Embraer 170 soldiers on toward November approval

 - August 11, 2008, 9:35 AM

Brazil’s Embraer remains firmly on target for November certification of its much-heralded but delay-prone Embraer 170, according to company vice president of commercial programs Fred Curado. Just days after returning to the company’s São José dos Campos headquarters from a trip to China, where Embraer and AVIC II subsidiary Hafei Aviation continue work on a new assembly line for license-built 50-seat ERJ-145s, Curado said Brazilian certification of the new 70-seat jet would most likely happen during the first half of the month, followed “not more than two weeks later” by FAA and JAA approvals.

“We have a very aggressive plan in place, and the plan is being met,” said Curado. “We have really reinforced our cooperation [with Honeywell]. Every day we can save in the cycle is worth saving. There was a specific plan put together to ensure certification by November, and as far as I’m informed, the plan is going well.”

Launch customer Alitalia, previously scheduled to take the first of six airplanes in July, has opted to maintain its originally planned delivery rate of one per month, meaning it will take two airplanes this year then four through next April. Along with the six Embraer 170 prototypes, Embraer had finished two Embraer 175s, the first of which began flight testing in June. It also completed a production 170 originally destined for Swiss, but because that airline deferred first delivery until well into next year, Embraer plans to reconfigure it for another customer. It had also finished both production airplanes destined for Alitalia this year, bringing the total number of completed airplanes in the program to 11.

Although he wouldn’t offer specifics, Curado said Embraer had reached terms with Alitalia over compensation due the airline as a result of the delivery delay. As for North American launch customer US Airways, Curado expressed confidence that Embraer would meet its promised delivery rate of three airplanes in November and another three in December, provided the airline can secure the needed financing.

A risk-sharing partner in the Embraer 170, Honeywell–maker of the Primus Epic avionics suite implicated in this most recent delay for the 170–continues work on the integration of the systems’ Cat II approach, autothrottle and wind-shear-detection software with the help of the first Embraer 175 prototype, flown to Phoenix in late July specifically for cockpit troubleshooting. By press time Honeywell had sent 11 of the 12 loads of Epic software to Embraer. It planned to send the final load by the end of this month.

Nearly a Year Late

First acknowledged by Embraer CEO Mauricio Botelho during June’s Paris Air Show, the certification delay marked at least the third such setback for the Embraer 170, originally scheduled for regulatory approvals by the end of last year. In Paris, Embraer said it had hoped to employ a so-called “two-phase” approach, under which it would certify the airplane in July without Cat II landing capability, autothrottle and wind-shear detection, then add the extras for a subsequent approval in November. However, Curado quickly put to rest any speculation that Alitalia ever agreed to such a plan. “Alitalia never wanted to take the airplanes without the Cat II and wind-shear detection,” he said. “This was not a matter of Alitalia changing its mind. We dropped the ball on this one.”

Despite the program’s early technical problems, the Embraer 170/190 family has broken new ground in terms of sales, most notably in the low-fare sector, where New York-based JetBlue placed an order for 100 Embraer 190s in early June. Of course, the order placed by US Airways in May for 85 Embraer 170s, even if not particularly lucrative, did much to raise the program’s visibility and stature in the U.S. Most recently, Embraer received a formal request for proposal (RFP) from the Star Alliance to fill a requirement for at least 100 jets in the 70- to 100-seat range. Although on the surface Embraer appears the only choice for a family of jets spanning that entire capacity range, political considerations could carry as much weight as any in the final decision, particularly in a deal that could involve four airlines with vastly different agendas. Led by Lufthansa, the group of airlines involved also includes SAS, Air Canada and Austrian Airlines.

“Nothing prevents the Star Alliance from procuring a 70-seater from Bombardier, for example, and a 100- to 110-seater from Boeing,” said Curado. “We have a natural advantage because we can fill the entire requirement. On the other hand, the Rolls-Royce Deutschland engines on the 717 are German products, Lufthansa CityLine flies [Bombardier] CRJ700s and Airbus has A319s and A320s in the mainline Lufthansa fleet. So I think everyone has some sort of advantage, but I don’t think this is going to be a mathematical decision. If this was a pure airplane competition I think we would be in a very favorable position. But you’re talking about a few companies, not just one; you’re talking about existing fleets; you’re talking about potential combinations of solutions; so it’s going to be an interesting competition.”

