibility and greater risk to profitability when operated in low and mediumdensity markets. (Chart 7) Revisions to air service agreements are contributing to growth, namely the Taiwan-China and ASEAN bilaterals and the future proposal for ASEAN Chart 6 Propensity to Travel Enplanements per Capita 5 4 High potential for air service growth USA Singapore New Zealand Australia Japan Malaysia Thailand Indonesia Vietnam India Source: ICAO, The Economist, Embraer 18

20 open skies. This trend towards market deregulation will allow airlines to expand services in under-served secondary markets thereby creating opportunities for smaller capacity, right-sized aircraft. Demand in India has been growing steadily. In order to satisfy the volume of passengers, new airlines entered the market and expanded that nation s fleet. The result produced fierce competition and an unsustainable low yield environment. After a consolidation phase, the country s airlines will focus on greater operational efficiency. Stricter capacity management will play an important role and the deployment of smaller right sized aircraft in low and medium-density markets should help airlines achieve better results. Despite being a major player in Asian aviation, the Japanese air travel market is weak due to slow economic recovery and migration of passengers to high speed rail. Carriers are scrutinizing all areas of their operations in an effort to minimize costs and increase efficiency and productivity. Deployment of 61 to 120-seat aircraft is a proven tool to complement or right size existing operations and could be a solution for Japan s capacity issues. The presence of several LCCs in Australasia has made the region intensely competitive. There are opportunities to introduce smallercapacity aircraft with lower financial risk to access new, low and mid-density routes. Although low cost carriers in Asia were affected by the economic downturn, they have been growing at a faster pace than mainline carriers and now represent some 34% of total domestic ASKs in the region. However, the number of new markets added by LCCs has been declining perhaps due to their exclusive deployment of highcapacity narrow-body jets. With increasing market liberalization and competition, LCCs may need to consider 61 to 120-seat jets to open low and mid-density routes. Markets Operated by LCCs Year Number of Markets Growth % % % % % % % % % Source: OAG regional overview trends and analysis Chart 7 Fleet in Service & Backlog Number of Aircraft by Seat Segment Fleet in Service Backlog TPs J J J J J >400 Source: OAG, ACAS 19

21 The diverse geography of Asia makes air travel essential to promote economic growth yet traffic is still highly concentrated: 70% of scheduled flights (up to 3,500 km) in 2009 departed from only 10% of the region s airports. The development of secondary markets with smaller-capacity 70 to 120-seat jets could offer higher-frequency, nonstop flights that reduce airport congestion and improve regional connectivity. The concentration of traffic at hub airports and preference for large aircraft leave many low and mid-density markets with limited direct air service. In 2009, 54% of all markets up to 3,500 km flown by jets averaging 160 seats had fewer than two daily frequencies. (Chart 8) Market Forecast The 30 to 120-Seat Jet Segment Embraer forecasts a requirement for 575 new jets in the next 20 years: 71% to support demand growth and 29% to replace old aircraft. The 30 to 120-seat jet fleet will increase from 195 units in 2009 to 655 by 2029, when only 5% of current fleet will still be in service. Turboprops Over the next 20 years, the turboprop fleet in service is forecast to increase from 460 units to 895 aircraft. From 2010 to 2029, 600 new aircraft will be required: 42% to replace old aircraft and 58% to support market growth. In 2029, only 29% of the current fleet will still be in service. Narrow & Wide-Bodies The narrow and wide-body commercial jet fleet will grow from 2,170 aircraft to 4,695 in the next 20 years. By 2029, 17% of the current fleet in service will remain in operation. Over the next 20 years, 4,140 new jets will be delivered: 42% to replace old aircraft and 58% to sustain growth. Chart 8 Market Profile Number of Markets by Daily Frequency by Average Seats per Departure 500 Number of Markets Average Seats per Departure >10 0 Source: OAG 20

22 Asia Projected New Deliveries Seat Capacity Segment Turboprop Total Turboprops Jets Total NB ,235 1,330 2,565 WB > ,575 Total ,985 2,155 4,140 Total Jets 2,230 2,485 4,715 Total 2,470 2,840 5,310 Asia Fleet In Service Seat Capacity Segment Turboprop Total Turboprops Jets Total NB ,205 2,795 WB > ,900 Total ,170 4,695 Total Jets 2,365 5,350 Total 2,825 6,245 regional overview trends and analysis 21

