Embraer Sees Path To Surviving Downturn
Darren Shannon darren_shannon@aviationweek.com 
Embraer expects Brazil's development bank to almost triple its financing commitments for new sales from the 11% achieved last year, the manufacturer's president and CEO said Friday.
Speaking to analysts and media during a conference call to discuss the company's 2008 results, Frederico Fleury Curado also indicated that Embraer will not contemplate changes to its commercial product line for another 20 to 24 months, and even then a decision is contingent on the development of new engine and airframe technologies, as well program developments at Airbus and Boeing.
The Brazilian manufacturer's top executive also said the development of a turboprop is a secondary decision to either a new or adapted jet aircraft.
These details came during a call to discuss the 20.6% year-on-year drop in Embraer's 2008 net profit to $388.7 million, due predominantly to a sluggish fourth quarter.
Despite a 3% dip in fourth-quarter revenue to $1.8 billion, Embraer's revenues for the year totaled $6.3 billion, a 20.8% growth on the $5.3 billion recorded in 2007. This increase, said Embraer, was due to the year's increased delivery schedule to an unprecedented 204 aircraft compared to 169 in 2007, and improved profitability of the types of airframes built.
Operating and sales expenses for the 12 months to Dec. 31 also grew in line with this increased delivery schedule, although research and development costs dropped due to the launch of the Phenom family of very light jets.
Although the year proved to be strong, Embraer's fourth quarter shows a truer picture of the company's current performance, and the effects of the global economic slowdown. The 3% drop in quarterly revenue was due predominantly to the slump in business jet demand, and revenue from that sector dropped almost 27% to $249.7 million in the last three months of 2008. At the same time commercial sales grew about 3% to $1.2 billion and defense and government revenue grew 17.5% to $176.4 million.
Commercial sales represented 65.4% of Embraer's fourth quarter revenue, a 3.7 percentage point increase on the same period in 2007.
Embraer's fourth quarter gross profit also fell 10.9% to $377.4 million and net income dropped 44.9% to $111.7 million, although this was greatly affected by a shift in the company's net financial income line item, which went from $34.8 million in the fourth quarter of 2007 to a $154 million expense in the last three months of 2008.
Embraer increased its trade accounts receivable and customer commercial financing by $112.8 million to $963 million by the end of last year, due mainly to short-term bridge loans for customers and the trade-in of three Embraer aircraft in the fourth quarter.
Curado, however, is emphatic that the company will not burden itself with more of these expenses, and has even stopped a dividend payment to preserve cash. Cash, cash equivalents and investments totaled $2.2 billion at the end of 2008, a slight dip on the roughly $2.5 billion held at the end of 2007, but higher than the $1.9 billion reported at the end of the third quarter.
This stance is aided by a new commitment from Brazil's development bank BNDES to finance about $1.4 billion worth of 2009's deliveries. This commitment, which represents about 25% to 30% of this year's expected commercial deliveries, could also be extended into 2010, Senior VP of Sales and Finance Paulo Silva told Aviation Daily in a separate interview.
BNDES's commitment, which is in line with that being offered by the U.S. and European development banks, is almost triple the 11% - or $600 million worth - of Embraer's deliveries financed by BNDES in 2008.
This support should help Embraer weather the downturn affecting all major aircraft manufacturers, which are seeing orders deferred and sometimes canceled because of a lack of financing. But the Brazilian company is not immune, and recently cut 20% of its workforce because of a collapse in business jet demand.
Embraer is also cushioned by its large backlog, which includes 800 Phenom VLJs - a number that allows Embraer to move some orders forward if early slots are deferred or canceled - and 426 commercial jets. This backlog, however, will shrink in the next two years, said Curado, who during the conference call noted, "We assume [demand] will not improve before the end of next year, and we will not see a book-to-build ratio above one before 2011."
However, he added, "We obviously expect to sell [some aircraft] so we will not entirely deplete the backlog. This year for sure and next year probably we will deliver more than we book."
Embraer expects to deliver 110 VLJs in 2009 along with 115 commercial jets and 17 business aircraft.
One expected sale is to Aerolineas Argentinas, which has just received $700 million in funds from Brazil's government. However Silva warned that despite this cash infusion, no order is imminent.
Curado also used the conference call to yet again play down rumors the company is considering a new commercial program, noting that "maybe in 20 to 24 months we could decide on whether we go ahead with another aircraft." That decision, he added, could be for a new aircraft type or an upgrade on its existing lineup, but even that is contingent on what engines are available and what materials could be used for the airframe.
Embraer's president and CEO also warned that any commercial aircraft program commitment would be contingent on what Airbus and Boeing finally decide for their own narrowbody families. "They are formidable... and we do not want to be in direct competition with them."
Curado also noted that although the concept of a turboprop is more acceptable than it was two years ago, such an aircraft is secondary to either a new or upgraded twinjet.
"The very small aircraft, the 20-, 30-, 40-, or 50-seater is trending towards turboprop," said Curado. However, it is "the larger seat aircraft where it is unsure" if the fuel economies of a turboprop or open rotor engine outweigh the speed limitations and "public perception" that jets are a superior product.
Photo: Embraer
