- Aviation's Week in Charts
- Posts
- Small jets: a buffer against market cyclicality
Small jets: a buffer against market cyclicality
How small commercial aircraft like Embraer’s E170/E175 bring stability to portfolios with their more predictable value profiles
We’ve partnered with Falko to bring more free analysis and charts. Once a month, we’ll be including a second analysis for the week on one of our favorite and least understood markets: regional aviation. Of course, our regularly scheduled programming will arrive on Thursday as usual.


Cyclicality is present in any market. Regardless of the industry, there will be times of stronger and weaker periods.
This is especially true of aviation. Demand for air travel closely rides the fortunes of local economies. At the same time, aircraft supply is riding its own wave of cycles, driven by renewed attention on supply chain constraints.
These diverging cycles between aircraft supply and demand have driven volatile aircraft values. The recent COVID-19 pandemic served to exaggerate these cycles, creating a perception of risk around the aircraft as an asset. Following our prior analysis of the various regional airline business models and how they differentiate risk, we turn to the assets themselves. To be certain, aircraft can pose substantial risks. The near-complete shutdown of air travel during the pandemic serves as an undeniable example of this.
However inherent the risk may be in aviation investments, opportunities exist to find market stability without leaving the industry. Indeed, this market stability is a key characteristic of the 70- to 90-seat jet demonstrated over the past 20 years.
Compared to the A320ceo, representing the core of the narrowbody market, Embraer’s E170 and E175 have delivered higher lows and, until very recently, lower highs. This historic stability is a function of much more than the asset itself – it is a combination of the right aircraft in a unique market.
The E175 has become the standard scope clause-compliant jet in North America. By far the world’s largest market, network airline labor agreements - better known as scope clauses - have been designed to limit the market size of the aircraft and, as such, create one of the most stable aircraft markets in the world.
A standout example of the stability the E170/E175 aircraft have brought to the market is the assets’ performance during the Great Financial Crisis. At a time when most aircraft values were declining, the E170 and E175 found uniquely stable market values.
Primarily due to the growth in North America during this period of economic challenge, airlines were looking to right-size fleets following bankruptcies and mergers. The scope clause compliant E170/E175 became a truly counter-cyclical asset, breaking the traditional relationship between aircraft demand and airline financial health.
This level of stability in the E170 and E175 markets is not due to its ability to avoid crises. In fact, the contrary is true. The aircraft type entered the uncertainty of COVID just like any other asset but then was forced to deal with a unique and unprecedented pilot shortage in the U.S. which disproportionately affected the regional airlines.
During COVID, the large regional jet returned to the skies significantly faster owing to its ability to keep networks connected at lower costs than narrowbody counterparts. The subsequent drop in values for the E170/175 series was present but shallower than more traditional narrowbody and widebody aircraft.

Even during the worst of the U.S. pilot shortage, large regional jet utilization dropped; however, demand for the aircraft remained robust. Indeed, orders were placed with Embraer for new E175s during this period, signaling airline confidence in the long-term viability of the aircraft. In March 2024, American Airlines placed a firm order for 90 E175s with options for another 43 aircraft. This confidence is directly translated into value stability.
What is unique about the aircraft type is its ability to maintain stability through the various downturns. Through each crisis, E170 and E175 aircraft values remained stable when compared to narrowbody and widebody aircraft. This historical value stability is also directly translated into reduced uncertainty of residual values, of particular importance to those investing in the metal. While residual value risk remains with any aircraft type, the potential range is minimized with the E170/E175. This residual value uncertainty is further reduced by North American network airlines operating aircraft well beyond 25 years.
But, with stability during the downturns also comes stability during the strong periods. The same dynamics are at play in the large regional jet market during strong economic growth, from which this sector is also partially insulated.
North American pilot scope clauses effectively place a market cap on the E170/E175. Despite the need for more aircraft, any airlines subject to scope clauses will not be able to exceed limits agreed with the pilot unions.
While this appears a limitation of market demand at first glance, the end result is that the scope clause limits drive an extraordinarily stable market. Embraer’s shared production lines between the large RJ E175 production line and the small narrowbody E190E2 and E195E2 production lines allow the manufacturer to deliver into either market, preventing E175 oversupply.
Similarly, with nearly 85% of the E170 and E175 market subject to scope clause limitations, the overall market size is extremely well-defined and transparent. Airlines cannot contribute to oversupply with the E175 simply because it is not allowed in contractual agreements.
Alternatively, airlines are hesitant to leave scope clause room underutilized. As much as the airlines would like more E175 aircraft, they simply cannot add more without violating pilot contracts, making the active fleet that much more valuable and stable.
Of course, this is not to mean the market for new E175 aircraft is closed. As older 70- and 76-seat aircraft near 25 to 30-year retirement dates, the E175 is the only replacement option for aircraft of this size.
It is in this way that we think of the E170 and E175 more as a-cyclical rather than counter-cyclical to traditional narrowbody and widebody markets. While it can move opposite to narrowbody demand, as was experienced following the 2008 financial crisis, it can also move in a similar, though with muted amplitudes, as was the case during the COVID pandemic.
Regardless, the movement of the narrowbody and widebody markets have little effect on the 70+ seater jet space. Subsequently, it results in a highly stable market for the E170 and E175 that can serve as a buffer for a volatile narrowbody and widebody market.
For further information about Falko, visit their website or follow them on LinkedIn. To learn more about investing in regional aircraft contact Falko’s Investor Relations team at [email protected].
If you would like a PDF download of this analysis, you can find it here: https://visualapproach.io/small-jets-a-buffer-against-market-cyclicality/
If you were forwarded this email, score!
As valuable as it is, don't worry; it's entirely free. If you would like to receive analyses like this regularly, subscribe below.
Then...
You can pay it forward by sending it to your colleagues. They gain valuable insights, and you get credit for finding new ideas!
Win-win!