23 China Key Figures (2009) Real GDP Population Passenger Demand Passengers Scheduled Airlines US$ 3.7 trillion 6.7% annual growth ( ) 1.34 billion 420 billion RPKs 7.3% annual growth ( ) 230 million Fleet In Service 1,500 Airports 166 Air Transport Industry Perspectives China s exposure to the global financial crisis has been limited by high levels of liquidity and the government s stimulus package which was directed mainly at infrastructure investment. Economic growth combined with a continued rise in internal consumption led to a significant increase in demand for domestic air transport. 33 The mid to long-term outlook for China remains very strong; continued gains in productivity and investment will sustain steady 6.7% annual growth over the next 20 years. China is poised to become the largest world economy and will lead world passenger demand with an expected annual growth rate of 7.3%. High Growth of Air Transportation Room for Regional Service Expansion Despite the global financial crisis, demand for air travel increased in the Chinese market with domestic volume up 20% over Regional jet operations still represent only 1% of the total domestic market. Demand is highly concentrated 20 airports account for 80% of all passenger enplanements. 86 new airports are planned to be built by 2020 which should facilitate greater regional integration and the acquisition of rightsized regional aircraft. (Figure 2) Figure 2 Airports Existing: 158 airports To be built: 86 airports Source: CAAC 22

24 Opportunities for Regional Aviation Region Seat Jets Seat Jets The Chinese market has unique characteristics that are compatible with regional jet operations: expansive geography, a high number of low-density markets, a fleet comprised mostly of highcapacity narrow-body jets and passenger loads suitable for smaller aircraft. Demand in 76% of all domestic markets is between 26 and 300 daily passengers. Most of these low to medium-density routes are under-served by narrowbodies with infrequent fl ights, low load factors, high operating costs and suboptimized airline profi tability. (Chart 9) USA 43% 57% Europe 29% 71% China 8% 92% The implementation of high speed rail services will continue over the next 20 years. In the largest markets where there is potential for a significant shift from air transport to HSR, airlines may be forced to reduce capacity to maintain market presence. Smaller aircraft may be instrumental in offering a competitive mode of transport to rail. In 2009, more than 120 new airplanes entered the Chinese fleet for total of 1,500 civil aircraft flying scheduled services. In comparison to other world regions, the Chinese fleet is heavily skewed to largecapacity aircraft. Only 8% of the jet fleet is comprised of jets of 30 to 120-seats compared to 29% and 43% in Europe and the USA respectively. regional overview trends and analysis Chart 9 Market Density Number of Markets by Daily Passengers % of all markets are low density >800 Source: CAAC 23

25 86% of all domestic operations (some 1.47 million flights) to more than 800 markets use 121 to 210-seat narrowbody jets. Yet about 40% of flights depart with an average of 60 to 105 passengers, volumes more suited to smaller aircraft. (Chart 10) Market Forecast The 30 to 120-Seat Jet Segment Embraer forecasts a need for 950 new jets in the next 20 years: 88% to support growth and 12% to replace old aircraft. The 30 to 120-seat jet fleet will increase from 125 units in 2009 to 960 by 2029, when only 10% of the current fleet will still be in service. The projected demand for 50-seat regional jets is low due to the current trend towards higher-capacity aircraft. Turboprops There will be a requirement for 120 new turboprops in the next 20 years: 21% to replace old aircraft and 79% to support market growth. The fleet in service is forecast to increase from 25 units to 120 aircraft. By 2029, no aircraft from the current fleet will still be in service. Narrow and Wide-Bodies Embraer estimates a need for 2,885 new jets in the next 20 years: 40% to replace old aircraft and 60% to sustain growth. The narrow and wide-body commercial jet fleet will grow from 1,350 aircraft to 3,080 during this period. By 2029, 15% of the current fleet in service will remain in operation. Chart 10 Passengers per Departure of Narrow-Body Fleet Annual Flights (x1000) by Passenger per Departure % of narrow-body flights depart with more than 60 and fewer than 100 passengers >135 Source: CAAC 24

