Embraer Sees More Sales With Planes’ Bigger Overhead Bins

In an era when airlines are squeezing passengers with charges of an average $25 for checked bags, Embraer SA (EMBR3) is making more room for carry-ons.

Embraer’s second-generation E-Jet will have overhead storage providing at least 40 percent more volume per traveler than current models, according to the company. It will be the only single-aisle plane to let each flier to stash a roller bag, giving Embraer a unique advantage in its sales pitch.

The planemaker is betting it can outsell Mitsubishi Aircraft Corp., Sukhoi Co. and Bombardier Inc. by giving carriers a way to appease customers long familiar with losing perks in a revenue-conscious industry. Lucrative business passengers especially are more likely to shun airlines that lack room for carry-ons.

“Embraer and the airlines that operate its new E-Jets will be the heroes of every beleaguered traveler if Embraer’s new planes allow every passenger to stow a standard suitcase in the overhead bin,” Henry Harteveldt, a travel industry analyst and founder of Atmosphere Research Group in San Francisco, said by e-mail. “Current limitations in overhead bag stowage frustrate passengers and cabin crew alike, as they struggle to find overhead bin space for the last few passengers who board, and contribute to flight delays.”

Extra Fees

Embraer is investing about $1.7 billion to refresh the E-Jet lineup amid a shrinking market for smaller planes. Rather than design an aircraft from scratch, the world’s fourth-largest planemaker opted to offer the upgraded E2 family as U.S. airlines move toward larger, more-efficient regional jets to replace 50-seaters. The first E2 is due for delivery in 2018.

Airlines increasingly count on fees from checked luggage to boost revenue. In the U.S., ancillary sales from bag charges, preferred seats and other services are estimated to have totaled $14.3 billion in 2013, according to aviation consultant IdeaWorksCompany. At the same time, carriers are packing planes fuller and fliers are trying to cart on bigger bags, leading to a battle for overhead real estate.

The bins in the new E-Jets will accommodate bags that measure 22 by 18 by 10 inches (56 by 46 by 25 centimeters), according to Claudio Camelier, vice president of market intelligence for Embraer’s commercial aviation division. That’s bigger than the carry-on limits (22 by 14 by 9 inches) that United Continental Holdings Inc. began enforcing in March for all planes, not just regional jets.

Passenger Satisfaction

Airlines first look for operational efficiency in buying new planes, including low fuel and maintenance costs, “but not less important is the satisfaction of passengers,” Camelier said in a telephone interview.

“Today, passengers have the liberty to access information online and see what’s most convenient, they can see the opinions of other passengers regarding airlines,” Camelier said. “More and more, airlines are paying attention to passenger demands, especially in terms of cabin comfort.”

Airlines are also cracking down on passengers trying to lug aboard everything from cowboy hats to musical instruments, said Brett Snyder, who runs the Cranky Flier airline industry blog.

“People get really wound up about carry-ons, and part of it is they don’t trust the airlines to not lose their bags, and part of it is they don’t want to pay to check in,” Snyder in a telephone interview. “I hate checking a bag.”

Embraer, based in Sao Jose dos Campos, Brazil, faces a dwindling market for the smallest commercial jets. Regional jet deliveries dropped from a peak of 244 in 2004 to 150 last year, according to data compiled by Bloomberg Industries.

American Order

The company is counting on the upgrade strategy to trump Bombardier, which is keeping its existing regional-jet lineup while investing in the all-new CSeries, a larger aircraft that has been delayed several times and has failed to attract many big-name airlines.

Bombardier said the CSeries will have the biggest stowage in its class. A Bombardier CS100, which seats at least 108 people in a standard configuration, can hold as many as 93 roller bags in overhead bins, said Marianella de la Barrera, manager of media and public relations at Bombardier Aerospace.

“Any bin volume claims from the competition have yet to be confirmed,” de la Barrera said in a telephone interview. Bombardier has a larger bag limit at 24 by 17 by 11 inches.

“We expect Embraer to be in the running against Bombardier to win a major order from American Airlines (AAL),” a team of analysts from Banco Bradesco led by Edigimar Maximiliano Jr. wrote in an April 30 note. About 45 percent of Embraer’s revenue comes from its E-Jets, and its biggest customers are U.S. airlines, with 38 percent of revenue coming from North America, according to data compiled by Bloomberg.

More Profitable

Embraer sales totaled 14.4 billion reais ($6.5 billion) in the 12 months through March, compared with $18.2 billion for Bombardier. Embraer traded at 14 times estimated 2014 earnings compared with 9.6 times for Bombardier, data compiled by Bloomberg show. Embraer rose 61 percent through yesterday since it decided to go with the E2 in November 2011, while Brazil’s Ibovespa index slid 7.3 percent. Bombardier dropped 6.7 percent.

Embraer climbed 0.7 percent to 18.75 reais in Sao Paulo. The shares gained after the company said today it signed a contract with the Brazilian government to provide 28 KC-390 aircraft over 10 years for 7.2 billion reais.

For airlines that see bigger bins as a selling point to travelers, Embraer’s additional storage may create a difficult tradeoff: Ancillary revenue such as checked-bag fees is helping bolster industry profit.

That total rose 18 percent worldwide to an estimated $42.6 billion in 2013, according to Shorewood, Wisconsin-based IdeaWorksCompany.

“The problem with creating more room for carry-ons is that people will use it and I don’t know that that’s in the airlines’ best interest financially,” said IdeaWorksCompany President Jay Sorensen, a former Midwest Airlines executive.

Some U.S. airlines charge for carry-ons. Spirit Airlines Inc. (SAVE)’s fees can run as much $100, and Frontier Airlines Inc.’s charges top out at $50, according to the companies’ websites.

Passengers should be happy with Embraer’s change, said Snyder, of the Cranky Flier. The lack of overhead bin space had previously defined regional jets and frustrated passengers connecting into the smaller planes from mainline aircraft.

“Storing your bag in an overhead bin -- that is a constant battle for everyone on every flight,” Snyder said. “This will create a more standard product.”

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net Molly Schuetz, John Lear

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Airlines increasingly count on fees from checked luggage to boost revenue. Close

Airlines increasingly count on fees from checked luggage to boost revenue.

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An Embraer SA Phenom 100 jet at the Singapore Airshow on Feb. 11, 2014. Close

An Embraer SA Phenom 100 jet at the Singapore Airshow on Feb. 11, 2014.

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