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Embraer Needs Another Q4 Delivery Surge to Meet Its 2019 Targets

By Adam Levine-Weinberg - Updated Oct 21, 2019 at 7:52AM

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The regional jet maker's commercial aircraft deliveries declined in the first nine months of 2019.

Earlier this year, Embraer (ERJ 1.57%) reported that it delivered 90 commercial jets in 2018, as it began the transition to its new E2-series jets. It also projected that it would deliver a similar number -- 85 to 95 -- this year. By contrast, the company had delivered more than 100 commercial jets annually between 2015 and 2017.

However, as of the end of the third quarter, Embraer remained far behind the delivery pace it would need to reach its full-year target. As a result, it will need a big surge in deliveries during the fourth quarter to achieve its full-year guidance, particularly if it is to meet or exceed the midpoint of that forecast.

Another slow quarter for deliveries

In the first quarter of 2019, Embraer delivered just 11 commercial jets. It bounced back with 26 deliveries in the second quarter, though. This gave it 37 deliveries for the first half of the year, down from 42 in the same period of 2018.

An Embraer E195-E2 in flight

Embraer delivered the first E195-E2 last month, but Q3 was a quiet quarter overall. Image source: Embraer.

On the company's Q2 earnings call in August, management said that deliveries would be stronger in the second half of the year: particularly in the fourth quarter. Based on production and delivery data from Planespotters.net, the third quarter was no better than the first half of 2019. It appears that Embraer delivered 17 or 18 commercial jets last quarter, giving it at most 55 deliveries for the first nine months of the year.

There is often some seasonality to Embraer's commercial airplane deliveries. Indeed, the company delivered only 15 commercial jets in Q3 2018. A brief strike last month by certain Embraer workers also may have pushed some deliveries into the fourth quarter. Regardless, the midpoint of Embraer's full-year guidance implies a uniquely back-loaded delivery schedule.

Embraer needs to accelerate the E2 delivery pace dramatically

Embraer does have a handful of big commercial jet orders to fulfill this quarter. In its recent quarterly report, United Airlines said that it expects to receive nine E175s in the fourth quarter. American Airlines is supposed to receive seven E175s in the second half of 2019. Only two of those arrived in the third quarter, leaving five to be delivered this quarter. Finally, E195-E2 launch customer Azul Brazilian Airlines received its first E195-E2 last month and expects to have six by year's end.

Thus, these three airlines should account for 19 deliveries in the fourth quarter. Embraer is also set to deliver a handful of first-generation E-Jets to several smaller customers this quarter. That might account for around half a dozen deliveries, but it would still leave Embraer with only about 80 commercial jet deliveries for the full year.

That means the E2-series jets are the key to Embraer reaching its goal for deliveries. Embraer executives have estimated that E2 jets would account for about 20% of the delivery mix this year -- implying approximately 18 deliveries -- but the company delivered just five in the first three quarters of the year. It would double that delivery total just with the five additional planes that Azul will receive this quarter. Embraer expects three new airlines to begin operating E2 jets this quarter, and Air Astana will add at least one more E190-E2 to its fleet before year's end.

In the 18 months since it delivered the first E190-E2, Embraer has delivered just nine E2-series jets. Embraer is well positioned to deliver more than that number in the fourth quarter alone. That will help it reach at least the low end, 85, of its annual guidance for commercial jet deliveries. However, reaching the midpoint of the guidance range for the year looks like it would be extremely challenging at this point -- and hitting the high end would be virtually impossible.

Adam Levine-Weinberg owns shares of Embraer Brazilian Aviation Co and is long January 2020 $20 calls on American Airlines Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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