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Embraer looks to U.S. rebound to offset Europe
May 29, 2012 / 4:52 PM / in 5 years

Embraer looks to U.S. rebound to offset Europe

SAO PAULO (Reuters) - Brazil’s Embraer (EMBR3.SA), the world’s largest maker of regional jets, is counting on a recovery in the United States to offset weaker demand from Europe, the company’s chief executive said on Tuesday.

Brazilian aircraft maker Embraer's CEO Frederico Curado speaks during the Reuters Latam Investment Summit 2012 in Sao Paulo May 29, 2012. REUTERS/Paulo Whitaker

Speaking at the Reuters Latin America Investment Summit, Frederico Curado said the U.S. regional aviation market is poised for growth after years of stagnation, which should lift the company’s order pipeline from a more than five-year low.

“Reliance on the North American market is growing,” Curado said at the Reuters office in Sao Paulo. “Our expectation there is for growth this year, compensating the decline in Europe.”

That could reverse Embraer’s earlier efforts to diversify away from business in the United States, which made up just 20 percent of net revenue last year, down from 68 percent in 2005.

While Embraer is kicking off new sales campaigns in the United States, Curado said prospects in Europe are limited for now to smaller options from existing contracts. European business may continue slipping from a quarter of total revenue in 2011 and a third in the prior two years.

Steady growth in Latin America and Asia continues to support Embraer’s aim to expand revenue by as much as 7 percent in 2012 from last year, even as a weak global economy reduces appetite for its commercial and executive jets.

Embraer’s order backlog, a gauge of its ability to weather industry downturns, slipped to $14.7 billion at the end of March, or less than three years worth of revenue. It was the first time since 2006 that the backlog fell below $15 billion.

Curado said the company aims to halt its backlog’s slide in 2012 and replace each regional jet delivery with a new order.

The recent sales slowdown is far less severe than what the company saw after the 2008 financial crisis, he added, when credit for aircraft purchases dried up.

Airlines’ financing options are slimmer than before that crisis, Curado said, but a greater participation of state banks and leasing companies has ensured enough credit for new orders.

NEARING GREEN LIGHT IN CHINA

Embraer’s shrinking pipeline was due largely to canceled orders for private jets, following a global slump in executive aviation. But Curado said he has seen recent signs of growing interest in business jets, indicating a recovery originally expected next year could come sooner than expected.

Asian executive jet sales in particular could see a boost when Embraer gets permission to build Legacy business jets in China, cutting down on the cost and inconvenience of selling planes that require import licenses.

“The local production of the Legacy is a pillar of Embraer’s executive aviation platform in China,” Curado said, adding that he expects final authorization for the factory in June or July.

A recent agreement between Chinese state plane maker Comac and Embraer’s Canadian rival Bombardier (BBDb.TO) to develop commercial aircraft raised no concerns for Curado, who said China has shown no signs of carving up its aviation market.

“It’s not just about the product. Having a local industrial operation is important, because there the government is everything: client, regulator and final authority,” he said.

Embraer expects Chinese demand for new regional jets to total 975 aircraft by 2030. The company sold 90 commercial jets in China from 2000 through September of last year, accounting for 70 percent of the Chinese market for aircraft smaller than 120 seats.

Brazilian aircraft maker Embraer's CEO Frederico Curado speaks during the Reuters Latam Investment Summit 2012 in Sao Paulo May 29, 2012. REUTERS/Paulo Whitaker

Curado also maintained his hopes for a growing fleet of Embraer’s regional E-Jets in Brazil after local airlines Azul Linhas Aereas Brasileiras and Trip announced on Monday a merger to form the country’s third-biggest carrier.

“It’s good news for competition,” Curado said. “I don’t think they will have any problem with regulatory approval.”

Analysts say the new company may present a more credible challenge to Brazil’s dominant airlines, TAM TAMM4.SA and Gol (GOLL4.SA), which control 80 percent of the domestic market.

NO RUSH FOR NEW LINEUP

Embraer, which has dominated the recent order flow in the 70-to-120-seat commercial jet market, is also weighing possibilities for a revamped lineup of E-Jets offering greater performance and fuel efficiency.

The company is in talks now to select a supplier for a new engine late this year or early in 2013, Curado said. That would allow the board to make a final decision on the project next year and the new lineup to enter service in 2018.

“We’re not in a rush ... We have time to do things right,” he said. “But just because we are laid-back about setting short-term deadlines does not compromise our focus on 2018. That is our goal.”

Embraer may not determine the size of its new fleet until it sees the result of labor negotiations at U.S. airlines, which could spark a new wave of regional jet orders.

The manufacturer is closely following union talks with Delta Air Lines (DAL.N) and American Airlines AAMRQ.PK, Curado said, regarding the so-called scope clause restricting the size of planes that pilots can operate.

A looser scope clause could free up airlines to expand their regional jet fleets from the standard 50-seat aircraft to the slightly larger offerings that are Embraer’s specialty.

DEFENSE SATELLITE

Embraer is also expanding its defense unit to dampen the swings of the global aviation market.

The company reported separately on Tuesday that it had signed a shareholder agreement with state telecom Telebras to form a joint venture aimed at launching Brazil’s first defense and communications satellite. Embraer will hold 51 percent of the venture, known as Visiona Tecnologia Espacial.

Embraer’s defense chief said in March that the government contract to launch the satellite could be worth $400 million.

The company's stock closed 1.4 percent lower on Tuesday, in line with the benchmark Bovespa stock index's .BVSP 1.1 percent drop.

Follow Reuters Summits on Twitter @Reuters_Summits

(Additional reporting by Cesar Bianconi and Alexandre Caverni; Editing by Phil Berlowitz, Tim Dobbyn and Matthew Lewis)

For other news from Reuters Latin America Investment Summit, click here

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