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EMBRAER SUCCESSFULLY EXPANDS ITS REGIONAL JET FAMILY

Just behind the terminal at São José dos Campos airport, 100 km to the east of São Paulo, trucks and tracked excavators are noisily at work. Here, on a 20,000m2 (215,000ft2) site, half of which will later be roofed over, assembly facilities and workshops are under construction for the new regional jet family of the Brazilian aircraft manufacturer Embraer. Another factory intended mainly for final assembly of military aircraft will shortly be built in Gavião Peixoto, in the state of São Paulo.

All this expansion is necessary to adapt manufacturing capacity to cope with the meteoric growth of the company. If everything runs according to plan, then the 70-seat ERJ 170 should make its maiden flight in the middle of 2002, while the 98-seat ERJ 190-100 and the biggest member of the family, the ERJ 190-200 (with 108 seats) will take to the air from the middle of 2004. These developments mark Embraer's entry into a new phase, both from the technical and financial viewpoints. For example, the longhaul version of the ERJ 190-100, which has a range of 4,260km (2,300nm), will be able to fly from Lisbon to Moscow or from New York to Los Angeles.

At the same time the company is now on a sound financial footing. "Arithmetically we could actually finance production of the new jet family out of the cashflow being generated from current orders," Embraer president Mauricio N. Botelho is pleased to say. The fact that an investment programme of $1.3 billion over five years will thus be largely self-financing should please the company's shareholders. $300 million of this will pay for expansion of factory capacity and gearing up to production, $700 million will go into airliner production while the remaining 300 million is earmarked for military and agricultural aircraft.

Behind this impressive investment programme is one of the few truly global players in Brazilian industry. Embraer's customer base today comprises 23 airlines and its aircraft are deployed on scheduled and chartered air services in 14 countries.

When Embraer was privatised in 1994, exports accounted for only 65% of its turnover, but since then the proportion has risen to 95%. Its component suppliers are based in Belgium, Spain, the USA and Chile. Finally it also has a components joint venture operation with the German Liebherr Group, which is planned to supply external companies later on.

1999 was a bumper year for Embraer and saw record profits of around DM458 million ($219 million), with after-tax profit 3.2 times higher than in the previous year and sales, at DM 3.75 billion ($1.79 billion), more than double the level of 1998. Embraer's meteoric rate of expansion continues to amaze foreign observers of the company. No doubt, suggests production manager Almir Borges, many of them are not aware that "we have actually been around for more than 30 years and have already built and sold 5,500 aircraft."

However the company did go through a bad patch when civil aviation was hit by a serious recession after the Gulf War. At the same time the market for military aircraft, which still accounted for 40% of Embraer's turnover at the beginning of the 1990s, slumped due to cost-cutting measures adopted by many governments, so that at that time the Group was virtually on the verge of bankruptcy.

Under Botelhos's presidency and thanks also to a massive injection of capital from major banks and pension funds which recently became major shareholders, Embraer has achieved a phenomenal comeback. Whereas before all it produced was regional turboprops, the Brazilians have achieved aggressive market penetration with their newly developed ERJ 135 and 145 jets, and now claim to be the leaders in the regional jet market, with 36% of new orders by number, just under 45% of deliveries and 40% of orders and options.

In purely numeric terms, they have achieved over 1000 airline orders for the ERJ 135 and 145, worth a total $17 billion (of which $7 billion are firm orders). At the start of this year Embraer had already clocked up 325 orders (120 of them firm orders) for the new ERJ 170 and 190, having received launch orders from Crossair, the French Regional Airlines and GE Capital Services (GECAS).

So much success arouses envy and anger in the competition. Long-standing accusations from Bombardier that the Brazilians have been enticing customers away with subsidised prices are countered by Embraer president Botelho with the argument that the Canadian aircraft are more expensive than his simply on the basis of production costs. He does not dispute the fact that his company has over the years received $4.5 billion of interest subsidies for exports from the state-owned Brazilian development bank BNDES. But then, according to Botelho, Bombardier has enjoyed similar special treatment, the only difference being that "they have only disclosed $100 million out of a total of $5 billion of subsidies, whereas the Brazilian interest rate equalisation programme has been published in the federal gazette down to the last centavo".

In the meantime the Geneva-based World Trade Organisation has ordered the Canadian and Brazilian governments to exclude the aircraft construction industry from their export promotion programmes (Pro-ex and Canadair/Technology Partnerships Canada respectively). For Brazil this is a serious trade setback as Embraer is today one of the country's biggest earners of foreign currency. Although the company does buy many components abroad in dollars, last year it achieved a net surplus of $647 million, which the Brazilian government is reluctant to forego. After the WTO announced its decision foreign minister Luiz Felipe Lampreia made it clear that there was no question of the loss of interest subsidies being made retroactive.

If the interest subsidies Brazil's aircraft building industry has enjoyed have made its trading partners rebellious, another smart move by Botelho, the sale of 20% of the company's equity to Aérospatiale-Matra, Dassault, Thomson and Snecma, has aroused the suspicions of parts of the parliamentary and military establishment. At a hearing before the Senate, Embraer's president had to answer the accusation of having breached a clause in the company's articles of association dating from privatisation in 1994 which forbade any shares in the company being held by competitors. This argument Botelho dismissed as "irrelevant" on the grounds that the European manufacturers only build turboprops in the regional class and not jets, making their product range "not competing, but complementary". This especially applies to Dassault, Botelho explained to FLUG REVUE. By allying the company with the Europeans, he expects to gain "synergy effects in product development, marketing and sales as well as customer service and maintenance".

And as for the concerns of the armed forces at the prospect of foreign influences on Embraer's strategic know-how, these he attempts to play down by referring to the economic benefits of his globalisation strategy. The proportion of Group turnover accounted for by military aircraft has dropped to only 7%. It is inconceivable today that the Brazilian or indeed any other air force would seek to develop a new aircraft either in isolation or even jointly with only one other country (as in the case of Italy, which is developing the AMX fighter jet as a joint Italian-Brazilian collaboration). On the other hand, Botelho believes that if Embraer allies itself with several major European suppliers of defence equipment its manufacturing and market prospects will be good.

Finally, Botelho is extremely confident about future trends in the civilian regional jet market. Here, Fairchild-Dornier "is of course a competitor which has to be taken seriously". However, it will not be plain sailing for the American-German company due to the lead its two competitors Embraer and Bombardier, which together have an order backlog of 2,500 aircraft, have gained.

From page 39 of FLUG REVUE 9/2000