PLANNING FOR THE FUTURE

2015-2034

Dear Reader:
It’s reassuring to see many of our customers prospering as the airline industry reports stronger bottom line results. As much as it may be tempting for carriers to start adding bigger airplanes as demand strengthens and costs stabilize, our business is cyclical and things can change quickly.

We’ve seen how too much capacity and a strategy to capture more market share can, in some cases, be a tradeoff for weak yields and low return on assets. The airline business is very capital intensive which makes it all the more imperative to have a business model that is sustainable since short-term strategies may carry undue risk. We welcome the emerging trend among airlines to focus on generating return on shareholder-invested capital as their main goal.

It’s one of the reasons why we continue to see new opportunities for the 70 to 130-seat jet segment, even a decade after our first E-Jet was delivered. Across the globe, there is a continuous need for more network connectivity and frequency: the tremendous traffic growth in Asia, greater disposable income among a rising middle class in Africa and Latin America, continued strength in the USA and economic recovery in Europe.

Planning for the future is always a tough challenge. Not only do airlines need to estimate their capacity requirements far in advance, they must also ensure that their investment in new equipment earns an acceptable return on those assets. Understanding how 70 to 130-seat aircraft influence that return is critical, especially as we enter a period of new growth.

I hope you find our Market Outlook informative and insightful.

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Paulo Cesar de Souza e Silva
President & CEO | Commercial Aviation
June 2015

GLOBAL TRENDS

Economic Scenario - Fuel Price Airline Financials The Urban Middle Class LCC Expansion

FORECAST RESULTS

RPK and GDP Growth Rates The 70 to 130-Seat Jet Segment 70+ Turboprop Segment The 130 to 210-Seat Jet Segment

PROCESS OVERVIEW

MARKET FORECAST PURPOSE

For more than 10 years, Embraer has focused on continuous improvement of the market forecast process to refine out modeling in order to identify and forecast future trends. The Embraer Market Outlook process consist of two main steps: (1) the traffic demand forecast for the future evolution of RPKs by regions and sub-regions based on econometrics for the next 20 years and (2) the aircraft demand forecast that estimates the number of new aircraft deliveries from 30-seater turboprops to wide-bodies during the same period.
The accurate analysis of this aircraft demand can support the identification of airline needs and new product requirements in addition to better position Embraer with its discussions with stakeholders.

METHODOLOGY

The process consists of identifying the future evolution of traffic demand, in terms of RPKs, for the next 20 years based on econometrics. Such models have several inputs, among which are: historical traffic data; Gross Domestic Product (GDP) evolution; trade tourism fuel price; population dynamics; airline competition; and traffic of other transport modes.
The models consider network traffic of intra- and inter-regional traffic flow interactions by airline domicile. The output is obtained by an analytical choice of equations and variables that better fit the historical traffic evolution for each flow. In addition, other “proxy” variables are considered for quantitative events that shift the outcome, such as occurence of terrorist attacks, war, disease and airline bankruptcy.

FORECASTING NEW DELIVERIES

The new deliveries forecast in the Embraer Market Outlook splits the aircraft into regions and segments by seat capacity, from 30-seater turboprops to wide-bodies, for the next 20 years. Examining each regional network allows Embraer to forecast how the future load factor, and consequently future capacity, will be distributed for different seat segments. Embraer goes through its own models to better understand previous and future aircraft utilization, retirement age, pre-owned aircraft flow and aircraft leasing dynamics. All of these subjects cover macro drivers like fuel price, entry in service of new generation aircraft or airline business model evolution, to derive the future required fleet and hence the projected new deliveries.

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AIRCRAFT SEGMENTATION

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REGIONAL DEFINITIONS
North America & Caribbean (USA and Canada), Latin America (includes Mexico), Europe (includes Israel), Russia/CIS, Africa, Middle East (includes Egypt), Asia Pacific, China (includes Hong Kong, Macau and Mongolia).
DATA SOURCES
All analysis developed used data from: Global Insight, The Economist, OECD, McKinsey Global Institute, OAG, ACAS, ICAO, IATA, A4A, CAAs, AEA, ALTA, APAC, AFRAA, Eurocontrol, Sabre, Embraer Market Intelligence, Airlines.

Contact

We welcome your feedback and comments at:

Email: market.outlook@embraer.com.br

The Embraer Market Outlook is also available online at:
www.embraercommercialaviation.com