Senator calls for inquiry into Embraer subsidies

 - September 28, 2010, 11:36 AM

With analysts predicting that Embraer could equal or even surpass Cessna as the world’s largest business jet maker by volume in the next few years, some are wondering how the market newcomer could have achieved such stunning success so swiftly without the assistance of its government. Among the most vocal is Sen. Sam Brownback (R-Kan.) who in a recent statement noted that Embraer now claims to have cornered approximately 14 percent of the worldwide market for business aircraft despite having entered  the industry only in 2002. “This is an almost unbelievable feat for a company that has been manufacturing business aviation aircraft for a little over seven years,” Brownback wrote in a press release.

Calling for his colleagues on the Senate Finance Committee to request an inquiry by the U.S. International Trade Commission (ITC) into business aviation industry competition in the U.S., China, Brazil, Canada and Europe, Brownback–a candidate for governor of Kansas in next month’s elections–offered a previous example as fuel for his suspicions. “Considering similar statistics from previous years that were later proved to be the result of illegal subsidization of aircraft from the European Union, Embraer’s activity does not seem possible without heavy and creative support across the board.”

Increased Market Share
Brownback’s suspicions are not without precedent. In the early 2000s the World Trade Organization (WTO) ruled that both Embraer and Canadian manufacturer Bombardier received illegal subsidies for their aircraft programs from their respective governments, and as recently as this summer the WTO issued its final ruling in the seemingly interminable dispute between Boeing and Airbus, stating that the European Union illegally subsidized the entire line of Airbus aircraft.
According to the WTO panel report, the European airframer received government launch aid that covered up to 90 percent of the development costs for the A330, and its investigation into the A380 uncovered $4 billion in prohibited export subsidies.

In JP Morgan’s most recent Business Jet Monthly Report, equity analysts estimate that next year Wichita-based Cessna will deliver only five more aircraft than its Brazilian rival. That gap is estimated to narrow to just two airplanes in 2012. By 2013, Embraer plans to certify and begin deliveries of its new Legacy 500, which could land it on top of the list in terms of delivery volume.

In this year’s first-half statistics released by the General Aviation Manufacturers Association, while most bizjet makers were posting double-digit negative results compared with the first half of last year, Embraer showed a 107-percent increase in deliveries year-over-year, buoyed by surging deliveries of its Phenom 100.

“We are certainly happy to be increasing our market share in the industry,” said Luis Carlos Affonso, Embraer’s executive vice president of executive jets. He asserts that the reasons behind the airframer’s success are simple. “We talked to the customers, we understood what the characteristics were that they wanted in airplanes, we developed those differentiated airplanes and we are introducing them to the market on time, meeting and exceeding the specs.”

Embraer’s official response directly refutes Sen. Brownback’s assertion. “Contrary to the Senator’s assertions, the company’s recent success with business aircraft is not the result of government subsidies. Embraer did not use launch aid or any other illegal subsidies to develop its business jets portfolio or the equally successful E-Jet commercial aircraft [series]. Rather, Embraer financed the $1 billion (U.S.) development of the latter with a public offering of stock, contributions from risk-sharing partners and retained earnings. It did not use any public funds for either family.” The company last month signed a loan agreement with a group of 25 international financing institutions for $1 billion in available credit, broken down into $400 million for pre-export financing, and $600 million for working capital financing. This, according to Embraer, represents a renewal of the syndicated credit operation of $500 million announced in August 2006.

In his statement, Brownback (whose office did not respond to a request for an interview) noted that over the past two years, 13,000 general aviation workers in Kansas–home to Cessna, Hawker Beechcraft and Bombardier’s Learjet ­division–lost their jobs, as the industry was buffeted by the economic fallout as well as “uncalled for and unhelpful” criticism by some members of Congress, officials in the White House and members of the media.

On top of those hurdles, Brownback claimed, the industry also faces unfair international competition. “It is critical that we fully engage the competition and pursue all means necessary to ensure that an important U.S. industry is not negatively affected by the illegal actions of foreign governments,” the Senator wrote. While both Cessna and Hawker Beechcraft acknowledged Brownback’s statement, neither manufacturer had further comment.

In an interview, Affonso also denied wrongdoing by his government. “[Embraer has] the support of the Brazilian government, and the position the government takes about the WTO negotiations and international trade disputes is that countries should create a level playing field,” he told AIN. “In other words, the Brazilian government is against illegal launch aids or distorting subsidies. If the competition is not between companies, distorting subsidies becomes a competition between the treasury of countries, and we believe the treasuries of the U.S. or the European Union or Canada are stronger than the Brazilian treasury, so for us, this game should be played on a level playing field.”

Affonso said the airframer has not received any grants or financing packages with repayment dependent only upon the commercial success of the airplanes. He also noted that while other manufacturers are seeking to move jobs out of the United States to remain competitive, Embraer is establishing a final assembly facility in Melbourne, Fla., for its Phenoms. That facility is expected to open early next year and provide at least 200 jobs. Affonso also cited further economic activity generated by the Brazilian manufacturer. “Our statistics demonstrate that 66 percent of the bill of materials of our airplanes comes from the U.S. We believe that we generate more than 7,000 jobs through this business of buying parts and components [see box] from the U.S.,” he said.

“We have even made a calculation in terms of our trade balance,” said Affonso. “The balance is positive to the U.S., meaning that we buy more from the U.S. than the U.S. buys of our airplanes.” Since the company sells its airplanes worldwide, Affonso said that commerce helps favor the U.S.’s industrial exports as well.

In summing up his position on the ITC investigation request, Brownback noted, “For years Kansas has been leading the way in the general aviation industry, and I know that if everyone plays by the rules Kansans will easily rise above the competition. With the ITC report, we will have a better understanding of the global players in the general aviation industry and how the U.S. can ensure we are all competing on a level playing field.”