What happened
The military arm of aerospace manufacturer Embraer (ERJ +7.02%) suffered a setback at the hands of the Brazilian Air Force, and the stock traded down as a result. Shares of Embraer lost 12.7% in November, according to data from S&P Global Market Intelligence, on investor concerns that the company will have a hard time backfilling the lost orders.
So what
Embraer, a Brazil-based manufacturer of commercial jets and military equipment, has long had close ties with its home government. But the Brazilian federal government dealt the company a blow in mid-November, when it decided to reduce its order for Embraer-made KC-390 transport planes from 28 units to 15. Factoring in compensation for R&D work and other revenue, Embraer said the decision would reduce the total contract value on the order by 25%.
Image source: Embraer.
The company in a regulatory filing said it would seek legal recourse, but this is a difficult time for the government in Brasilia. Brazil has been hit hard by the pandemic, and the domestic government is focused on boosting domestic assistance programs, even at the cost of military spending.
Now what
Brazil represented the bulk, but not all, of the KC-390 order book. Embraer still has a five-aircraft order from Portugal and commitments to buy two planes from Hungary, as well as the potential to book sales from Argentina, Chile, Colombia, and the Czech Republic.
But the cut is a symbolic blow to the program, and Embraer will have to tread carefully when trying to get whatever compensation it can without angering its most important customer.
Embraer also posted some good news in November. Its commercial arm won orders from Nigeria's Overland Airways for three new aircraft valued at about $300 million, for example. But Embraer, as a smallish manufacturer in the global aviation business going up against titans like Boeing and Airbus, needs to make every program count, and investors were clearly disappointed with the KC-390's domestic setback.
