Smaller planes the cure for budget airline woes: Embraer

SINGAPORE — Smaller aircraft are the solution to budget airline operators’ woes as they jostle in the competitive skies in the region, Embraer Commercial Aviation’s Asia Pacific vice-president Mark Dunnachie said yesterday, warning that the low-cost carriers’ (LCC) business models in their current form are unsustainable in the regional market conditions.

Embraer, based in Sao Jose dos Campos, Brazil, is the world’s third largest plane maker, but is far behind Boeing and Airbus. Embraer’s aircraft are typically smaller than those manufactured by the two market leaders.

“We did extensive research and found that, in 2015, in every two routes that the budget carriers in the Asia-Pacific region opened, they closed one,” Mr Dunnachie told TODAY on the sidelines of the Singapore Airshow. “That is because their aircraft are too big to be profitably deployed during the lean season. There is a distinct change in business model required for the LCCs to start making money.”

Dublin-based Ryanair, for instance, changed its approach to the market when it realised that rival LCC Easyjet was taking away the business travel, he noted.

“In the Asian context, the LCCs are still on a learning curve. If they want to grow more, they need to go to the lower-density and potential markets where people do not fly at the moment, and the markets that are underserved,” said Mr Dunnachie.

“These markets, we believe, are best served by fuel-efficient smaller planes. It is not about the seat-mile cost, which for a smaller plane is slightly higher. But the trip cost is 20 per cent lower. If you have 170 seats to fill and can’t fill them, you drop fares and lose money.”

Reducing fares to offset falling load factors has its limits and focusing primarily on ancillary revenues is not a sustainable business strategy, said Embraer.

There are already signs of saturation, despite the 8.6 per cent growth in revenue-passenger-kilometres last year.

Carriers in the region are estimated to have earned a net margin that averaged only 2.9 per cent, boosted by the lower price of fuel. Profitability remains elusive for Asian carriers facing the challenge of surplus capacity.

“We are showing to airlines the benefit of moving from ‘red oceans’ to ‘blue oceans’, that is, to move away from a crowded marketplace and seek out opportunities in markets that are currently underserved or not served at all, where yields are also stronger, moving from one to two digits,” said Mr Paulo Cesar Silva, president and CEO, Embraer Commercial Aviation.

According to the global Embraer Market Outlook for the 70- to 130-seat capacity segment for the next 20 years, the entire market will demand 6,350 new jets in this category, valued at US$300 billion (S$421 billion). It expects airlines in the Asia Pacific, including China, to take delivery of 1,570 new jets in the segment, in deals worth US$75 billion.