Embraer bets on smaller jets for post-pandemic success

In its battle to get back to growth after the turmoil caused by the pandemic, Brazilian aerospace and defense group Embraer is imagining a not-so-distant future of flying taxis and electric planes.

But in its effort to double its revenue in five years, the world’s third-largest commercial plane maker is pinning its hopes on a more prosaic prediction: that the recovery in air travel will involve greater use of the smaller passenger jets that are your niche market.

After years of disorganization in the global aviation sector, Embraer should come out of the red in 2022, according to its executive president Francisco Gomes Neto.

“We expect to produce net income by the end of the year. This is an important step,” he told the Financial Times in an interview at Embraer’s headquarters in São José dos Campos. “Our plan is for big growth… this follows the resumption of domestic flights, which is the role our jets fit into.”

A 45% jump in its share prices made the company the best performing company on the Bovespa index, the benchmark for the Brazilian stock market, in 2021. After laying off 2,500 workers during the pandemic, a campaign to improve efficiency and debt reduction helped Embraer return to positive free cash flow. By accelerating production, the company recently announced the creation of 1,000 new jobs.

But to convince investors, especially after a sharp drop in its shares this year, Embraer needs to overcome skepticism about its ability to expand further, in a civil aviation sector dominated by Boeing and Airbus.

Doubts about the future shape and direction of a company seen as the crown jewel in Brazilian industry were compounded by the acrimonious collapse of a plan to merge with Boeing. Not long after the airports were closed, at the start of the pandemic, the American giant ended a joint venture agreement that would have given it an 80% stake in Embraer’s commercial aviation operations, for US$4.2 billion. .9 billion).

Gomes Neto ruled out any sales of important assets or a spin-off of the company, stating that “we are open to other partnerships, but not the kind that would break up the company or involve the sale of any of its parts”. With a goal of doubling last year’s reduced revenue to about $4.2 billion annually by 2026, he added that the biggest potential lay in boosting the commercial aviation division’s revenue.

Embraer is the largest producer of commuter jets, which traditionally have up to 120 seats, serve shorter hauls and are most popular in North America.

The company anticipates that it will deliver 60 to 70 civil planes in 2022, up from 48 last year, and could reach a total close to 100 units annually by the end of the five-year period, said Gomes Neto. By comparison, Airbus plans to produce 720 jets a year.

Over the past quarter century, airlines have migrated to larger planes in an effort to gain fuel efficiency and reduce unit costs.

A pillar of Embraer’s strategy is its mid-range “E2” aircraft, the second generation of its E-Jet family, and an aircraft larger than its main lineup of regional models. Capable of carrying between 80 and 146 passengers, the new models fit more into the conventional narrow-body jet market and, according to the company, produce less noise and lower carbon dioxide emissions per seat.

Embraer executives believe there will be changes in air travel patterns after Covid-19, with slower growth in air travel, less business travel and more people moving to small towns, all of which would favor the use of the smaller jets it produces. “Airline companies are going to look for planes that meet this level of demand,” said Rodrigo Silva e Souza, Embraer’s vice president of commercial aviation marketing.

But the Brazilian manufacturer remains outside the category of devices where there is more demand from airlines, said Stephen Trent, an analyst at Citi.

“The position that they occupy in the global aerospace market at the moment certainly seems to offer better prospects than they have had in the last two years,” he said. “But in the long run, I’m still concerned that there aren’t so many airlines that are super interested in that category of plane.”

In the 10 years until 2031, the projection is that 13,000 planes with a capacity of more than 150 passengers will be delivered, according to data from the consultancy Cirium. For regional jets of between 85 and 150 passengers, the category in which Embraer operates, the forecast is for just 3,500 deliveries.

The Brazilian company needs to keep in mind the fate of its historic rival in regional jets, Bombardier, a former champion of the Canadian industry, which nearly went bankrupt after trying to compete directly with Airbus and Boeing in the market for conventional passenger jets with C- Series, consisting of small and narrow-body models. The two biggest rivals defeated the challenger and took it out of the market; the C-Series program was sold to Airbus in 2017 and Bombardier completely abandoned the field of commercial aviation, to focus on business jets.

“We continue to anticipate that larger aircraft from Airbus and Boeing will dominate the narrowbody jet market, which includes the smaller model category,” said Rob Morris, who heads Cirium’s global consulting division, Ascend by Cirium.

Except for the similarity between its E195-E2 model and Bombardier’s C Series, now known as the Airbus A220, in most business segments Embraer does not compete directly with Boeing and Airbus, say executives at the Brazilian company. However, the smallest of the three models in its E2 family faces a hurdle in terms of US pilots’ union contracts, which limit the weight and capacity of planes used by regional affiliates of major airlines.

Outside of commercial aviation, which accounts for about a third of the group’s revenues, Embraer is benefiting from a worldwide boom in executive jets. The company anticipates selling up to 110 of them in 2022, up from 93 in 2021.

While the pace could slow down in the coming years, said Gomes Neto, there would be a “soft landing” with continued growth. “We have all our production sold practically until the end of 2023, and we are already selling for delivery in the second half of 2024,” he said.

The executive added that geopolitical tensions caused by the war in Ukraine had heightened interest in two of Embraer’s military planes: the A-29 Super Tucano fighter jet and the C390 Millennium transport plane — although the Brazilian air force has recently reduced its orders of this latest model from 28 to 22.

Another bet for the future is an electric vertical take-off and landing plane, known by the acronym eVTOL. Embraer’s Eve division, recently spun off as a SPAC (special purpose acquisition company) in the United States, has orders worth US$5 billion and wants to start commercial operations in 2026.

While shares in several similar Spacs that develop air taxis have plummeted because analysts are concerned about inflated expectations for the industry, analysts and executives say Embraer’s track record in testing and certification gives the company an edge over rival startups. Competitors Boeing and Airbus are also investing hundreds of millions of dollars in this field.

Other areas of interest include a line of low-emission aircraft that is under development and a new generation of turboprops for regional airlines.

In the short term, though, investors will want to see a financial improvement. Embraer’s net loss was reduced to US$ 44.7 million (R$ 222.7 million) last year, compared to a deficit of US$ 732 million (R$ 3.6 billion) in 2020. But a production stoppage related to the final reinstatement of the commercial aviation division contributed to a loss of US$ 31.7 million (R$ 157.9 million) in the first quarter.

Embraer shares are down about 50% so far this year, giving the company a market cap of around US$1.8 billion. Its chairman attributes the drop to a mix of investor frustration over the company’s announced forecasts, supply chain problems, and the broader impact of the Ukrainian conflict on the stock market. Boeing also fell 37% and Airbus shares fell 5%.

Marjan Riggi, of the credit rating agency Kroll Bond Rating Agency, highlighted Embraer’s order book as a positive point – orders reach the mark of US$ 17.3 billion (R$ 86.2 billion), the highest total high in four years—and also mentioned the recovery in the US regional aviation industry.

“The numbers [trimestrais] It still doesn’t look great, but you can see a very positive trajectory,” she said.

Translation by Paulo Migliacci