Dragons in the Sky – somewhere between Sao Paulo and Rio

What flies and spits fire at the same time? That’s right: airplanes.

Aircraft are major emitters of greenhouse gasses and reducing these emissions poses a challenge to airlines, regulators, and manufacturers. How will Brazilian aircraft manufacturer Embraer react to this changing environment? What steps have they taken to become more eco-friendly and not be left behind in this new competitive scenario?

 

Why should we care about airplanes?

flying high. Commercial jet at altitude

If you ever hopped on a plane and flown across the world to go on that perfect vacation, I’m sorry to tell you that flying probably accounts for a relevant part of your carbon footprint. The average American will generate 19 tons of CO2 in a year [2] – the worldwide average is about 5 tons per year [3], whereas flying round-trip from New York to Europe will generate an effect equivalent to 2 to 3 tons of CO2 per passenger [2]. Commercial flights alone are estimated to produce 700 million tons of CO2 per year [1] – about 2% of total world emissions.

Current levels of emissions originated from flying are high, but estimates are that this number could triple by 2050 [4]. Specific studies point out that the temperature increase caused by aviation alone could be of 0.03oC by 2050 [6]. It comes as no surprise, then, that governments and international agencies have already started suggesting and enforcing regulations on greenhouse gas emissions from airplanes [4] [5].

In a world where emissions are controlled and regulated, aircraft manufacturers that fail to adapt to the new reality might be headed for disaster. On the flipside, producing “greener” planes will provide an edge over their competitors. Companies can achieve that in basically two ways:

  • Use cleaner energy
  • Produce airplanes that are more energy efficient (added benefit of cost reductions for operating the airplane)

Going about achieving these goals requires R&D spend and can be done in-house, through partnerships – with other companies, universities, institutes etc. – or through acquisitions – of either companies or just patents or technologies.

The decision of which strategy to pursue will hinge on the company’s internal capabilities and resources.

 

Why do we care about a company in “I-don’t-know-where”, Brazil?

6638c8_c83da5b56c524b7c8cc10040609109b4

Sao Jose dos Campos is the foremost Brazilian aerospace and defense hub, including the Brazilian Space Research Institute, the Institute of Aeronautics and Space, the Aeronautics Institute of Technology (ITA), defense companies Avibras and Mectron, and the third-largest commercial airplane manufacturer in the world, Embraer [15]. You might have flown in one of Embraer’s airplanes and not know about it [16].

This also happens to be the city where I grew up and where my family still lives. I have also earned my degree in aeronautical-mechanical engineering in the city – at ITA, even though I have never worked in this field.

Embraer focuses on the medium size and executive airplane segments, selling its airplanes to more than 90 airlines in more than 60 countries. It’s safe to say, then, that their clients will be impacted by some form of carbon regulation sooner rather than later.

 

What have they been doing?

embraer_195_521500_i0

Embraer created its Environmental Department in 2007 [8], and has been investing in energy efficiency and green fuel development, mainly through partnerships. Partnering makes sense given Embraer’s tiny R&D budget compared to competitors: $40 million compared to $3 – 4 billion for Boeing and Airbus [11] [12] [13].

Embraer’s advances in wing design and avionics have contributed to energy efficiency, but, without the collaboration of turbine manufacturers, the impact will most likely be limited.

In 2009, a partnership was established with GE (turbine manufacturer), Azul airlines and Amyris [17] to develop renewable aviation fuel primarily based on sugar cane ethanol, leveraging Brazil’s natural resources – world’s greatest producer of sugar cane – and expertise in this matter (e.g. 92% of cars produced in Brazil ran on both gasoline and ethanol in 2013 [20]).

In 2011, in partnership with GE, Embraer completed flight tests under a variety of different conditions with an E170 aircraft powered by hydro-processed esters and fatty acids [9] [10]. In 2012, an E195 of Azul Airlines successfully flew using bio kerosene made from sugarcane, produced by Amyris [9].

