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Embraer – Making Money in a Tough Economy

And still delivering aircraft at a good pace….

Our company started operating the new Embraer Phenom 100 in November 2009. We now have two Phenom 100s in our fleet and have delivered six more to owner/ operators in the United States and Europe.

The new very light jet has had a few growing pains with reliability issues, mostly centered on the software that drives the diagnostics systems, but all in all it is a great aircraft. These type issues are typical of a new design aircraft in the first year and we expect that with the support being offered by Embraer, it will be a productive and efficient addition to our fleet.

Over the past few months, I have written several posts about Embraer and what they are doing in the business jet market. Based on the March 19, Bloomberg online article by Fabiola Moura and Robin Stringer, it looks as though Embraer is still on track to become a world competitor in the business jet market while maintaining a strong position in the airline market as well. Excerpts from the article below state that they will deliver 137 business jets in 2010, which is impressive in this economy.

Empresa Brasileira de Aeronautica SA, the world’s fourth-largest aircraft maker climbed the most in two months after fourth-quarter earnings beat analysts’ estimates, boosted by a record delivery of 91 planes.

Embraer, as the Sao Jose dos Campos, Brazil-based company is known, reaffirmed its 2010 forecast of $5 billion in net revenue and said it had a fourth-quarter profit of 167.5 million reais ($93 million). The 23 centavos a share profit compares with a loss of 40.5 million reais, or 5 centavos a share, under Brazilian accounting standards, a year earlier, Embraer said in a statement posted on its Web site yesterday.

Commercial aviation will make up $2.6 billion of sales this year, Embraer said. Executive aviation will provide $1.1 billion, with the remainder of its $5 billion forecasted net revenue coming from defense and other businesses.

Embraer aims to deliver 227 aircraft in 2010, including 90 commercial jets and 137 executive planes, and said it will invest $300 million in its operation this year.

The company’s backlog of airplane orders dropped to 265 last year from 400 in 2007. The company doesn’t expect plane orders to return to those levels until 2013, Executive Vice President Mauro Kern said in an interview last month.

This is a tough economy for aviation at all levels of the supply chain and especially for the manufacturers. Profitability in aircraft manufacturing takes tough decisions about overhead and costs control while still maintaining a competitive edge with investment in product development for the long future. I do not envy the leadership of this company managing in this economy.

Interestingly, as positive as the business jet delivery numbers are, because of fewer regional jet orders, the company does not see a return to 2007 aircraft delivery levels until 2013.

I would agree with that forecast. Based on what I see happening right now, there are buyers for new aircraft and used aircraft, but the demand is nothing like it was three years ago. There is still a glut in the market of used aircraft and the prices have been depressed to the point where buyers must be looking more at used versus new. In the three decades I have been in this business, I have never seen used aircraft prices fall so hard. Until the inventory levels of aircraft for sale drops significantly, the industry cannot see a recovery to the levels we have seen in the past.

The manufacturers who continue to innovate in product design and efficiency while controlling costs to deliver a better aircraft at a lower price point will be the winners over the long haul. It seems the guys at Embraer have that figured out so far. If you’d like to see it for yourself and are in the Nashville, Tennessee, area on Wednesday, March 31, join us at the John C. Tune airport between 3:00 and 7:00 PM for an Open House, featuring the Embraer Phenom 300.

Read this article and others at PlaneConversations.