Solid Embraer is ready for life beyone Botelho

Farnborough Air Show » 2006
November 16, 2006, 6:52 AM

This is Mauricio Botelho’s last Farnborough International show as chief executive of Embraer. Next April he will hand over the reins to an as yet unnamed successor, before assuming the position of chairman for a two-year term and then retiring from the Brazilian airframer, having presided over a remarkable transformation of the group’s fortunes.

When Botelho came to Embraer in 1995 it had just been privatized but its future seemed far from clear or secure at the time. “It was disastrous,” he confessed to Aviation International News last week.

But Embraer’s 135/145 family of new generation regional airliners started to make an impact on the market and prospects soon looked up. The company’s first five-year plan after privatization targeted annual revenues to reach $1 billion by the end of the period, and yet by 2001 it had far outstripped this goal to achieve $2.3 billion.

“We are now very solid financially with solid cash and our investment grading [by international debt rating groups such as Moody’s] is better than Brazil’s,” Botelho explained. And Embraer’s future is set to get even more solid, he argued, with the company having been restructured on March 31 to allow it to raise significant amounts of fresh capital by widening ownership of its shares by international investors.

In Botelho’s view Embraer is entering an exciting third phase of its corporate life in which–having completed its modernization from being an old-style state institution–it is set to fulfill its ambitious plans as a true public company with dispersed share ownership that will no longer be dominated by any one shareholder group. Under the new structure, voting rights are limited to five percent for each shareholder, regardless of how much stock they hold.

There is also built-in safeguard against the group being taken over. Any shareholder whose stake reaches 35 percent of the total stock has to immediately make a global offer to buy fully 100 percent of the shares–and this can only be done with the approval of the Brazilian government, which has retained its golden share.

According to Botelho, the money that Embraer expects to raise from the international capital markets will fund a fresh wave of investment that will need to be larger than the $2.3 billion it spent between 1995 and 2005 and over a shorter period of time. The company had neither the cash, nor the ability to cover these costs through debt and so would have found itself in an arrested state of development without the restructuring. Its shares are now trading on both the São Paulo and New York stock exchanges.

More New Bizjets

Botelho confirmed exclusively to AIN that Embraer will commit to two more business aircraft–a super light jet and a midsized model–to expand a product portfolio that includes the Legacy 600, the Phenom 100 and 300 and the new Lineage 1000. These programs are not likely to be formally launched until next year.

Here at Farnborough International this week, Embraer will announce its full backlog for the Phenom jets–a tally that Botelho described as “very gratifying.” The manufacturer can be proud of having broken into a business aviation market that until its arrival was dominated by a few long-established specialist players. Its CEO attributes this success to offering “better products at more affordable prices” and the fact that its aircraft had already won acceptance in the demanding airline sector.

Embraer has yet to secure an order for the Lineage 1000 that it announced at May’s European Business Aviation Convention & Exhibition, but Botelho said it is receiving significant interest. The new very large bizjet is based on the Embraer 190 airliner, offering a five-section cabin (with room for a suite with double-bed) and 5,000-mile range that can take its passengers from London to Chicago non-stop.

Apart from the planned new executive jets, much of the emphasis for Embraer’s next wave of investment will be to significantly expand its service network worldwide to support the growing number of business aircraft customers. This will see the establishment of a network of authorized service centers.

With European certification for the Embraer 190 very recently secured, the airframer is ready to make the first delivery to UK carrier FlyBE next month (see page 36). Botelho said that this model and the larger 195 jet have penetrated new market segments, beyond the orthodox regional airlines to appeal to both larger legacy carriers (like Air Canada) and the low-cost operators (such as JetBlue).

But without a significant shift in engine technology, Embraer will not be taking the leap to offer a new generation narrowbody twinjet above the 120-seat sector. Botelho maintained that it is the lack of a viable new powerplant that has stalled the plans of his rival Bombardier for the proposed C-Series development.

In addition to the development of a diverse product portfolio, the transformation that Botelho has overseen at Embraer has included  significant investments in the skills of its personnel and in new manufacturing techniques. The latest evidence of this is the new SAP 4.3 integrated information technology network that now links operations throughout the entire company.

Some international observers of Embraer have taken a rather patronizing view of its emergence on the world aerospace stage–perhaps doubtful of Brazil’s ability to compete on an equal footing with North Americans and Europeans. Botelho laughed out loud when AIN put this point to him. “Yes, we have surprised people all around the world,” he chuckled. “And even in Brazil itself.”

He remembers all too well back in the 1990s when he found it hard to get bankers to take his plans seriously. “I used to tell them that if they wanted me to talk about our balance sheet the conversation would only last five minutes, but that if they wanted to hear about our future we would be there for two hours,” he said.

In conclusion Botelho said that Embraer has gotten where it is today by, “being better at differentiating ourselves with our attitude, our behavior toward  customers to achieve their satisfaction and our flexibility in responding to problems that all companies face.”

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