This could be an important step towards emission reduction, given the estimate that “sustainably produced aviation biofuel emits 50 to 80 percent lower carbon emissions through its life cycle than fossil jet fuel.” [7]

In 2012, a partnership began between Embraer and Boeing [9], which has yielded development and tests in biofuel, LIDAR technology and other features such as “ice-phobic” paint [7] by 2016.

Even though they have been acting, Embraer could increase R&D spend to attempt to develop some of the innovations in-house (Embraer spends 0.7% of revenues on R&D [11] vs 3.4% for Boeing [12] and 5.4% for Airbus [13]).

As the “underdog” company, with much less money than competitors, Embraer needs to use ingenuity to its advantage, a strategy that has served them well for in the past [18].

 

(775 words, excluding references)

 

 

[1] “Science Magazine”, June 12, 2015,

http://www.sciencemag.org/news/2015/06/us-move-regulate-greenhouse-emissions-aviation-puts-international-rules-runway

[2] “New York Times”, Jan 26, 2013,

http://www.nytimes.com/2013/01/27/sunday-review/the-biggest-carbon-sin-air-travel.html

[3] “World Bank”

http://data.worldbank.org/indicator/EN.ATM.CO2E.PC?year_high_desc=true

[4] “New York Times”, Feb 8, 2016,

http://www.nytimes.com/2016/02/09/business/energy-environment/un-agency-proposes-limits-on-airlines-carbon-emissions.html?_r=0

[5] “New York Times”, June 10, 2015,

http://www.nytimes.com/2015/06/11/business/energy-environment/epa-says-it-will-set-rules-for-airplane-emissions.html

[6] Sausen, R. & Schumann, U. Climatic Change (2000) 44: 27,

http://link.springer.com/article/10.1023/A:1005579306109

[7] Boeing Website, July 7, 2016,

http://www.boeing.com/features/2016/07/embraer-ecodemonstrator-07-16.page

[8] Embraer Website, October 31, 2007,

http://www.embraer.com/pt-br/imprensaeventos/press-releases/noticias/paginas/embraer-cria-diretoria-de-meio-ambiente.aspx

[9] Embraer Website, Jan 14, 2015,

http://www.embraer.com/pt-BR/ImprensaEventos/Press-releases/noticias/Paginas/Boeing-e-Embraer-inauguram-centro-de-pesquisa-em-biocombustiveis-no-Brasil.aspx

[10] MIT Laboratory for Aviation and the Environment,

http://lae.mit.edu/fueling-the-future-of-flight/

[11] “Embraer 2015 Annual Report”, page 7,

http://ri.embraer.com.br/list.aspx?IdCanal=raizxNueT5FGW442/D1BFg==

[12] “Boeing 2015 Annual Report”, page 3,

http://s2.q4cdn.com/661678649/files/doc_financials/annual/2015/2015-Annual-Report.pdf

[13] “Airbus 2015 Annual Report”, page 2,

http://www.airbusgroup.com/int/en/investors-shareholders/Publications.html

[14] Airbus Website,

http://www.airbus.com/innovation/future-by-airbus/future-energy-sources/

[15] Embraer Website,

http://www.embraer.com.br/pt-BR/ConhecaEmbraer/EmbraerNumeros/Paginas/Home.aspx

[16] “The Wall Street Journal”, March 29, 2010,

http://www.wsj.com/articles/SB10001424052748704896104575140151650091716

[17] Embraer Website, November 18, 2009,

http://www.embraer.com/pt-br/imprensaeventos/press-releases/noticias/paginas/embraer-general-electric-azul-e-amyris-anunciam-projeto-de-avaliacao-de-combustivel-renovavel-para-jatos.aspx

