The FAB (Brazilian Air Force) unilaterally reduced the order for Embraer’s KC-390 military freighters, an unprecedented act that exposed its discomfort in its 52-year relationship with the company, opening an unprecedented crisis.
The company said it will study “legal measures” regarding the case, reiterating its confidence in the quality and potential of the plane. Its shares fell 8.4% this Friday (12), and closed the session with a drop of 4.4%.
The aircraft is the biggest bet in Embraer’s defense sector, and a robust initial government purchase is needed to leverage its exposure in the foreign market — the KC-390 has already been purchased by Portugal and Hungary, members of NATO (Western Military Club), and is offered to other countries.
The information was provided by the newspaper O Estado de S. Paulo. In a text published on the FAB website this Friday, the Force commander, Brigadier Carlos de Almeida Baptista Junior, stated that the “undesirable” decision was the responsibility of Embraer.
According to him, when the Air Force informed that the budget restriction on strategic programs by the Jair Bolsonaro government (no party) would affect the purchase of the KC-390s, in April, negotiations were opened with the company.
Baptista Junior says that the talks extended beyond the initial deadline, August, reaching a deadline on Thursday (11). “Embraer informed the non-acceptance of the Air Force’s proposal”, says the military chief.
The company, which was born from the FAB’s womb in 1969 and was privatized in 1994, will evaluate “legal measures relating to the economic and financial rebalancing of contracts, as well as evaluating the effects of the reduction of contracts on its business and results”, as stated in notes Antonio Carlos Garcia, vice president of finance. So far, four KC-390 have been delivered to the Force.
With the FAB’s decision, the initial order for 28 planes will drop to 15, a process that will take place “within the limits established by law”. It is not yet public what this means in terms of expenditure on the program, which consumed BRL 720 million in 2020.
Under the contract signed in 2014, the 28 planes would be purchased for R$7.2 billion (about R$11 billion today, adjusted for inflation). It is not clear whether the value will remain the same for the 15 units or if there will be a reduction in value.
As the questioning title of Brigadier Baptista Junior’s article indicates, “FAB and Embraer: future paths in favor of converging interests?”, the malaise is enormous.
According to sheet heard from people with access to the negotiations, Embraer complained about the scope of the decision, considered unusual given that the program had already suffered cutbacks in the past, merely delaying the aircraft delivery and development schedule.
At the company, there are complaints about the concept, among the military, that Embraer is still a state-owned company at the mercy of its designs.
Furthermore, the FAB has insisted on buying two Airbus A330-MRTT multifunctional aircraft, at a cost of more than R$800 million each. They are air transport and refueling aircraft of another category, larger than the KC-390, but even among the military there are doubts about the logic of the business.
Finally, there is speculation that the FAB is looking to gain fiscal space to make an announcement for the purchase of a new batch of Gripen fighters, manufactured by the Swedish Saab in partnership with Embraer and other national companies.
On the military side, there is a perception that Embraer was not flexible, despite the KC-390 being a product developed in 2008 with R$ 5 billion (R$ 11 billion in current values) injected by the federal government. This amount will be reimbursed with royalties from the plane’s exports.
More than that, Baptista Junior himself indicates in his text the discomfort with what the military see as Embraer’s ingratitude, given the close relationship between its successful programs and the FAB.
“This history of partnerships is not always made up only of victories and convergences. Yes, it was the Brazilian Air Force that, forgoing importing the most modern weapons systems available on the world market at prices compatible with our possibilities, opted for a process of industrial nationalization,” he wrote.
“In each of the military programs in which we participate, we contribute to the acquisition or expansion of the company’s technological capabilities, knowledge that spilled over into the areas of commercial and executive aircraft,” he continued.
A classic example of this is the production of the Italian-Brazilian attack plane AMX, which gave Embraer the capacity to design the ERJ-145 regional jet, the plane that saved the company after its privatization. A similar movement now occurs with the Gripen, which is supersonic and brings together cutting edge data fusion technologies and the use of composite materials.
Giving his message, the brigadier concluded: “And they started to produce the victorious products, which guarantee continuous profits to their shareholders, especially after the privatization process, which took place in 1994”.
The expectation now is on the terms of this unilateral renegotiation, and finding out if it can lead to a judicialization that harms the Siamese relationship between FAB and Embraer more seriously.
For the manufacturer, of course, it’s bad news, not only because of the impact on the KC-390’s external image. The company is already coming off two huge hits, the cancellation of the sale of its commercial aviation area to the American Boeing and the impact of the pandemic on the aeronautical market.
In the third quarter, its Defense and Security division posted net revenue of R$916.5 million, against R$1.27 billion from commercial aviation and R$1.27 billion from executive.
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