Embraer Banking On U.S. Regional Jet Revival

 - March 18, 2013, 2:40 PM
Embraer CEO Frederico Curado.

Embraer expects to see substantial sales activity over the next few months involving 70- and 76-seat E-Jets as U.S. major airlines respond to relaxed union limits on regional jets among their regional airline partners, according to the manufacturer’s CEO, Frederico Curado. Speaking with security analysts during the company’s fourth-quarter earnings conference call on March 13, Curado expressed optimism about the prospect of further large-scale sales following bankruptcy court approval a day earlier of American Airlines’ plan to award Republic Airways the right to fly 47 seventy-six-seat E175s under the American Eagle banner. Embraer hopes to close the sale to Republic this week, he said.

American’s business plan calls for it deploy 215 “large” regional jets within its network by 2018. New scope clauses at both United Airlines and Delta Air Lines have prompted requests for proposals to add new equipment to the fleets of their regional partners as well, leaving Embraer, Bombardier and a newcomer in the form of Mitsubishi all vying for the spoils. In December, Delta placed an order with Bombardier for forty 76-seat CRJ900s, all of which it plans to place with its Memphis-based Pinnacle Airlines subsidiary starting in the second half of this year.

Curado said he expects a U.S. market for between 400 and 600 new regional jets over the next “several” years, as all three of the country’s major airlines move not only to add 70- to 76-seat jets, but also to replace their aging and inefficient 50-seaters.

“Overall, I’d say we have an optimistic view on the U.S., and, in a certain way, balancing out the activity elsewhere,” he noted. “That’s good because…for the last several years we have had a lot of activity outside the United States and no activity in the United States. It’s about time there is a resumption of that activity.”

Meanwhile, the core of Embraer’s commercial backlog stands to change significantly, as fewer regional players ordering equipment smaller than the 100- to 122-seat E190/195 favored by low-fare and major airlines constitute more of the order book.

As a result, Embraer expects to see more margin pressure in the short- and medium-term because large orders for smaller airplanes tend to generate less profit per unit.

In the longer term, the company expects its planned newly revamped E-Jets, colloquially known as the G2s, to relieve some of that margin pressure. “The new airplanes will be blockbusters; we’re very convinced of that,” said Curado. “We are rebuilding most of the systems of the aircraft, not only for [performance] improvements but for cost reduction.”

Aiming to launch the airplane “some time around mid-year,” Embraer also expects to choose all the major suppliers by that time. It already has replaced GE with Pratt & Whitney as the engine supplier and maintained Honeywell as the supplier of a new avionics package. Last week it announced its choice of UTC Aerospace for the airplanes’ electric power generation and distribution systems as well as wheels and brakes.