Industry Perspective: Brazilian manufacture's ambitions center on full family of business jets
When Embraer decided to enter the business jet market after the successful launch of a family of regional airliners in the 1990s, the company’s chief executive had a clear vision for the future. Mauricio Botelho–the man who led Embraer’s resurgence after the Brazilian government privatized the company in 1994–was determined that Embraer also be a significant force in the market for business jets, and not merely a niche player.
Five years after launching the Legacy business jet, based on the ERJ 145 regional airliner, Embraer has introduced the Phenom 100 very light jet, the Phenom 300 light jet and, most recently, the Lineage 1000, a bizliner intended to compete with the likes of Airbus’ A318 Elite. And Botelho says the company’s not done yet. Embraer likely will launch two more business jets, to fill the market gap between the Phenom 300 and Legacy 600, giving the manufacturer a sizable family of business airplanes with which to challenge the competition.
This will be Botelho’s last NBAA Convention as company president and CEO. He steps aside next spring, ceding the reins of the company to his long-time protégé, Federic Fleury Curado. He will remain as chairman of the board for two more years, serving in a nonexecutive role but nonetheless holding considerable sway over Embraer’s future. Botelho talked with NBAA Convention News about the company’s bizav strategy and how it got here.
How are the Phenom and Lineage programs coming along?
They’re doing very well. The Phenom 100 will have its first flight by mid-2007 and certification and first delivery in mid-2008. The 300 will follow one year later, flying in 2008 and entering service in 2009. The Lineage 1000 will be delivered by the first half of 2008.
Suddenly Embraer appears on the verge of emerging as one of the top players in the market for business aircraft. What factors led to the decision to broaden the company’s horizons beyond the Legacy?
The decision was based on a learning process that started in 1999 when we had just launched the new family of commercial airliners–the Embraer 170 and 190–and in developing those airplanes we thought we would have the core competence that would allow us to address another market, which wasthe executive jet market.
However, we were aware that the only similarity between the commercial airline market and the executive jet market was that the products would both fly, but that’s the only similarity. The rest of it would be quite different–the customers, the way sales would be made, the way the products would be supported, the operation itself.
Executive jet pilots are well trained, but the operators rely on the manufacturer’s ability to have an organization that can provide adequate service, which is absolutely the contrary of the airline market, where you have solid, professional structures dedicated to that task. So we decided to launch the Legacy in 2000 to allow us to learn about the market. It was a planned action based on a long-term view of penetrating this market with strength.
In launching the Legacy we would be providing customers with a low-risk aircraft and, as well, a proven aircraft, because the machine was based on the ERJ 145. The first Legacy was delivered in 2002 and we quickly learned about the product, learned about relations with the customers. Last year we decided to rename [that airplane] the Legacy 600 because the product today is very much different from the product we launched in 2002 in terms of interiors, cabin amenities, quality and performance. At that point we felt that we had learned enough to move on in the market.
In May of last year we launched the Phenom 100 and 300, but without names, and then last year at NBAA we named them. This year at EBACE we decided to launch another product, a large aircraft called the Lineage 1000, which is a totally different product, very much competitive in terms of performance and price with the others of that size.
Our views for the market are not limited to these products. We see and we understand that customers move up from one product to the next. We see that from the Phenom 100 and 300 to the Legacy 600 is quite a jump. It will be necessary to address the valley between these aircraft and it is very likely that we will insert two aircraft in this niche between the Phenom 300 and the Legacy 600.
What about the market gap between the Legacy 600 and the Lineage 1000?
I think there is a potential there, but that would mean having to compete head-to-head with the Global Express, the Gulfstream 550 and the Falcon 7X, so we’ll just take one step after the other.
The biggest perceived advantage of Embraer’s products seems to be price. Has beating the competition on price been your strategy all along for the business aviation market or is it a combination of things?