26 China Projected New Deliveries Seat Capacity Segment Turboprop Total Turboprops Jets Total NB ,410 2,305 WB > Total ,155 1,730 2,885 Total Jets 1,535 2,300 3,835 Total 1,560 2,395 3,955 China Fleet In Service Seat Capacity Segment Turboprop Total Turboprops Jets Total NB ,105 2,400 WB > Total ,350 3,080 Total Jets 1,475 4,040 Total 1,500 4,160 regional overview trends and analysis 25

27 Europe Key Figures (2009) Real GDP Population Passenger Demand Passengers Scheduled Airlines US$ 15.6 trillion 2.0% annual growth ( ) 597 million 890 billion RPKs 4.2% annual growth ( ) 530 million 151 Fleet In Service 4,005 Airports 580 The liberalization of Europe s air transport policy over ten years from 1987 to 1997 reshaped the airline industry. Since then, economic volatility, the high cost of labour, lack of consolidation, shareholder restrictions and the emergence of low cost carriers have put pressure on traditional network carriers to maintain their dominance. Their intra-european market share has fallen sharply from 74% in 1995 to 40% in 2009 while low cost carrier share grew from 5% to 40% in the same period. Network carriers were forced to implement deep structural changes mainly focused on cost reduction in order to improve efficiency and productivity. In 2004, Air France and KLM signed the first big merger agreement among European carriers. In the meantime, more airlines have merged to benefit from pooled purchases, shared facilities, harmonized fleets and strengthened networks. It is a trend that is expected to continue in the mid to long term in which Embraer forecasts air transport will increase by 4.2% per year, 2.1 times the predicted annual GDP growth of 2.0% over the next 20 years. Opportunities for the European Market The 2008 financial crisis focused airline attention on capacity management. With declining traffic and a smaller component of business travelers, carriers were forced to adjust capacity to maintain market presence and preserve profitability. Adding frequency will be a key part of airline growth strategies as the industry recovers. Embraer foresees fleet optimization opportunities in four main areas: rightsizing, replacement of old and inefficient aircraft, natural growth, and low cost carrier expansion. Chart European Frequency Profile Intra-European Markets Quality of Services 21% Flight Profile Markets with less than 1 daily frequency 1% 76% 31% > % Markets with less than 1 daily frequency served predominantly by NB (76%) 23% WB NB < 1 Markets Aircraft Category < 120 Seats Source: OAG 26

28 Network carriers are increasingly focused on exploring lucrative international markets through joint ventures and with their alliance partners, or by seeking new market opportunities, especially to Africa, the Middle East and Latin America. Consequently, regional airlines have become even more critical to mainline carrier operations to feed intra- European traffi c. Markets served without daily narrowbody frequencies will continue to be transferred to regional airlines with seat jet aircraft. Today, 48% of intra- European city pairs have less than one daily frequency. Of those routes, 76% are flown by narrow-body aircraft and are more suited to smaller jet capacity and frequency. (Chart 11) Schedule frequency and competitive positioning will continue to improve in markets where narrow-body aircraft fl y during peak-demand periods and 61 to 120-seat jets fl y at off-peak times. LCC Expansion The introduction of a second aircraft type (91 to 120-seat jets) in LCC fleets allows airlines to explore new opportunities in medium-density markets. JetBlue Airways in the USA and Austria s NIKI have accessed markets that are more profitably served with lower-capacity aircraft. Embraer expects that more European airlines will adopt the same philosophy as they pursue growth strategies. Replacement of Old and Inefficient Aircraft Older-generation aircraft are less fuel efficient and more costly to maintain than new-technology fleets. Of the 360 aircraft in the 91 to 120-seat category, nearly 150 have an average age of 15 years and are due to be replaced in the mid term. (Chart 12) The 2012 implementation of the ETS (Emissions Trading Scheme) will accelerate the need to replace ageing fleets with more fuel efficient aircraft. The ETS will determine the share of emissions each airline will be permitted each year. Excess amounts will be offset by the purchase of carbon credits. regional overview trends and analysis Chart 12 European Fleet in Service Number of Aircraft by Average Age (Years) 2500 NB ( ) Aircraft #Acft Avg Age 2000 TP Jet Jet Jet Jet WB 210+ TP 30+ Jet Jet NB ,045 8 WB Total 4, Source: OAG 27

