Will United Airlines Buy Embraer's Next-Generation Jets?

More than five years after formally launching its E-Jets E2 program, Embraer (NYSE: ERJ) still hasn't won an order from a major airline. As of midyear, Embraer had only 130 firm orders for its E190-E2 and E195-E2 models combined. The majority of those orders were placed by aircraft leasing companies. Brazilian low-cost carrier Azul's deal for 30 E195-E2s is the largest outstanding order from any airline.

Embraer missed an opportunity to secure a flagship customer for the E195-E2 last month, when JetBlue Airways decided to order the A220-300 from Airbus (NASDAQOTH: EADSY) instead. As a result, Embraer has turned its sights toward Alaska Air (NYSE: ALK), Spirit Airlines (NYSE: SAVE), and -- most notably -- United Continental (NYSE: UAL) in the U.S. market.

Winning an order from United would be a game changer for the E2 program. Let's take a look at whether Embraer has a realistic shot at sealing a deal with the third largest airline in the world.

Three targets

Last week, a top Embraer executive highlighted Alaska Airlines, Spirit Airlines, and United Airlines as three carriers that could benefit from E2-series jets, according to Flightglobal. The E190-E2 and E195-E2 have lower trip costs than the smallest mainline jets operated by all three airlines today. That makes them ideal tools to help Alaska, Spirit, and United expand into smaller markets.

However, the likelihood of winning an order from Alaska Airlines is very slim. The carrier is currently slowing its growth rate and implementing a variety of initiatives to help reverse a steep slide in its earnings power. It's also deciding whether or not to get rid of its Airbus planes to regain the efficiencies of operating a single fleet type. Adding a third fleet type would be a stunning break from Alaska's recent plans.

On the other hand, Spirit Airlines represents a legitimate sales opportunity for Embraer. That said, the Brazilian aircraft manufacturer would have to make an aggressive offer to convince Spirit to move away from an all-Airbus fleet.

United Airlines may thus be Embraer's most realistic sales target in the U.S. -- as well as the biggest. Here are some of the considerations that will play into United's fleet decision.

United is becoming more receptive

A year ago, United Continental President Scott Kirby said that it would be hard to justify adding small jets like the E190-E2 and E195-E2 to United's mainline fleet. He pointed to higher labor costs (on a per-seat basis) and lack of commonality with United's existing narrowbodies. Kirby would prefer to expand using larger 737-family or A320-family aircraft, instead.

However, Kirby now seems to be softening that stance. The reason is that United's pilot contract allows the carrier to expand its fleet of 76-seat regional jets only if it adds small mainline planes at the same time. United Airlines desperately needs the 76-seaters to remain competitive. Thus, barring the unlikely possibility that its pilots relax their "scope clause", the carrier will need to order either E2-series jets or A220-100s.

Embraer's main advantage in this potential competition would be its ample supply of delivery slots over the next few years. By contrast, if Airbus sticks to its plan of producing all A220s for the U.S. market at its Mobile, Alabama facility after 2020, it might not be able to meet United's full needs until 2025 or thereafter.

An agreement with United could be transformational

One of the big sticking points for United Airlines regarding adding a small mainline jet is that it wants to avoid the cost headwind of operating many different fleet types. However, Embraer could offer its E2-series jets not just to meet the requirements of United's scope clause, but also as a replacement for the carrier's Airbus A319s and Boeing 737-700s.

United Airlines currently configures its A319s with 128 seats and its 737-700s with 126 seats. While Embraer advertises the E195-E2 as seating 120 in a typical legacy carrier configuration, United could probably squeeze up to five extra seats onboard using the tighter spacing between rows that it has adopted on other aircraft types. This would make the E195-E2 a very close replacement for both the A319 and the 737-700, albeit with slightly less range.

United currently operates 40 737-700s, all of which were built between 1998 and 2002. The vast majority of its A319s -- 55, to be exact -- were built between 1997 and 2002. These planes will start to come up for replacement a few years from now.

Between the 88 small jets it would need under the pilot scope clause to max out the size of its 76-seat jet fleet and the 95 A319s and 737-700s that ought to be replaced over the next decade, United could potentially have a need for 180 or more E2-series jets. That would be a big enough fleet to provide economies of scale.

Securing an order of this size would be a huge deal for Embraer: enough so that it should be willing to offer unusually big discounts to make it happen. It's certainly a realistic possibility -- but only if United's pilots definitively slam the door on management's preferred scenario of adding 76-seat jets without introducing a small narrowbody to the mainline fleet.

10 stocks we like better than Embraer Brazilian Aviation CoWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Embraer Brazilian Aviation Co wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

Adam Levine-Weinberg owns shares of Alaska Air Group, Embraer, and Spirit Airlines. The Motley Fool owns shares of Spirit Airlines. The Motley Fool recommends Alaska Air Group and Embraer. The Motley Fool has a disclosure policy.