More on JetBlue EMB-190 order & its competitve threat to US Airways

[USA320Pilot]

Boyd Group - Hot Flash - June 16, 2003

The jetBlue Embraer Deal...
It''s A Lot More Than A Jet Order
Airbus Just Took One Right On The Nose Cone...

Two very significant events took place last week. One caused a media frenzy. The other was hardly noticed, if at all.
The first was the jetBlue order for 100 Embraer E-190s. The second notable event was when Frontier, at the Paris Air Show, accepted the keys to the carrier''s first Airbus A-318.
Airbus Thought Boeing Was The Competition. They''re Thinking Again. The significance of these events has apparently been lost on most everybody, except maybe for some thunderstruck folks deep within the Airbus and Boeing strategic planning departments. While the media types babbled on about jetBlue''s "regional" jets, the folks in Toulouse no doubt got the real message: the 170/190 E-Jet platform has launched Embraer into the forefront of the mainline airliner business. Worse, with the jetBlue order, Airbus just got kicked in the nose cone, and possibly even relegated to a secondary role in the 100-seat market as well. The A-318 is in deep trouble.
Consider: jetBlue ordered a fleet of 100-seat airliners. Simply because the manufacturer was Embraer, the veneer types in the media called it a big "regional jet order." (They must have missed the press releases from both the airline and the manufacturer: neither used the term "regional jet.") At the same time, Frontier took possession of the A-318, which Airbus describes as its "100-seat" airliner. But nobody called it a "regional jet" when Frontier ordered it. Frontier ordered a handful of A-318s. jetBlue ordered and optioned 200 Embraers.
The E-190 is a 100-seat jet with a range well in excess of 2,500 miles. The A-318 is what Airbus bills as its own 100-seat jet, and it also has a range in excess of 2,500 miles. The real-world, in-fleet mission capabilities of the two aircraft are not much different, but some media trendies, many of whom couldn''t recognize a E-190 from a Curtiss Condor, saw the name "Embraer" and confidently referred to the aircraft as a "regional jet."
Airbus Just Got The Bionic Winkie. The 2003 Paris Airshow, at least behind the scenes, was likely not a real happy place for Airbus. While they were publicly tipping the bubbly, toasting a couple of A-380 orders, they where being zapped out of the lower end of the fastest growth airliner demand category.
Consider The Impact. The jetBlue order likely hit Airbus like a brick. The A-318 is almost 100% compatible with the A-320. Cockpits. Maintenance. Parts inventory. Training. Pilot exchangeability between the two. Consider: jetBlue has over 100 A-320s in operation and on order. From that perspective, the A-318 was the slam-dunk choice when jetBlue was looking for a smaller airliner, right? Wrong. The relative economics of the two airplanes apparently more than made up the difference. jetBlue clearly understands that it isn''t the number of seats, it''s the economics of the airplane.
The hard fact is that the A-318 and the E-170/190 series are direct competitors. Looking at what both airplanes can do, say, from Frontier''s Denver hub, there isn''t much difference. The A-318 is a little bigger, and has more range, but both aircraft have very similar in-fleet mission applications. Both, by the way, can reach either cost from Denver. Both can offer seats more than an inch wider than a 737. The only difference, and it''s a big one: the economics of the Embraer are likely leagues better than the A-318, which is a downsized A-320.
The Beginning of The RJ End. Far from being an extension of the "RJ phenomenon" as some are trying to spin it, the emergence of the E-170/190 as a viable player in the US is another signal that the RJ order cycle is ending fast. While <51 seat jets (and their stretched 70-90 seat Canadair progeny) will continue to have a role, it''s going to be one that will be in decline by the end of the decade.
Leveling The Playing Field. While jetBlue is a low cost airline, they do not have a permanent lock on operational efficiency. These smaller E-Jets can be used to great effect by network carriers. Not only do the economics lend well to feed roles, but the ergonomics are equal to larger jets, or better. Mega-carriers can apply these aircraft to building medium-size markets, generating more revenue through their hub operations than possible with 50-seat RJs.
Where The Demand Will Be: 70 - 150 Seats. As the fleet forecasts at our annual Forecast Conferences have made clear over the last four years, the main growth area in airliner demand in the coming decade won''t be widebodies. And, as we alone first forecast, it sure won''t be <51 seat RJs. The real demand in terms of units will be in the 70-150 seat narrowbody jets. The jetBlue order shows without any doubt that Embraer has staked out the lower end of this demand category.
We''d all better wake up and smell the Brazilian coffee: There are now three global producers of airliners: Boeing, Airbus, and - Embraer.

Best regards,

Chip

 

[USA320Pilot]

Key Points from Bear Sterns JetBlue EMB-190 Report


NEW AIRCRAFT ORDER - In a surprise move, JetBlue breaks with its single aircraft type fleet and orders 100 Embraer 190s with options for 100 more. Deliveries begin in 2005. Lease financing has been arranged for the first 30 planes.