[18] Aviation Marketing Consulting, May 30, 2013,

http://www.aviationmarketing.aero/2013/05/30/embraers-simple-strategy/

[19] Embraer Website,

http://www.embraer.com.br/pt-BR/ConhecaEmbraer/TradicaoHistoria/Paginas/default.aspx

[20] Uol, March 19, 2013,

http://carros.uol.com.br/colunas/alta-roda/2013/03/19/motor-flex-celebra-dez-anos-presente-em-92-dos-carros-novos-do-pais.htm

 

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Student comments on Dragons in the Sky – somewhere between Sao Paulo and Rio

  1. Hello “Sharp Boy” – interesting blog post. I would love to see whether airlines have committed to purchasing these new eco-friendly planes. Having worked at an airline myself, the struggle always comes down to cost. Given the low fuel price environment, purchasing fuel efficient new planes might not make sense given the high price tag on the new fuel-efficient aircrafts. How does Embraer tackle this issue, especially given its high investment in R&D and the need for a high price tag in return for an attractive ROI?

  2. Thanks for the sharp article, Arthur. I agree with you that this is a very important topic, especially as most of us fly on planes so much. I wanted to challenge some parts of it. You mentioned that they could increase R&D as a percent of sales to meet competitors, but due to it’s smaller size, do you think that it would be worth it? In my view, that money would be better spent investing in third party research as well as partnerships, as you mentioned. Another question I have is how sustainable is biofuel produced from sugarcane. As sugar prices have been very volatile in the last couple of years, this could be a challenge for the industry with quite a few companies facing financial distress. Although this research and new source of sugarcane demand could be a boost for the sugar producers and a great opportunity overall, do you think that the industry is ready?

  3. What if they just invest in teleportation instead 😛

    In all seriousness, thanks for summarizing what airline companies have been doing. What I’m curious about is what their incentives will be to do this given the significant level of investment as well as risk (safety given the business of airlines to carry people)? The scale of R&D spend Embraer has used is certainly impressive. How have they been allowed by their leadership/stakeholders to do this given the hit to their profitability?

    By the way, I love the opening riddle referencing dragons – reminds me of how the dragon in The Hobbit asks riddles.

  4. Sharp Boy! (Arthur?) Didn’t realize Embraer was Brazilian. It seems like an underdog should spend more on R&D as a percentage of income than the big companies. I’m also why they would partner with Boeing unless they think Boeing is going to come up with something they can’t. Do you know what the terms of that agreement were with regard to ownership of the IP?

  5. Interesting post, Sharp Boy. From a technological point of view, the commercial airplane is one of the few technologies that has survived the past 50 years without a technology disruption, it reminds me of the telephone before the mobile phone revolution and the car as it stil stands today very similar to its original conception. Innovation is still incremental an improvements are marginal. The thing that strikes me the most is the more we only have marginal improvements, the closer we are to disruption point and I sincerely believe that it will probably come in terms of new propulsion technology that will limit the use of fuels and drastically reduce its carbon footprint. One of the answers might be with Hyperloop, that has recently passed its proof of concept stage.

  6. Interesting article Arthur! It is actually refreshing to see that there are certain industries that are, not only making significant advancements to address climate change, but are partnering up understanding the magnitude of this issue. Do you think their current strategy, as you mention, of taking advantage of ingenuity and being the underdog will bring the most benefit to Embraer or from your experience and insight you feel that they should be taking a different approach? One last thing… just out of curiosity. Is this model replicable in other latin american countries? ie. 92% of cars produced in Brazil running both on gasoline and ethanol is impressive.

  7. Sharpie! Boa noite.
    In many ways being number 3 after two gigantic, and slow moving competitors is a good thing. Embraer can be nimble about positioning itself as an eco-conscious supplier. Increasingly there is going to be a demand from customers for their airline to be low on carbon emissions. However, it is equally likely that this concern never materialized because the world is able to get its act together and control global warming. It would be interesting to know what the management thinks about their research and development efforts and how they want to hedge excess invesmtnet in being efficient.

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