Embraer braces for ‘challenging’ 2009

 - January 29, 2009, 9:50 AM

Embraer delivered a record 204 airplanes last year, including 162 jets in the regional/commercial sector, leaving the company on what it hopes proves firm enough financial footing to readily absorb the economic “challenges” that lie ahead for this year. However, a relatively weak fourth-quarter order intake resulted in the company’s first quarterly decline in backlog value in more than two-and-a-half years–to $20.9 billion from $21.6 billion at the end of last year’s third quarter.

That the company–along with the airliner manufacturing business as a whole–will see a further contraction in backlog hardly appears open to question, as airlines around the world respond to market conditions the World Bank expects to result in a global recession this year. Even China–a market projected by Embraer in its first Chinese Market Outlook to lead the world in airliner capacity growth over the next 20 years–has dampened expectations as it calls on its airlines to cancel or postpone aircraft deliveries this year.

Although he did admit to “a couple” of deferrals by airlines outside China by the middle of last month, Embraer airline market executive vice president Mauro Kern told AIN that the company’s two remaining Chinese customers for the E-Jet–Hainan Airlines and Kunpeng Airlines–had not yet asked for delivery delays. At the time Embraer had delivered seven out of 50 E190s on order by Hainan and three of the five destined for Kunpeng. But while he expressed no doubt that Kunpeng would take its final two airplanes on schedule, he couldn’t offer an iron-clad guarantee in the case of Hainan.

“If [there are] any [E-Jet deferrals from Chinese airlines],” they would come from Hainan, he indicated. “The [50-seat] ERJ 145 is another subject,” added Kern. “We’ve been negotiating with [Hainan] a rescheduling of all the deliveries.” The Harbin-Embraer joint venture facility, which builds the ERJ 145, has so far delivered 10 airplanes to Hainan, but none during last year’s fourth quarter and just six all of last year. “At this point I cannot anticipate what will be the outcome of [the Hainan negotiations], but we can expect some rescheduling…at least a reduction of the number of airplanes delivered this year,” said Kern. The original schedule called for delivery of the remaining 40 airplanes by the end of 2010.

Although he wouldn’t comment on aircraft financing arrangements involving Kunpeng, in the case of Hainan, it “has been working with the Chinese banks, and so far everything is OK,” said Kern.

From a global perspective, the Embraer executive admitted that aircraft financing stands as his foremost concern, even though, he said, “the majority of deliveries planned for this year are financed.” There remain “a few” pending, however–primarily deliveries scheduled for the second half of this year–that could prove to become a problem.

“We are working closely with the Brazilian export credit agency, BNDES,” said Kern, who nevertheless emphasized the fact that until now Embraer customers haven’t had to rely exclusively on the Brazilian government. “Some customers had received financing from the banking system at the end of 2008, so it was not completely stopped,” he said. “It was more difficult, it was more expensive, but we are waiting to see how the overall banking system will come back in the next weeks or months.”

Regardless of how quickly the credit crisis subsides, Embraer expects to see its backlog continue to shrink this year, said Kern. But he finds some comfort in the reaction of airlines to past crises when it comes to choice of aircraft size. “In other crises, like September 2001, we’ve seen demand flowing to lower-gauge, lower-capacity airplanes” such as the E170 and E190 from traditional mainline narrowbodies, he said. “We see those airplanes playing an important role for many airlines already, [and] we see there could be a good potential for smaller-gauge airplanes if everything was OK on the finance side. But as the financing is a big issue we cannot expect a big number of sales.”

Unfortunately for the Harbin factory, the downward shift to which Kern referred didn’t extend to the 50-seat class, demand for which had essentially evaporated even before the economic crisis took hold last year. However, with fuel prices returning to levels not seen since 2005, Kern suspects that the rate at which airlines ground those types will slow considerably. Still, “We think that oil prices are artificially low right now,” said Kern. “We see them going back up again, not to the levels of $130 or $140, but we expect something like $80 to $100 in the long term.”

In any case, Kern stressed that the factory in Harbin accounted for a small portion of Embraer’s revenues. Far more important to the company will be the rate at which demand for E-Jets slows. Kern said Embraer plans to cut E-Jet production by 15 to 20 percent this year–a reduction he said a “ramp-up” of Phenom business jet rates would ameliorate–but one that signals no lack of concern for tough times ahead.

“Everybody is concerned about what will happen in 2009, but there is no firm consensus on the numbers,” said Kern. “Airlines have already adjusted capacity to increase fares and that is going to be useful now.”

Meanwhile, said Kern, “We’re working hard to minimize the effect of this crisis on our manpower,” in response to a question about possible layoffs this year. “We see nothing significant at this point.”