COST PRESSURE - Our primary concern is that the addition of the new plane will cause unit costs to increase. Unit costs will be about one penny higher (15%) on the Embraer 190 than the A320. In addition to add-ons for pilot training and maintenance, we believe the economics of a smaller plane servicing shorter routes will drive overall unit costs up by 0.5 cents (8%) by 2009 from current levels.


BUT ADVANTAGE REMAINS - The good news is that even with this change, we project that JetBlue will still have a 25-35% unit cost advantage to the majors over the long term.


A PROBLEM OF PERCEPTIONS - Near term, we believe this will be a tough pill for investors given the attraction to the single aircraft type, point-to-point model. The key is arguing that the move will propel rapid growth into the second half of the decade. On the roadshow, management''s challenge will be breaking down the perception that the single aircraft type is the only road to success.


KEEPING AN OPEN MIND - We believe it would be a mistake to fuel the knee jerk reactions which immediately dismiss any departure from the existing business model. While we are concerned about the unit cost pressure, we believe that markets exist that can be served by the EMB 190 at fares that will stimulate demand and propel continued growth at JetBlue. We maintain our YE target range of $33-$37.

Best regards,

Chip

 

[USA320Pilot]

Dear Moderators:
I started this thread, "More on JetBlue EMB-190 order", because of the New York-based carriers competitive position and the orders effect on US Airways. Many US Airways employees do not look at the JetBlue board; therefore, please keep this thread active on the US Airways board.
Thanks.
Best regards,
Chip

 

[USA320Pilot]

Key Points from Bear Sterns Lehman Brothers EMB-190 Report

JetBlue Announces Order for 100 Regional Jets


JetBlue announced an order for 100 Embraer 190 aircraft along with 100 options that will be delivered beginning in 2005. The company plans to > utilize these aircraft in further developing existing cities by creating opportunities in medium size markets to augment its existing service in larger markets.

Two Concerns.

A new fleet type brings added complexity to an airline operation. While JetBlue has a solid track record, we believe that an added fleet type adds to the risk of the overall story. The company acknowledges that the aircraft will carry a higher unit cost on a stage length adjusted basis (about 1c, which is significant for as low cost an operator as JetBlue) than its existing A320 fleet and that it will increase the complexity of its very simple operation. However, JetBlue believes that market opportunities will allow for comparable margins to what it achieves with the A320.

Our second concern is that we do not believe JetBlue will enjoy as great a structural cost advantage in delivering this service as it does in delivering its mainline service. JetBlue''s cost advantage with the 100-seaters will depend to some extent on scope clauses at network airlines (if the networks flew the same aircraft through regional affiliates, they might achieve costs much closer to JetBlue than they now achieve in their mainline operations). Admittedly, it will be very tough to get scope clauses lifted to 100 seats, but JetBlue''s cost advantage could theoretically dissipate somewhat with a change in contracts.

But Investors Should Keep 3 Points in Mind JetBlue believes this move provides the opportunity for the carrier to expand into 3-4x the markets it currently services and expects to achieve a 24-25% CAGR through 2011. As has always been the strategy of JetBlue (and of Southwest for that matter), the company expects it will be able to stimulate significant demand in a number of markets through lower fares. AND although the Embraer 100-seater diversifies the product, it will offer similar amenities to the existing JetBlue service, which includes leather seats with a 32" pitch and DirecTV.

Investors should also be mindful that there will be no significant impact on JetBlue''s earnings or performance from this announcement until well beyond 2005 (2005 impact will be negligible). As well, JetBlue has repeatedly (and successfully) defied conventional wisdom (from leather seats and DirecTV to successfully operating a low-fare operation out of JFK). Is it not conventional wisdom that is > sending the shares down today?

Bottom line... Our near-term concern with JetBlue has been valuation. One of the reasons valuation is a concern is that skepticism around the story has dried up lately. Today''s announcement may have a silver lining in that skepticism may create some opportunity, although we believe the shares need to decline further before we would get aggressive. We are not surprised by the market reaction to today''s news. It clouds the longer-term growth outlook somewhat and defies conventional wisdom.

Best regards,

Chip

 

[USA320Pilot]

On June 16, Airline Financial News (AFN), www.aviationtoday.com interviewed JetBlue chief executive officer David Neeleman. AFN said, "While Embraer may consider the 190 a regional jet, Neeleman does not. "It is not a regional jet in the original sence of the word. This has a wider aisle and seats than the A320." The plane will have a range of 2,100 nautical miles. "It''s not a transcontinental, but is also not constrained," Neeleman said.
"On the Embraer we will need 60 people to breakeven, but we would need 120 on the Airbus," he noted.

Best regards,

Chip

 

[scot]

While what B6 does, does affect US employees so does every other airline on the board. The purpose of the board is to have the specific airline info posted on it''s particular board. For those US employees intersted in how B6''s move will affect you, please check out the thread posted on the Jetblue board which was kindly started by Chip and already has replies.
Thank you.
Scot