29 Natural Growth Although 50-seat jets have been instrumental in feeding hubs, the 61 to 120-seat jet segment will be the backbone of multi-hub systems that strengthen network connections for international flights and intra-european traffic. (Chart 13) In order to maintain growth and sustain competitive frequency, airlines will continue to replace 50-seat jets with aircraft in the 61 to 120-seat segment. The development of high speed rail links will attract a share of short-distance airline traffic and will contribute to the overall improvement of connectivity of European travel. The EU supports the integration of various forms of transportation including the development of airports that have multimodal roles. High speed rail operators will continue to integrate their services with airlines to offer combined air and rail tickets. Despite the development of high speed rail networks, turboprops will be required on short-haul routes and in niche markets as an integral part of Europe s air transportation system. Market Forecast The 30 to 120-Seat Jet Segment Embraer forecasts a requirement for 1,510 jets for Europe in the next 20 years: 51% to support growth and 49% to replace old aircraft. The 30 to 120-seat jet fleet will increase from 820 units in 2009 to 1,545 by 2029, with 2% of the current fleet in service in Turboprops From 2010 to 2029, 520 aircraft will be required: 71% to replace old fleets and 29% to support growth. The fleet in service is forecast to increase from 525 to 635 aircraft. By 2029, 20% of the current fleet will be in service. Narrow and Wide-Bodies Over the next 20 years, 4,455 units will be delivered: 54% to replace old aircraft and 46% to sustain growth. The narrow and wide-body commercial jet fleet will grow from 2,660 aircraft in 2009 to 4,725 by 2029 when 10% of the current fleet will be in operation. Chart 13 European Regional Jet Fleet Number of Aircraft Jet Jet Jet Source: OAG 28

30 Europe Projected New Deliveries Seat Capacity Segment Turboprop Total Turboprops ,070 Jets Total ,510 NB ,350 1,855 3,205 WB > ,250 Total ,830 2,625 4,455 Total Jets 2,470 3,495 5,965 Total 2,690 3,795 6,485 Europe Fleet In Service Seat Capacity Segment Turboprop Total Turboprops Jets ,090 Total ,545 NB ,045 3,330 WB > ,395 Total ,660 4,725 Total Jets 3,480 6,270 Total 4,005 6,905 regional overview trends and analysis 29

31 Latin America Key Figures (2009) Real GDP Population Passenger Demand Passengers Scheduled Airlines US$ 3.1 trillion 4.0% annual growth ( ) 586 million 227 billion RPK 6.0% annual growth ( ) 124 million 120 Fleet in Service 1,265 Airports 475 An Industry in Transition Focus on Efficiency Despite the global financial crisis, the region fared better in 2009 than in previous downturns with less impact than in developed countries. Positive economic indicators show the region to have maintained its attractiveness to global investors that are supporting a strong investment cycle in South America. Many countries with expanding global economic links are seeing rapid growth in the middle class. Representing 68% of the continent s GDP, Brazil, Chile, Colombia, Costa Rica, Mexico and Peru are considered investmentgrade countries. The classification signals a significant improvement in macroeconomic fundamentals in the region over the past decade. Brazil will host the two most important international sporting events of the decade: the FIFA Soccer Cup in 2014 and the Olympic Games in Analysts predict media coverage will promote investment confidence in Latin America and the visibility will generate new interest in tourism, business and infrastructure development. The region has attracted new international air service from major foreign airlines owing to strong performance during the recent financial crisis and growth prospects over the next 20 years. Adjusted for GDP, Latin America enplanements per capita are well below those of mature markets. The region has enormous potential for air transport growth through the development of low and medium-density city pairs, the addition of flights and trade-offs with other transportation modes. (Chart 14) Chart 14 Poised for Growth Enplanements per Capita 3 Adjusted for Purchasing Power Parity USA Chile Colombia Mexico Brazil Peru Argentina Paraguay LatAm Source: Global Insight and DGACs 30

