ILFC’s Embraer Order Seen Filling Boeing-Airbus Small Plane Gap

International Lease Finance Corp. (AIG) said its purchase of 50 Embraer SA (EMBR3) regional jets, its first deal for planes that small since the 1990s, was driven by the shift of Boeing Co. (BA) and Airbus SAS (EAD) toward bigger aircraft.

The world’s second-largest airplane lessor expects to place the E2 variants, worth $2.85 billion at published prices, with short-haul operators primarily in Asia and Europe, ILFC Chief Executive Officer Henri Courpron said in a telephone interview.

“We see that Airbus and Boeing are vacating this 90 to 120 seat category, and that gives an opportunity for Embraer to be successful,” said Courpron, a former Airbus executive who took the top job at ILFC in 2010.

ILFC agreed to buy the jets at last month’s Paris Air Show as parent American International Group Inc. works to complete the delayed sale of the leasing company to a Chinese group for $4.2 billion. Los Angeles-based ILFC ordered 25 each of Embraer’s E190-E2 and E195-E2 jets, which typically have about 100 to 132 seats, and options for an additional 25 of both.

Airbus and Boeing have shifted their focus to bigger versions of their A320 and 737 families of narrow-body jets as they’ve redesigned the planes with more fuel-efficient engines, with as many as 220 seats in the higher-density configurations. Neither manufacturer offered the smaller versions -- the A318 and Boeing’s 737-600 -- with the new engine option. Chicago-based Boeing stopped producing the 100-seat 717 model in 2006.

Future Customers

ILFC hasn’t determined exactly how many seats its E2 jets will have because that’s up to the future customers who will lease the planes, and no orders have been placed yet, Courpron said. Deliveries will begin in 2018, and Courpron said he envisions most going to Asia and Europe.

“We could put a third in Europe or thereabouts, put some in Asia, probably more than half because of the way Asia is growing now, and sprinkle the rest in South America,” Courpron said. “And once you do that with the first 50, we will gladly exercise our options, order 50 more, and keep spreading the joy.”

ILFC may have closer ties to Asia after its sale to a Chinese consortium led by New China Trust Co. Chairman Weng Xianding. Courpron reaffirmed the July 31 targeted date for the deal to close.

Chinese Buyers

AIG in June granted a second extension to the buyers, giving them until the end of the month to complete the purchase, and has plans to sell shares in ILFC to the public should the accord with the Chinese fall through.

ILFC, which completed its first lease transaction 40 years ago, hasn’t owned jets this small in its 1,000-aircraft fleet since the 1990s when it sold the last of its Fokker aircraft.

ILFC began talking with Sao Jose dos Campos, Brazil-based Embraer three years ago and was attracted to the promised fuel savings of the E2 jets, Courpron said. The aircraft will be powered by United Technologies Corp. (UTX)’s Pratt & Whitney geared turbofan engines instead of General Electric Co. (GE) engines on current models, a decision influenced by ILFC, Paulo Cesar de Souza e Silva, head of Embraer’s commercial unit, said in the interview.

Tapping into ILFC’s global network “is an opportunity to enlarge our customer base,” Silva said. “To have a market leader in our program is a huge endorsement.”

The E195-E2 has a fuel savings of 23 percent, while the E190-E2 has 16 percent, Silva said.

Russian Market

“The success of the e-jet over the last 10 years has for us made a difference,” Courpron said. “It has to be a liquid asset. Leasing it once, twice, three times over its life is what makes it relevant.”

The deal puts Embraer in nations such as Russia, where its E-jets are certified, though none is in the air yet, Silva said. It’s also where Embraer will face new competition from Sukhoi Co., which has a new regional jet. The Brazilian company will also soon face competitors with regional jets being developed in Japan and China.

“We believe we are very well placed to face the competition,” Silva said.

ILFC was able to take an active role in choosing elements of the new jets, including increasing the size of the biggest E195-E2 to add three more rows of seats, and redesigning wings and engines, Silva said.

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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