Embraer Engaged

Give Embraer (NYSE: ERJ  ) credit. After suffering what seems like an endless string of margin-destroying production problems with its E190 regional jet, management is finally taking action.

According to a report in The Wall Street Journal, Brazil's largest jet maker has hired and trained 2,500 workers for a new production shift that will enjoy expanded facilities and take over responsibility for crafting wings on its aircraft, a task that had become problematic in recent quarters.

Obviously, the changes can't come soon enough:

Metrics

Q1 2007

Q4 2006

Q3 2006

Q2 2006

Earnings from cont. ops margin

3.1%

11.5%

6.9%

13.6%

Return on capital

0.3%

4.5%

2.4%

8.3%

Source: Capital IQ, a division of Standard & Poor's.

But this is about more than efficiency. With a $15 billion backlog comprised of 401 firm orders for the 100-seat E190, demand is as high as it's been in years. Failing to boost production capacity now could cost the jet maker millions in new business later.

And I do mean millions. Airlines have taken to the E190 for its low operating cost and flexibility. US Airways (NYSE: LCC  ) , for example, plans first-class cabins for some of its Embraer jets. JetBlue (Nasdaq: JBLU  ) , meanwhile, flies the E190 for its regional routes, such as New York to Nantucket. (No rhymes please.)

Even more opportunity is emerging overseas. China's fourth-largest airline, HNA Group, ordered 50 of the E190s last September. Japan Airlines followed in February with an order for 10 of the E170, an elder cousin to the 190.

In all, 21 of the world's airlines are flying Embraer aircraft today, the Journal reports. 223 of them are either the 170 or the 190.

Frankly, I won't be surprised if that number doubles in a few years. Management says that production upgrades will allow for between 165 and 170 deliveries this year, up from 130 in 2006.

Still, that won't be easy to accomplish. Embraer delivered just 25 aircraft in its fiscal first quarter. Do the math; it must average 47 jets delivered in each of the remaining three quarters in order to meet its fiscal 2007 target. Talk about ambitious.

But you know what? I like that. You should, too, if you're an investor. All firms fail at some point. Very few ever reach new heights. Embraer, thankfully, is climbing.

Taxi toward related Foolishness:

•  Embraer is experiencing turbulence on the margins in Q1.

•  The fourth-quarter numbers weren't good, either.

•  But that doesn't mean you should eject this stock from your portfolio.

Embraer and JetBlue are Stock Advisor picks. Click here to get 30 days of free access to the entire portfolio, which is beating the market by nearly 38%.

Fool contributor Tim Beyers, who is ranked 3,567 out of more than 29,500 in our Motley Fool CAPS investor intelligence database, didn't own shares in any of the companies mentioned in this article at the time of publication. Tim's portfolio holdings can be found at his Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy isn't here right now. Please leave a message after the tone.


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