I think it’s a combination of things. Price is a positive on our side for sure, but not the only positive. Price is very relative at the low end of the market, but when you’re talking about the mid to high end of the market, that’s not the key issue. Those who will acquire a $25 million airplane are not very concerned whether it is $25 million or $30 million. They are concerned also with reliability, and Embraer is known by the quality of the products we design and produce. Average reliability for the worldwide fleet of ERJ 145s is 99.75 percent. Now, the Legacy, it is an ERJ 145 if you look at the systems and the overall machine, and it can provide the same level of availability. We’re targeting the same high reliability for the Phenom 100 and 300. So really it’s a mixture of reliability, quality and price that make a very powerful selling instrument for us.
How was Federico Fleury Curado chosen as the new president and CEO?
When I arrived at this company I became the CEO, just after privatization in September 1995. At that point, immediately coming to the company, I identified all the executives who were present, and put Federico at my side to be responsible for organizational development and strategic planning. Over the years, he has participated in developing our business views, our strategy and implementing them. After only three or four years, he assumed responsibility for airline market sales. About three years later he assumed the responsibility not only for sales but also for service and the interrelationship between sales and marketing with the industry. Federico knows the position, he knows the company and he has been able to share my views.
What role will you play as chairman after stepping aside as president and CEO in April?
Under Brazilian corporate law, the board of directors is basically a supervisory board. The chairman of the board is a nonexecutive chairman. However, very powerful roles are addressed to the board of directors, such as approval of the strategic plan, approval of investment, approval of the policies respective to human resources, just to cite some of them. While my position will be nonexecutive, I will have a very close relationship with the company officers. So this means I will be present, but not as the main executive.
When you joined the newly privatized Embraer in 1995, what were your expectations for the company at that time, and how would you say today’s reality meshes with your early forecast for growth and profitability?
When I took office, my only concern was to survive. And that was a reality at that time. We were very much closer to dying than anything else. All the concerns, all of the focus, was put on survival. Actually, our break-even point was achieved in 1997. From that point on we started to think about the future.
But to give you an idea of what we had then and what we achieved, in December 1995 we finalized our first strategic plan looking forward to the next five years. At that point, with a very optimistic view we put our target for the year 2000 at becoming a company with $1 billion in revenue. In 1994, when the company was privatized, the revenue that year was in the range of $250 million and the losses registered $330 million. So, when we planned five years ahead to have revenue of $1 billion and be a profitable company, that was very optimistic. But actually, when the year 2000 came, we had revenue of $2.4 billion. And this year we’ll have revenue somewhere in a range likely above $4 billion.
To what would you attribute what turned out to be just an incredible success story?
There is not one cause, but a series of causes. First, I think it has to do with the stability of the shareholders who assumed control of the company in January 1995. Those controlling shareholders invested a cash capital increase of about $650 million. This shows the commitment the shareholders had to the company’s recovery. Second, I think it was the business views that we brought to the company. Embraer was part of a state-owned organization. It was focused on engineering, not the business. I think a relative part of the success that we had was a result of the successful merging of two cultures, the very strong engineering culture as well as the very strong business culture that was brought in.
A focus on results, which came from the business side, prepared the company for long-term success, not an immediate success. We focused on customer satisfaction, and today that flows across the company from the top management to the shop-floor level. We want high-tech processes to be everywhere, not just in the products but in the tools we use in manufacturing as well as the practice of financing, managing and logistics. We invested in the last five years more than $100 million in personnel training. We have built our own university dedicated to providing post-graduate education for aeronautical engineers. It is all part of a strategy to have a global presence.
What impressions will you take away from your tenure as president and CEO of Embraer?
The thing that will be very dear to my heart will be the quality of the people with whom I have been involved at this company. The attitudes in confronting and overcoming challenges, this is something that will be carried very deep in my heart for the rest of my life–and I still expect to have significant additional life [laughs]. Another thing is the sophistication of this business: it is a global business, a high-tech business, which implies significant volumes of capital, and all of this makes one’s life very interesting.