Can America's Wealthy Make Embraer SA's Dream Come True?

Brazilian plane maker Embraer (NYSE: ERJ  ) entered the executive jet market in 2000, and the business has become its second highest revenue contributor, behind commercial aviation. The company specializes in making small and midsize executive jets, and plans to extend its offering as the executive aviation market shows signs of recovery. The aircraft maker has delivered more than 750 business jets across the globe and is preparing to further solidify its position in the market. 


Phenom 300, Source: Embraer Executive Jets

Business jets are regaining the lost momentum
The business aviation market was in full bloom when the financial crisis reared its ugly head in 2008. By 2012, industrywide orders were cut by almost half to 672 from 1,313 in 2008. But things have started to look up since 2013, the first time in five years that annual shipments rose.

Corporate profits are the closest reflection to measure how the executive aviation market is shaping up since rosy numbers give companies the leeway to invest in private air travel and save precious time. It's been observed for several years that healthy financial numbers have a positive impact on the demand for executive jets. And the fact that corporate profits are in fine fettle in the U.S. is welcome news as the country is the biggest business jet market, operating around 60% of the world's total business jets. The S&P 500 companies are seeing best-ever margins of 9.8% on an average with solid cash positions. 

Embraer forecasts that the North American market could become even bigger with the U.S. gobbling executive jets in greater numbers over the next 10 years. Though the company marginally trimmed 2015-2024 global sales estimate from 9,250 jets to 9,235, it raised the outlook for North America from 4,530 to 4,620 jets -- $120 billion worth of business. 

Global scenario
Embraer's rival Bombardier thinks that over the long run, greater wealth creation, greater progress in world economy, globalization of business, and the need to replace old planes should drive the demand for business jets. As trade increases in the emerging markets of Asia and the Middle East, it could mean more business traveling -- supporting the corporate jet market. Rolland Vincent, president of aviation consulting firm Rolland Vincent Associates, says China's constructing 70 airports and with increasing commerce is poised to become a big importer of business jets. Dubai's business traffic is also gearing up with flourishing trade and commerce. 

The Latin America and Caribbean (LAC) region, which currently operates more than 5,000 executive aircraft, according to data from JetNet, also has strong prospects for business jets. The fleet growth rate in the region has been more impressive than in North America. The reason behind this is the increasing number of high-net-worth individuals (HNIs). LAC is home to around 542,000 HNIs with about 76% living in Brazil, Mexico, and Argentina. Around four to five per 1,000 HNIs own a business jet compared with 2.87 in North America.

Embraer seizing the opportunity
Embraer is positioning itself to emerge as a stronger player in the $21 billion market with its Legacy, Lineage, and Phenom families. The three brands offer aircraft in the light to ultralarge range, with Phenom 100E and Phenom 300 part of the light jet segment and Lineage 1000E, ultralarge.

Vincent estimates that 39% of the deliveries in the next decade would be for ultralong-range jets, 18% would be for large long-range jets, and large jets would take up 10% of the deliveries. The super-midsized, midsize, and light jets would make up 13%, 8% and 4.5% of the total deliveries, respectively.

Though Embraer lacks an ultralong-range offering, it's taking cues from the trends -- the ultralarge Lineage 1000E is the upgraded version of Lineage 1000 and has been given a new cabin, functionalities, and an extended flight range. The company is considering building larger intercontinental-range jets with bigger cabins to take on the likes of Gulfstream and Bombardier and capitalize on the demand for bigger jets. Till then, its present stable is holding the fort nicely. In 2013, Phenom 300 was the most delivered business jet with 60 aircraft. In June, Embraer delivered the 500th Phenom, which had entered service five and half years back. Phenom 100 has been upgraded to Phenom 100E. 

Embraer considers its Legacy 500, which can seat 12 passengers, "a game changer" and claims that it possesses the "technology of a $50-million jet." The jet has received certification from Brazil's aviation regulator and is scheduled to debut this year. The Legacy 450 is slated for its first flight in 2015. Richard Aboulafia of Teal Group feels the two jets could help Embraer widen its market share.


Legacy 500, Source: Embraer Executive Jets

Embraer has started to threaten seasoned players like Cessna, Bombardier, and Dassault Aviation. And "more of that is coming," Vincent believes, since the Brazilian plane maker has a loyal customer base in the LAC region that helped it grab 7% market share by the middle of 2014. Embraer has grown its global fleet at a CAGR of 16.5% since 2008. Its growth trajectory in the global business jet market has risen from 3% in 2008 to 18% in 2013. For 2014, the company is looking to deliver 25-30 large business jets and 80-90 light ones. In 2013, it delivered 119 business aircraft, and in the first half of the year, Embraer delivered 49 (39 light and 10 large). 

Foolish takeaway
Embraer has evolved nicely in the business jet space in spite of being a late entrant. The improving corporate jet market augurs well for the company. It's upgrading its popular models to make them more attractive, and even testing new territory to keep up with the changing times. Opportunities abound, and Embraer is positioning itself well to be a part of the revival.

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