Embraer expects to deliver 30 percent fewer airliners this year than it shipped in 2008, and roughly half the number of Legacy and Lineage corporate airplanes. This is a set of circumstances that Fred Curado, the Brazilian company’s CEO, knew full well would result in the need to shave headcount and the kind of political pressure he hadn’t faced since succeeding Mauricio Botelho as head of the company in April last year.
After all, Brazil’s socialist President Luiz Inácio Lula da Silva rose to power and maintained his political influence on a populist, pro-worker platform. Of course, Lula, as the Brazilian president is commonly known, would have to show at least an effort on the part of the government to intervene. But his visit with Curado in February proved not particularly productive from the workers’ perspective–Embraer did not deviate from its plans to lay off 20 percent of its workforce–and it likely left the company’s CEO looking stronger than many had imagined.
Now, only a year into Curado’s tenure as CEO of one of Brazil’s largest exporters, he perhaps faces a sterner test than even Botelho did following the 9/11 terrorist attacks. As of just a few months ago, the company had seen more delivery cancellations than firm orders. Curado told AIN that the company this year plans to deliver 115 E-Jets and ERJ 145s combined (compared with last year’s total of 157 E-Jets and six ERJ 145 airliners), 17 Legacy and Lineage corporate jets (compared with a projected 35) and 110 Phenom very light jets. Of all the aircraft types it builds, only the Phenom program won’t suffer from a drop in projected production rates, even though Curado acknowledged a fair number of cancellations of the very light jets.
“There’s no question there will be cancellations and deferrals,” said the CEO, but, he added, Embraer’s backlog will prove sufficiently large and mobile to move airplanes now scheduled for delivery after this year into 2009 positions left vacant.
Embraer hasn’t yet received any notices of cancellation from airlines, said Curado, only deferrals that will result in deliveries happening, in some cases, years later than first planned. Meanwhile, he conceded that the Harbin-Embraer joint venture in China continued to operate, albeit at a snail’s pace.
Most of the deferral pressure has resulted from the global credit squeeze, said Curado, adding that Brazilian export development bank BNDES has committed to more than its usual share of financing this year, although not as much as he would like. “We’re trying to motivate them to do more,” he said. “I’d say 30 percent [of Embraer deliveries] is a fairly conservative number.”
Still, virtually all the customers planning for deliveries this year have either secured or expect little difficulty securing the needed financing, said Curado. “We don’t have any wild cards,” he said. “But of course, everybody is living one day at a time. There’s no way a manufacturer can say we are 100 percent certain. We all depend on the banking system.”
Last year Brazil’s export credit agency financed only 11 percent of Embraer’s deliveries, so Curado in essence hopes BNDES virtually triples its exposure this year. Considering the fact that Boeing expects the U.S. ExIm Bank to back at least a third of all its deliveries and Airbus expects European export credit agencies to finance as much as one half of all its deliveries, Curado’s expectations don’t appear out of line.
However, during a company conference call in March to discuss fourth-quarter earnings, Embraer CFO Luiz Carlos Aguiar set his sights somewhat lower, at between 20 and 25 percent.
If Embraer delivers the 242 airplanes it forecast earlier this year, it would collect revenues of $5.5 billion, said Curado, compared with $6.34 billion last year.
Nevertheless, he said, the company has committed to increasing its margins to 10 percent this year, due largely, of course, to a near 20-percent drop in payroll expenses.
While President Lula could ask Curado only to reconsider the amount of severance compensation Embraer promised to pay and perhaps the scope of the job cuts, a Brazilian labor court eventually served as the final arbiter. Curado said he knew that the company had violated none of the country’s labor laws. The court agreed, and ruled in late February that Embraer would not have to reinstate the some 4,300 employees laid off.
Still, one of the 12 judges that formed the tribunal to hear the collective lawsuit filed by the company’s unions characterized the company’s conduct as “abusive,” handing Embraer, if not a significant financial penalty, a domestic public relations blow.
Meanwhile, the court ruled that Embraer would have to pay the employees’ salaries up to March 13, rather than February 19–the day it originally instituted the dismissals. It also “validated” Embraer’s earlier offer to pay two months’ salary and a year’s medical benefits as severance, a company spokesperson told AIN.
On March 30 Embraer decided to appeal the court’s decision that set March 13 as the official date for the start of the company’s layoffs, according to the spokesperson. She also said Embraer will appeal the court’s use of the word “abusive” in its characterization of the company’s actions.
“Brazilian legislation is very clear about the right of any party, either the employer or the employee, to terminate his labor contact,” said Curado. “Of course, there are compensations which are clearly outlined and the laws are respected. That’s what we did …It would be very hard not to implement what has already been implemented. So [the lawsuit was] kind of a nonstarter.”
Curado harkened back to the events of 9/11, when Embraer cut 15 percent of its workforce, as an example of how a company needs to act quickly and decisively when faced with an acute shift in economic conditions.
“Adjusting to changes to radical changes in the scenario is part of our industry,” he said. “In 2001…those companies which were fast and firm, and adapted themselves to the new realities survived, and Embraer was one of them…After that we were able to recover our level of employment. From 2001 up to now, even after the reductions, we have contributed 6,000 new jobs.”