32 Stronger trade, a growing middle class, investment liberalization, more tourism and the expansion of free trade agreements will be the major contributors to sustainable air transport growth. The Fortaleza Agreement is expected to develop air transport in small and medium-sized markets beyond the scope of existing bilateral limits in the sub-regions of the continent. The Andean Pact is also contributing to greater efficiency in the region s air transport network. Bolivia, Colombia, Ecuador, and Peru are signatories to the accord which is creating greater freedom of market accessibility that is not contained in current bilateral agreements. The Fortaleza Agreement is expected to generate strong economic growth, improve regional, multilateral cooperation, and promote investment in infrastructure. The accord could expand to other countries and produce a truly integrated air transportation system for the region. Peru Brazil Opportunities for Latin America Markets Bolivia Many airlines are using old and inefficient aircraft to explore new Paraguay market opportunities throughout Latin America. Consumers are keenly aware of equipment age and view aircraft type as a differentiating aspect among Chile Argentina Uruguay competing airlines. The Latin American fleet has a large component of old aircraft that needs to be replaced. The 91 to 120-seat category is regional overview trends and analysis the largest with 290 jets averaging 19 years of age. Some 130 jets are over 20 years old and need immediate replacement. (Chart 15) Chart 15 Latin America Fleet in Service Number of Aircraft by Average Age (Years) NB ( ) Avg Age (Yrs) Fleet in Service Productivity (Annual FHs) Jets , ,000 > , WB (210+) TP Jets Jets Source: OAG 31

33 Excess capacity limits an airline s ability to maximize profits. In Latin America, 68% of all flights operated by large aircraft depart with loads more appropriate for 30 to 120-seat jets. (Chart 16) As the region becomes more integrated, there will be an opportunity for smallercapacity jets to increase network connectivity by serving low and mediumdensity markets. Market Forecast The 30 to 120-Seat Jet Segment Embraer forecasts a requirement for 575 new aircraft in the next 20 years: 63% to support growth and 37% to replace old aircraft. The 30 to 120-seat jet fleet will increase from 370 units in 2009 to 820 by 2029 with 28% of the current fleet still in service by then. Turboprops The turboprop fleet in service is forecast to increase from 190 to 225 aircraft. From 2010 to 2029, 140 new aircraft will be required: 84% to replace old aircraft and 16% to support market growth. By 2029, only 3% of the current fleet will be in service. Narrow and Wide-Bodies The narrow and wide-body commercial jet fleet will grow from 705 to 1,500 aircraft in the next 20 years. By 2029, 35% of the current fleet in service will still be in operation. In the forecast period, 1,180 new units will be delivered: 36% to replace old aircraft and 64% to sustain growth. Chart Intra Latin America Flights (>120 Seat Aircraft Only) % of Flights by Passengers per Departure 15% Loads Appropriate for Seat Aircraft 12% 13% 9% 9% 11% 10% 11% 6% 3% 3% 4% 7% 7% 6% 6% 4% 4% 5% 0% >=150 Source: Sabre GDD and Embraer database (routes up to 2,000 nm) 32

34 Latin America Projected New Deliveries Seat Capacity Segment Turboprop Total Turboprops Jets Total NB WB > Total ,180 Total Jets 755 1,000 1,755 Total 810 1,085 1,895 Latin America Fleet In Service Seat Capacity Segment Turboprop Total Turboprops Jets Total NB ,225 WB > Total ,500 Total Jets 1,075 2,320 Total 1,265 2,545 regional overview trends and analysis 33

35 Middle East Key Figures (2009) Real GDP Population Passenger Demand Passengers Scheduled Airlines US$ 1.1 trillion 4.0% annual growth ( ) 196 million 278 billion RPK 6.5% annual growth ( ) 72 million Fleet in Service 665 Airports The prime geographic position of cities in the Middle East is conducive to the natural flow of intercontinental traffic. Local carriers benefited from capacity cuts by European airlines and captured a share of connecting demand that would have routed through Europe. One striking aspect of the region is the age of its population. It is one of the youngest in the world and is home to millions of expatriate workers who generate strong demand for air services. Impressive Air Transport Growth The region s three intercontinental hubs at Dubai, Abu Dhabi and Doha have contributed to the boom in Middle East air travel. Despite the global financial crisis, international demand surpassed expectations by growing 11% in 2009 compared to 2008, according to IATA. Latin America was the only other region to record positive growth (0.3%) in the same period. Average Population Age of Middle East Countries Qatar 31 UAE 29 Kuwait 29 Bahrain 29 Lebanon 27 Iran 23 Saudi Arabia 23 Oman 22 Jordan 21 Syria 21 Yemen 17 Source: United Nations Chart 17 Middle East Fleet in Service Number of Aircraft by Average Age (Years) Aircraft #Acft Avg Age Jets WB (210+) NB ( ) Jets TP Jets TP Jet Jet Jet NB WB Total Source: OAG 34

