Presentation By Embraer

Transcript

John Slattery:It's just over a month since the very first commercial revenue-generating flight on April 24th of the 190 E2, and since then it's completed over 200 flights with an average of 8 cycles per day, and today enjoys a stellar 100% scheduled reliability. The Pioneer Airlines project was one of several innovations Embraer introduced in developing the E2 program to make it the most efficient new-generation single-aisle airplane. So to the issues today. The IATA economists anticipate 2018 is expected to be the 4th consecutive year of profits with a return on invested capital of about 8.5%, which exceeds the industry's average cost of capital by— of 7.7%. So it's a matter of basis points that it's already— that it's only exceeding the cost of capital. However, the fuel costs today and indeed the interest rates are on the rise, but the airframe— the airfares, well, they're stable at best and probably more likely on a downward trajectory. This will be another great year for the industry, no doubt, but it's hard to avoid the fact that the peak of this particular cycle is now definitively behind us. In this cycle, one of the most important short-term drivers that has shaped the industry was the relatively attractive oil prices. It made a massive difference to the bottom line, particularly for our industry which typically records such low profit margins. But over that period of low oil prices, the industry structure, the management teams generally didn't change the structure, and the pressures on yields are now likely to continue unabated as we now prepare for this next period of what we expected Embraer to be higher sustained oil prices. And IATA predicts a global operating profit again for 2018 of $56 billion, which is a 6.8% operating margin. This can drop to a profit of $30 billion which is a 4% margin if fuel reaches the 2014 levels, bringing the ranks of profitability back to very few of you in this room. Now, one may think it's not realistic to consider that oil, the price of oil at least, could reach the 2014 levels again this year, and maybe. Nevertheless, bear in mind that a 10% swing in oil price could affect airline profits worldwide to the tune of, well, give or take $20 billion per annum. The capability to generate profits, it must outlast any fuel cycle. Irrespective of whether the rise in fuel prices is transient or structural, its volatility poses a risk to us all. Over the long run, having the most fuel-efficient aircraft is the optimal long-term strategy to address the impact of oil volatility. The benefits of new generation aircraft go beyond fuel burn reduction, but also improve range and payload capability, a reduction in noise, CO2 and NOx emissions, enhanced living— passenger living space and stowage space, and of course, lower maintenance costs. But why exalt only cost savings if you can combine the best in cost efficiency with stronger yields. And although cost is critical for airlines' ability to remain competitive over the long term, well, profits are the ultimate analog of success. The economic performance of the airline industry will mostly depend on how far costs will rise and to what extent you in this room can sustain a healthy revenue environment. Now, profitability remains elusive for carriers facing the challenge of surplus capacity, the traditional overreliance on large aircraft results in inefficiencies that in, in turn lead to deep fare discounting in order to fill that excess capacity. We refer to it as a vicious cycle. History doesn't need to repeat itself, but at least it can be a useful guide to the airlines in the room for the future. As Winston Churchill stated in the 1940s, I consider that it will be found much better for all of us to leave the past to history, especially as we now propose to write that history. This new market dynamic offers you in this room an opportunity to develop a fresh strategic mindset that charts a bold new path moving away from the traditional one-size-fits-all mindset. A more nuanced competitive positioning will be increasingly important, and we at Embraer, we refer to that as a virtuous cycle, the virtuous cycle of rightsizing. As Churchill continues, we shall not fail or falter, we shall not weaken or tire. Give us the tools and we will finish the job. So with rising costs, not only fuel or interest rates but also labor, the line separating the winners and the losers in this future cycle around the global industry this year is most likely to be drawn on how well the airline management teams manage their efficiencies, their access and execution of efficiencies. A right-sized new generation aircraft like the E2 not only maintains a lower cost structure but also optimises revenue and yield management. Efficiency is indeed one of the engines of a sustainable future. Performance, by definition, is a snapshot of the past, and the current economic performance of the airline industry is, is, well, it's no guarantee of the future results. So in summary, ladies and gentlemen, whether or not the airline industry has something to brag about in the upcoming years will largely depend on how hungry you are for efficiency, just like we did at Embraer when we went beyond the ordinary with Pioneer Airlines. Thank you very much. Thank you, John.

Copyright policy: All transcripts on this site are the copyright of CAPA - Centre for Aviation. Our reproduction policy is as follows: you may quote up to 400 words of any transcript on the condition that you attribute the transcript to CAPA - Centre for Aviation and link to the original video page. All other use is prohibited. While we aim for 100% accuracy in the transcript, there may be some minor transcribing errors.