Embraer S.A Is Back in Business

Embraer’s turbulent times are a thing of the past as it bags new orders and leaves competition behind.

Apr 12, 2014 at 12:31PM

Brazilian aircraft maker Embraer S.A. (NYSE:ERJ) stole the spotlight not just from fellow player Bombardier (NASDAQOTH:BDRBF), but also from aero majors, at the Singapore Airshow in February. Out of the $5 billion contracts that were signed during the show, Embraer bagged the lion's share with a $2.94 billion deal from a new, low-cost Indian carrier, Air Costa, to deliver 50 next generation E-Jets, dubbed E2. The company's order book at the end of 2013 showed 349 firm orders and 487 conditional ones.

It's hard to imagine that just a couple of years back Embraer was starved for new orders and had to even cut production in 2013. What's behind Embraer's changing fortunes?

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E2 Jet. Source: Embraer

Big order wins
Winning orders in 2013 had become crucial for Embraer's sustenance. Its commercial firm orders had tumbled to just 185 jets worth $12.5 billion in 2012, which was less than two years of production.

But things changed as orders for U.S. routes started pouring in. In 2013, when Embraer amassed firm orders for 130 E175s and 100 E175-E2 from U.S. regional airline SkyWest, United Airlines, and American Airlines for their regional operations, Bombardier could grab just one for 30 CRJ900s.

Embraer and Bombardier vied for the orders neck to neck but the former came out as a clean winner. Even the single order that the Canadian aircraft maker won from American Airlines was split between the two, and the lion's share (60 E-175s) went to Embraer.

Embraer ended 2013 with a backlog worth $18.2 billion. The company was back in business, with its lead in the 70-seat to 130-seat jet segment well established.

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Growing demand from emerging markets
Embraer's pitching its regional jets like never before. In a 2012 interview, Luiz Sergio Chiessi, Embraer vice-president of commercial aviation market intelligence, said, "All eyes are on airlines in Latin America, China, the Middle East, Africa and Asia as they discover the potential of regional flying."

Demand for 61-seat to 120-seat aircraft is estimated to touch 7,000 jets by 2030. Planes with seat capacity of less than 120 are better suited to connect metros with Tier-II and Tier-III towns, and flying cost per passenger is lower than a 180-seater.

Asia-Pacific demand could surpass Europe and orders from China could reach as high as 975, or 14% of the global requirement. India's also increasing focus on regional connectivity. Mark Dunnachie, Embraer VP commercial aviation Asia-Pacific, expects the Indian 70-seat to 120-seat aircraft market to demand 200 jets in the next 10-20 years, which could benefit the company in a big way.

Both Bombardier and Embraer are marketing their regional jets to Indian airlines to take advantage of the expanding market. While the Canadian player is trying to sell the CS-100 and CS-300, Embraer is promoting the E2 jets.

The next generation E2 jets
Embraer's upping the ante with its reengineered aircraft E-Jet E2, which is a combination of the proven E-Jet family architecture and the latest innovative technologies. It unveiled the E2, a threat to Bombardier C-Series, at the Paris Air Show last June.

The E2 jets would feature Pratt & Whitney powered engines that claim to reduce fuel consumption significantly. These are very attractive selling points considering 32% of an aircraft's operating charges are attributable to fuel costs. Embraer estimates that the E2 jet would reduce flying cost by 20% compared with bigger 150-plus-seat planes. The bigger aircraft consumes more fuel to take off and operate as they are much heavier than a small-sized Embraer jet.

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Embraer Day Brazil 2014 -- Commercial Aviation Presentation. Slide 16

E2 has caught the attention of several airline companies across the world and many have started talks with Embraer. In the U.S., the E2 is consolidating the company's leading position in regional jets. Total orders, options, and letters of intent stood at an impressive 455 by mid-February. The aircraft will enter service between 2018 and 2020.

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Source: Embraer presentation

Coming back to life
Embraer's finally seeing sunny days. The improving backlog has thrown away concerns over a production cut back and underscores the company's strong position in regional jets. In addition, the rising demand from the emerging markets and strong response for E2 jets augurs well for the company's future growth.

ICRA Online has no position in any stocks mentioned. The Motley Fool recommends Embraer-Empresa Brasileira. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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