A Busy December Is Good News for Embraer

Embraer has been delivering lots of aircraft in the past few weeks. It also has nailed down a couple of key orders this month.

Adam Levine-Weinberg
Adam Levine-Weinberg
Dec 29, 2018 at 6:15PM
Industrials

Embraer (NYSE:ERJ) stock has endured some wild gyrations over the past few weeks. The Brazilian aerospace company has faced multiple court challenges related to its plan to sell an 80% stake in its commercial aviation business to Boeing (NYSE:BA). In December, a federal judge in Brazil blocked the planned joint venture twice, only for the decisions to be overturned quickly by the appeals court.

Brazil's government supports the Boeing-Embraer deal, so there's a good chance that it will eventually be implemented. That said, additional court challenges are likely. Until everything is finalized, there will remain a real risk that the joint-venture plan will fall through.

Thus, it's critical for Embraer to keep its commercial jet business running smoothly until it completes the handover of control to Boeing. From this perspective, its performance this month has been very encouraging. Embraer has been able to deliver more than a dozen commercial jets in December, while also firming up lots of orders for future years.

An E190-E2 in Embraer livery in front of an aircraft hangar.

Image source: Embraer.

A late-2018 delivery surge

Embraer's commercial jet production has slumped this year as the company has begun the transition from its current-generation models to its new E2-series jets. Embraer has projected that it will deliver 85 to 95 commercial jets in 2018, compared to an average of about 100 for the past several years. However, it only delivered 57 during the first nine months of the year, due in part to a few deliveries slipping from the third quarter into the fourth quarter.

In recent weeks, delivery activity has accelerated significantly as Embraer has raced to meet its 2018 targets. As of Dec. 26, the aircraft manufacturer had handed over 13 commercial jets in the month of December (seven E175s, five E190s, and one E190-E2). This came after it had already delivered four E175s and an E190 during the last week of November.

This surge in output has brought Embraer's fourth-quarter delivery total to 30 commercial jets. For the full year, it has delivered 87 jets -- already within the company's guidance range.

With a few days left in the year, Embraer may be able to get some more aircraft out the door before the calendar flips to 2019. Most notably, it's supposed to deliver at least one E190-E2 to a Chinese customer before year-end. (Of course, there's always a chance that the delivery will slip past Dec. 31.)

Embraer rebuilds its backlog, too

One of the biggest challenges facing Embraer over the past couple of years has been a shrinking order backlog. While the E175 is popular with U.S. regional airlines, that's a limited market opportunity relative to Embraer's total output. Meanwhile, the company has struggled to land big orders for its E2-series jets from the major global airlines. As a result, by the end of September, Embraer had just 251 outstanding firm orders for commercial jets.

Embraer has turned things around in December, though. Most importantly, it recently firmed up an order for 100 E175s from Republic Airways that was previously announced as a letter of intent at the Farnborough Airshow. Brazilian airline Azul finalized an order for 21 additional E195-E2s (also announced as a letter of intent at Farnborough) earlier this month, as well.

Complementing these two key deals, American Airlines ordered 15 more E175s in November, and Air Kiribati recently placed an order for two E190-E2s.

Entering the fourth quarter, Embraer had already filled nearly all of its delivery slots for 2019. The recent surge in order activity has enabled the company to line up customers for a large chunk of its 2020 delivery slots. This will allow its sales force to focus on courting some of the top global airlines during 2019 in the hope of landing a big sale that would validate the E2-series jets as a viable alternative to the Airbus A220.

The proposed joint venture with Boeing is by far the most promising alternative for Embraer's commercial jet business. But the company's strong December order and delivery activity should give investors more confidence that Embraer could stand on its own, if necessary.