36 Aggressive Aspirations Airlines in the Middle East are projecting aggressive growth prospects even after years of strong performance. The region is still regulated which limits frequencies and network connectivity. If the expected growth potential is to be satisfied, restrictions on market access, foreign ownership and pricing must be eased. There are opportunities for optimizing the fleet since the majority of existing aircraft and future deliveries favour narrow-body and wide-body equipment. (Chart 17) This makes it more difficult to develop new, low to mid-density demand air transport markets that would welcome better connections to international destinations. The region still has many city pairs that are served by low-frequency, narrowbody jets and other markets without air services. A solution would be to introduce right-sized, 61 to 120-seat jets to build intra-regional routes. These aircraft better match capacity to demand and can develop markets with lower fi nancial risk than larger jets. (Chart 18) Assuming that the strong growth rates continue and new markets are developed with smaller-capacity aircraft, Embraer expects Middle East demand (RPK) to grow around 8.0% per year in the next 10 years, and 6.5% over 20 years ( ). regional overview trends and analysis Chart 18 Intra-Regional Narrow-Body Markets Number of Narrow-Body Markets by Daily Frequency % 57% of NB markets have less than 1 daily frequency % 8% 9% 13% 0 < > 5 Source: OAG 35

37 Market Forecast The 30 to 120-Seat Jet Segment Partial deregulation is raising the profile of the 30 to 120-seat jet segment. There are several carriers that have already embraced the right-sizing fleet philosophy by acquiring aircraft in the category. They are increasing frequencies and building low to middemand markets. Embraer forecasts a requirement for 240 new and 40 used aircraft in the next 20 years: 84% to support growth and 16% to replace old aircraft. The 30 to 120-seat jet fleet will increase from 70 units in 2009 to 310 by 2029, when only 30 aircraft from the current fleet will be in operation. Turboprops Over the next 20 years, the turboprop fleet is forecast to increase from 15 to 60 aircraft. In that period, 60 new aircraft will be required: 25% to replace old equipment and 75% to support market growth. By 2029, no aircraft from the current fleet will be in operation. Narrow and Wide-Bodies The narrow and wide-body commercial jet fleet will grow from 580 aircraft in 2009 to 1,590 by 2029, at which time 9% of the current fleet will still be in operation. Over the next 20 years, 1,495 new and 40 used units will be delivered: 34% to replace old aircraft and 66% to sustain growth. 36

38 Middle East Projected New Deliveries Seat Capacity Segment Turboprop Total Turboprops Jets Total NB WB > Total ,495 Total Jets ,735 Total ,795 Middle East Fleet In Service Seat Capacity Segment Turboprop Total Turboprops Jets Total NB WB > Total ,590 Total Jets 650 1,900 Total 665 1,960 regional overview trends and analysis 37

39 North America Key Figures (2009) Real GDP Population Passenger Demand Passengers Scheduled Airlines US$ 12.9 trillion 2.6% annual growth ( ) 342 million 1.3 trillion RPK 3.2% annual growth ( ) 835 million Fleet in Service 6,230 Airports 940 Flight Plan for the Next Cycle Although the United States has emerged from a severe recession, recovery remains fragile. Recent indications of stability have not been sufficient to offset the drop in consumption. Consumers are still cautious because of high unemployment, limited credit and the erosion of wealth caused by the collapse in the housing market. 98 With economic recovery, demand for air services will gain momentum in the mid to long-term. Since GDP is a primary indicator of discretionary spending for both leisure and business travel, Embraer expects air transport demand to increase at an annual average rate of 3.2%, 1.3 times the average GDP growth from 2010 to The U.S. airline industry is firmly in the early stage of a new upward trend demand cycle but challenges remain to attract more price-conscious travelers and a more value-oriented premium business segment. Real yields are expected to decline further. The industry remains financially weak. One way to potentially improve revenues, lower costs and strengthen competitive positioning is through carrier consolidation, which was evident in The slow rate of economic recovery is forecast to continue to depress demand in the short term as consumers focus on essential product purchases. However, recent data confirm that the North American economy is gaining traction, as is demand for air transport. Chart 19 Opportunities in the North American Market Average Aircraft Size by Average Age (Years) and Number of Units 200 J J J140 1, J J seat segment gap TP70 93 J44 J J50 0 1, TP J TP50 11 J Source: OAG 38