Fewer deliveries likely next year, says Embraer

 - December 1, 2008, 4:32 AM

Embraer has lowered its delivery forecasts for next year to reflect the uncertain credit market. The company expects that by next year deliveries to business aviation, at 145, will eclipse deliveries to the airlines, at 125. However, despite delivering fewer airplanes, the company expects its profit margins to improve, as the value of the Brazilian real has dropped against the dollar.

Four Lineage 1000s are in the interior completion stage, and at least one of those airplanes is expected to be delivered this year. Embraer expects to deliver 10 of the entry-level Phenom 100 this year immediately after certification, which was imminent at press time.

As recently as August the company projected delivering as many as 150 Phenoms next year. It now forecasts delivery of 110 Phenoms (100 and 300) next year; the Phenom 300 is expected to be certified for deliveries to begin in the second half.

The lowered predictions reflect caution. Newspaper O Estado reported that in a conference for analysts after third-quarter results were announced, company president Frederico Curado said that the revised forecast reflected only orders from clients who had clearly indicated their ability to take delivery. Embraer’s 2009 delivery prediction for its business jets is now 145 aircraft, down from the previous prediction of 195 to 200 aircraft.

When asked about cancellations, Daniel Bachmann of Embraer’s executive jet division said, “If business jet customers are canceling or pushing back delivery dates, we haven’t seen those movements yet.”

Losses on Financial Ops

While the reductions in deliveries are so far speculative, Embraer has booked real losses on financial operations. Although its quarterly statements showed a profit of $57.7 million under U.S. accounting rules, its Brazilian financials showed its first loss in 11 years.

The loss was due to currency hedging and a sudden drop in the local currency, the real. The hedging loss was equivalent to $92.9 million, offset by $58.7 million

in foreign-exchange gains in the same period.

The quarterly loss was calculated by marking to market at the September 30 exchange rate. The real has continued to devalue since then, dropping 32 percent from the beginning of August to mid-November. Embraer stated, “The trend of appreciation of the U.S. dollar against the real might cause losses in the company’s derivative instruments.”

Embraer emphasized that the devaluation of the real is favorable to the company, since more than 95 percent of its sales are in dollars, while more than half its costs are in local currency. That should provide the company with a wider profit margin, a comfort in uncertain times.