Regional Jet Makers Battle for Emerging Market Dominance
While Airbus and Boeing fight it out for a bigger share of the large passenger jet market in Asia, another battle is heating up among manufacturers of smaller, regional jets that carry between 60 and 120 passengers.
Brazil's Embraer and Canada's Bombardier, which are among the bigger players in this space, are increasing their investments in emerging markets, anticipating a big jump in demand, driven by a rising middle class and higher levels of urbanization.
Bombardier, for example, opened three new offices in China, Singapore and Dubai and doubled the number of its sales directors in the last 12 months. Embraer has also been expanding its presence by opening a new office in Dubai and expanding customer support across Asia and the Middle East.
The Brazilian company, which opened offices in Beijing and Singapore in 2000, delivered its 100th jet to the Chinese market in November last year and flew in five jets for the Singapore Airshow , making it one of the bigger exhibitors at the event.
"Without question, the change in per-capita GDP in most of the growth regions, whether that's Africa, the Middle East, South East Asia, Asia, Oceania, or China, including India, is what's driving everything," Chet Fuller, Senior Vice President of Commercial at Bombardier told CNBC on the sidelines of the Singapore Airshow.
Regional jet makers are betting that as the number of airline passengers in emerging markets grows, airlines will need smaller aircraft than Boeing’s737 and Airbus’ A320 to serve point-to-point travel between smaller cities as well as to connect those smaller cities to larger hubs.
"(Regional jets) will be connecting outlying markets to hubs to connect on to international travel," says Bombardier's Fuller. "The same reason, there are regional jets in the United States, the same reason there are regional jets in Western Europe, that same maturity will occur."
On Wednesday, Indonesia's flagship carrier Garuda signed a deal to buy 18 of Bombardier's CRJ 1000 regional jets. This will help the airline connect smaller cities in the country to Singapore and provide direct connections between those smaller cities.
Within emerging markets, China is among the biggest for regional jet makers. Embraer estimates Chinese airlines will order 975 jets in the 61 to 120 seat segment between 2011 and 2030. According to the company's President of Commercial Aviation, Paulo Cesar de Souza e Silva, Embraer has a 70 percent market share for 100-seat jets in the country.
Bombardier's Fuller says the market share numbers depend on how you slice the data and which aircraft and deals you count. Bombardier, which has had a historically strong position in the regional jet market in North America and Europe, has faced criticism that it has fallen behind in Asia.
Fuller says the criticism may be fair, but the company is rapidly correcting that. In a commitment to how seriously it takes the challenge in emerging markets, 76 percent of the company's commercial staff (including marketing, sales, legal, etc.), will be based outside of North America by the end of this year.
Meanwhile, Embraer is also focusing more on India and Indonesia, two large growth markets. In India, it has yet to sell any of its commercial aircraft, but Alex Glock, Vice President for Asia Pacific at the company, hopes to change that. He says traffic between smaller cities (known as tier-2 and tier-3) is growing 27 percent per year, much faster than the traffic between India's four big metros: Delhi, Mumbai, Chennai and Kolkata.
"These markets are lower density markets and they cannot be operated by bigger airplanes, like the Airbus A320 or the Boeing 737," says Glock. "So they have to be utilized with a 100-seat aircraft... without compromising the level of service."
So far, turboprop or propeller-driven aircraft have served many of these smaller cities. Bombardier sold 15 of its Q400 turboprop planes to India's SpiceJet in December 2010. But Glock says, given India's strong monsoon season, airlines will have to upgrade to jets, which can fly higher and so avoid bad weather.
The Next Generation
As the competition heats up, both companies are also planning to upgrade their aircraft. Bombardier has invested heavily in a brand new aircraft, called the C-Series, which is expected to enter service by the end of 2013. Fuller says the plane is 12,000 pounds lighter than the most modern competitors and offers 20 percent less fuel burn on a per-seat basis. The company has sold 133 of the planes and now has a two-year backlog of orders.
Brazil's Embraer is also planning a new engine and other changes to its jets by 2018, which the company's President for Commercial Aviation told CNBC, will lead to at least 15 percent fuel efficiency over current models.