US Air Financing Still in Question

Meanwhile, at the time of AIN’s interview with Curado, US Airways had yet to secure the financing for 55 of the 85 Embraer 170s it ordered in May. While GECAS has pledged to finance 30 airplanes, Embraer still awaited response from Brazilian national export bank BNDES to a letter pleading the case for financing the rest. The president of BNDES told local reporters recently that Embraer’s customers should start looking elsewhere for their financing, intimating that the country’s largest exporter no longer qualifies as an emerging enterprise in need of government support to compete in the world market.

For its part, GECAS canceled a portion of its own order for Embraer 170s, in essence transferring 30 delivery positions to US Airways. Curado stressed, however, that US Airways’ positions on the GECAS-financed airplanes coincide with many of the remaining 50, and that even some of the six deliveries scheduled for this year stood subject to a new financing deal.

Despite the reports to the contrary, Curado insisted that the government considers Embraer worthy of support due to the huge contribution it represents in terms of the country’s trade balance and employment roles. “We have been in contact with BNDES about this process, and the discussions are still going on,” said Curado. “Philosophically and politically I think there is a clear understanding of the importance of Embraer as an exporter. But of course the exposure of BNDES to the airline market is already significant, as is that of EDC (Export Development Canada).”

The appeal for the cash came on the same day the Brazilian bank released some $500 million to Embraer customers for orders signed last year. Coincidentally, the EDC had just released $900 million to Bombardier CRJ customers. BNDES, however, has shown concern over its growing exposure to what many in the financial community still consider an extremely high-risk market. “The capital market for airplanes is not very robust today, so the ability of the export credit agencies to secure their receivables is limited or non-existent at this point,” explained Curado. “So basically I see there is some need to free some exposure for new financing. But of course the bank has limits. We at Embraer don’t know its limits. But the signs that we have are positive toward US Airways.”

While he admitted time is running short for US Airways, Curado expressed little or no concern about the transaction with JetBlue, which, he said, has experienced no trouble finding financing for its fleet of Airbus A319s. JetBlue has already won a financing commitment from GECAS for the first 30 of its 100 Embraer 190s on order, scheduled for delivery from 2005 to 2007. That gives all involved four years to arrange financing for the remaining 70 airplanes.

“We’re talking about 2007, so this is not a short-term or even a medium-term concern,” said Curado. “By the way, BNDES might be an alternative for JetBlue, but JetBlue has been able to arrange for financing that has been cheaper than what’s available from export credit agencies. They have full discretion in determining how to finance the airplanes and so far they’ve been very successful. In any case, JetBlue is really an issue for the future.”

Scramble for Order in China

An issue of more immediate concern involves Embraer’s joint venture with China’s AVIC II, which, under the schedule established when the companies signed their contract last December, should yield its first Chinese-built ERJ-145 by the end of this year. Technically, the project has gone well, said Curado, as engineers expected to finish building the ERJ-145 assembly line in Harbin, China “by October or November,” and the first two shipsets had already arrived in the People’s Republic. However, the joint venture known as Harbin-Embraer Aircraft, of which Embraer owns 51 percent, has yet to sign an order for an airplane–a circumstance Curado admits the Brazilian manufacturer did not anticipate when it signed the deal some nine months ago.

“My chief concern right now is to make sure we have a contract–a painted airplane,” said Curado. “There is an environment in China that is low yield and high cost; navigation fees and airport fees are high and fuel cost is tremendously high. This is a natural constraint; the country has been living with that for several years. But with SARS the moment is not very good.”

Before the Chinese government suspended regional jet imports in 2001, the country had begun to realize its market potential for all three Western regional jet builders. Embraer, for its part, had delivered five ERJ-145s to Sichuan Airlines and won firm orders for 20 of the 50-seat jets from China Southern Airlines and for 10 from Wuhan Airlines. But when the Chinese regime reached a conclusion that the demand could help buttress its own aerospace industry, it placed prohibitive import conditions on Western products, effectively closing the market to Embraer and its competitors.

The Chinese then invited the Western regional jet manufacturers to bid on coproduction agreements with state-owned AVIC II. Embraer won the contract for 50-seat jets, and hoped the deal would save its now canceled contracts with Wuhan and China Southern, and open new opportunities with the likes of Sichuan. No one could anticipate the onset of SARS and the resulting collapse in air travel throughout Asia, however.

“Now that everything is there, we expect the activity to resume, but SARS has made our life more difficult than we had planned,” admitted Curado. “But we continue to be very positive about the decision and we believe the model will work.”