Last week, Embraer (NYSE:ERJ) got some bad news, as longtime customer JetBlue Airways (NASDAQ:JBLU) picked the Airbus (NASDAQOTH:EADSY) A220 for its fleet renewal plan. JetBlue has been one of the biggest customers for Embraer's E190 jet, but it now expects to retire all of its E190s by 2025, becoming an all-Airbus operator. It will also cancel the 24 remaining E190 orders it had on the books.
Embraer competed hard for the JetBlue fleet replacement deal, offering its next-generation E195-E2 jet. Many pundits saw losing the JetBlue order to Airbus as a big blow for the E-Jets E2 program. As a result, Embraer stock fell 9% in the three days following the announcement, even though it has reached a deal to sell 80% of its commercial jet business to Boeing.
However, Embraer didn't stay down for long. In the first two days of the Farnborough Airshow, it signed up a slew of aircraft deals. That's good news for Embraer investors -- and for Boeing (assuming its Embraer joint venture deal goes through).
New firm orders solidify 2019 production
At the end of the first quarter, Embraer had just 141 remaining firm orders for current-generation E-Jets. About 70 of those planes were scheduled for delivery in the final three quarters of 2018. Furthermore, while Embraer booked an order for 15 E175s from American Airlines in May (with deliveries in 2019), the JetBlue order for 24 E190s will be canceled.
As a result, Embraer was on track to enter 2019 with around 60 remaining first-generation E-Jet orders. Given that production of the E2-series jets is ramping up very slowly, this meant that Embraer was at risk of seeing another steep decline in commercial jet deliveries next year. (The company expects to deliver 85-95 commercial jets in 2018, down from 101 a year ago.)
Fortunately, Embraer landed a firm order from United Continental for 25 E175 jets on Monday. All 25 jets will be delivered during 2019. On Tuesday, Embraer reported a second E175 firm order. Mauritania Airlines will add two E175s to its fleet next year. These recent orders will go a long way toward filling up Embraer's available delivery slots for 2019.
Embraer also revealed a firm order for its E195-E2 on Tuesday. Kuwait's Wataniya Airlines will buy 10 E195-E2s, with options for another 10. The first delivery is scheduled for 2020.
More orders in the pipeline
In addition to its firm order activity, Embraer also announced several letters of intent (LOIs) on Tuesday that need to be finalized in the coming months.
Most notably, U.S. regional carrier Republic Airways signed an LOI for 100 E175s, with options for another 100. It has the right to convert the orders to the E175-E2 if its major airline partners amend their scope clauses to allow their regional affiliates to use that new model. Neither side revealed a delivery schedule, and a Republic Airways spokesperson declined to comment on whether the carrier has already placed the jets with any of its legacy carrier partners. Embraer expects to finalize this order later in 2018.
Embraer also disclosed an LOI from Azul Brazilian Airlines to acquire an additional 21 E195-E2s. Azul is already the launch customer for the E195-E2, with 30 firm orders.
Other LOIs announced on Tuesday included a deal for 12 E190-E2s (plus another 12 options) with Helvetic Airways, a deal for three E190s from Nordic Aviation Capital, and an agreement for three E195-E2s and two options from an undisclosed Spanish customer.
Embraer is finally rebuilding its backlog
At the end of 2015, Embraer had more than 500 firm orders in its backlog. Since then, it has experienced gradual erosion of its order book, particularly after accounting for "at-risk" orders like the JetBlue deal, a 50-aircraft order from defunct Indian airline Air Costa, and an order for 100 E175-E2s from SkyWest that won't be completed if the current legacy carrier scope clauses remain intact.
The deals announced this week start to reverse this trend. In total, Embraer has announced 37 firm orders, 139 firm letters of intent, and 124 options. The firm part of the Republic Airways LOI alone represents roughly one year of production for the company.
This sets the stage for Embraer to return to building at least 100 commercial jets annually within the next year or two, with further growth possible during the 2020s. Losing the JetBlue deal to Airbus still stings, but Embraer will be just fine without that marquee customer.
Adam Levine-Weinberg owns shares of Embraer and JetBlue Airways and is long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends Embraer and JetBlue Airways. The Motley Fool has a disclosure policy.