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Regional jet orders give Embraer its best year so far since 2008

Jun 07, 2013 12:14 am

Skift Take

Even though most watchers at the Paris Air Show are most interested in the Boeing/Airbus battle, Embraer is steadily building orders that demonstrate the power of non-jumbo aircraft.

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Nacho Doce  / Reuters

Private jets are seen at the Embraer headquarters in Sao Jose dos Campos. Nacho Doce / Reuters


Embraer SA is amassing its biggest haul of regional-jet orders in five years as U.S. airlines buy bigger planes, keeping assembly lines busy while the company develops a new class of aircraft due to arrive in 2018.

The 119 E-Jet purchases ahead of this month’s Paris Air Show, the largest industry expo for deal announcements and new models, have a list value of about $5 billion. They helped fuel Embraer’s year-to-date rally of 33 percent through yesterday, the most in Brazil’s benchmark Ibovespa index.

U.S. carriers are acquiring 76-seat E-175 jets as they phase out the fuel-slurping 37- and 50-seaters popular in the 1990s when Sao Jose dos Campos, Brazil-based Embraer and Bombardier Inc. created the regional-jet market. Those sales will help bolster Embraer as it shifts to offer upgraded versions dubbed “second generation” or “G2.”

“The company is creating a base of Embraer airplanes at these U.S. airlines,” said Bruno Wittmaack, a research analyst at Victoire Brasil Investimentos in Sao Paulo, which manages 2.2 billion reais ($1.04 billion) including shares in the planemaker. “This guarantees some of the sustainability of the next generation.”

Embraer closed yesterday at 19.14 reais in Sao Paulo. That left the stock trading at 15 times estimated 2013 earnings, compared with 12 times for Montreal-based Bombardier, data compiled by Bloomberg show.

Pilot contracts

U.S. airlines paved the way for the E-175 deals by renegotiating pilot contracts to let lower-paying commuter partners fly larger planes. Such outsourcing had been limited to the smallest models, which are now out of favor with jet-fuel prices up almost sevenfold in the past 15 years.

“We are seeing strong demand for the E-Jets and also the G2,” Paulo Cesar de Souza e Silva, Embraer’s president for commercial airplanes, said in an interview at an airline trade group meeting this week in Cape Town, South Africa.

Orders this year in the U.S., the world’s largest aviation market, consist of 47 E-175s for Republic Airways Holdings Inc., the regional partner of American Airlines; 30 planes for United Continental Holdings Inc., and 40 jets for SkyWest Inc., a United partner.

Embraer lists the E-175 at $41.7 million. Neither Embraer nor the airlines disclosed financial terms of the sales, which would typically include discounts. Argentina’s Austral Lineas Aereas placed the other orders this year, for two larger E-190s.

Paris show

While Embraer hasn’t reported any purchases of G2 planes, the approach of the Paris show has kindled industry speculation that some buyers may commit at the event.

Management expects to seek board approval soon to formally offer the G2 to customers, Silva said. He declined to comment yesterday in an e-mail on whether Embraer expects any announcements of possible customers in Paris.

In focusing on upgrades, Embraer is taking a different approach than Bombardier, which opted to build an all-new model, the CSeries, said George Ferguson, a senior aerospace analyst at Bloomberg Industries. Last year, Bombardier delayed that jet’s first flight by six months.

“If you’re a fleet planner right now, you’re concerned that if there are any problems with the CSeries you’re not going to get your airplane on time,” Ferguson said in a telephone interview from Skillman, New Jersey. Bombardier reaffirmed this week it expects to meet its revised goal of a maiden flight in June and a first-delivery target of mid-2014.

Mitsubishi, Sukhoi

Embraer’s challenge is that Bombardier isn’t the company’s only rival. Japan’s Mitsubishi Aircraft Corp. and Russia’s Sukhoi Co. are offering their own regional-jet models and are positioned to pursue business in emerging markets, Ferguson said. Air traffic in those regions is expected to be the fastest growing worldwide, according to an Embraer study.

“They could make it very, very competitive and probably hurt revenue for anyone wanting to compete in emerging markets,” Ferguson said. The two planemakers didn’t return messages left for comment yesterday about competing with Embraer, whose biggest business is commercial aircraft, ahead of executive aviation and defense.

Joseph Nadol, a JPMorgan Chase & Co. analyst in New York, said in a May 1 note he was concerned that profit margins would be squeezed as the E-Jet family’s wind-down saps pricing power. His underweight rating on Embraer’s American depositary receipts is one of two equivalent to a sell, based on a Bloomberg survey of analysts. Eight rate the ADRs as buy and six say hold.

‘Best plane’

Embraer is winning orders because it has “the best plane in the category,” Silva said yesterday by e-mail when asked about any plans for discounting. The planemaker has assured shareholders that “it would not hurt margins,” Victoire Brasil’s Wittmaack said in an interview.

A long history in regional-jet manufacturing gives Embraer an advantage competitors, according to Sandra Peres, a Sao Paulo-based analyst at Coinvalores, who rates the shares traded in Brazil as buy.

“The position of Embraer’s leadership is consolidated,” she said in a telephone interview. The company is also benefiting from the strengthening of the U.S. dollar against the real, since 80 percent of first-quarter revenue came from outside Brazil, according to data compiled by Bloomberg.

“When you see a lot of orders, especially from the biggest market, the U.S., it shows that the market is heating up,” Peres said. “In 2013, the stock is going to go up a lot because the company is seeing substantially better results.”

With assistance from Robert Wall in Cape Town, South Africa. Editors: Ed Dufner, James Langford. To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net. To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net.  

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