Embraer's Botelho sees bright future for Legacy
Mauricio Botelho was appointed president and CEO of Embraer on Sep. 27, 1995, and has led the company after its privatization to become one of the world leaders in the aviation industry. Before joining Embraer, he was executive director of Cia. Bozano, a holding company with interests in several industrial and financial ventures. Before that he served in several high-level positions for a number of Brazilian companies involved in process-control systems for subways, railways, power systems and telecommunications and in industrial project implementation in offshore oil and gas production, steel-making and mining. He graduated in 1965 with a degree in mechanical engineering from the Brazilian National School of Engineering and also completed courses in finance and business administration. Attending his first NBAA Convention, Botelho took a few minutes to talk to NBAA Convention News about the Legacy, Embraer and his expectations for the next few years.
What led Embraer to develop the Legacy?
Our core competencies are in aeronautical engineering and knowing our customers’ needs, so the corporate aircraft market was a natural development. When we started the Legacy program, we had in mind a low-risk development for our customers and for ourselves. There are 1,200 EMB-145s sold and 620 in operation, so it is an already established aircraft. So the first point is that we are giving our customers confidence. They can trust the product.
The second point is exceptional value, because the aircraft has comfort, it has very reasonable performance and operational reliability and it has a price that is unbeatable.
The third point is that behind all of this, Embraer is a solid company.
What do you consider the characteristics of a solid aviation company?
Seven years ago we took control of Embraer and received the mission to turn it around. I was new to this business and had to learn about it. During the first few months after I became CEO, I visited each of Embraer’s customers. I talked to a lot of people. I determined that a successful aviation business is supported on five columns.
First is technology, both in the aircraft and in the process, systems and methods used in building the aircraft. The tools that you use to build the product are highly sophisticated.
The second point is the consequence of the first–highly qualified people. So we have been investing very strongly in education and training of our people. In the last three years we’ve spent more than $65 million for training.
The third column is cash. This is always a great concern. From 1995 to 2001, we invested into the company $1.1 billion from cash flow and the initial public offering–no government money. From 2002 to 2005, we plan to invest $1.3 billion from our own revenue to fund current programs.
The fourth column of the aviation business is its global aspect. No one can survive in this business without being a global company. We’ve expanded our presence, not only in Brazil where we now have five factories, but also in the U.S. in Fort Lauderdale, Palm Beach Gardens, Dallas and Nashville, and around the world in Paris, Australia, Singapore and China, where we want to establish a facility to build our products.
The fifth column is flexibility. A company must be flexible enough to respond to changes in the economy, as Embraer did after September 11.
How did September 11 affect Embraer?
One year ago in September, we were growing our production from 14 aircraft per month in January last year to 20 by December. In August we delivered 17 aircraft, and then September came. After the mourning period, we approached all our customers and discussed with them how this situation was going to impact them. Within two weeks we had a clear idea of the effect on our own operations, and we reacted very fast. On September 28, we had to fire 1,800, after hiring 2,200 from January to September. We rescheduled all our deliveries and went from 17 in August to 10 in September. Just like that.
We rescheduled with our suppliers, as well, but we had to receive the materials in the pipeline. Many lead-times were more than a year. From September to January, our inventories grew from $650 million to $1.05 billion. Today, this inventory has been eaten up and things are getting back to normal. The point is, we had the financial strength to support this impact. Our ability to react promptly in response to the situation allowed us to cross the valley and maintain profitability and investment capability.
You mentioned a joint venture in China. How did that evolve?
Until the beginning of the 1990s, the average import duty in Brazil was about 83 percent. Today it is about 13 percent. So we know what a closed economy is and we see a lot of similarities between China and Brazil in the way it was 10 years ago.
We went to China and had success in a very short period of time. In 1999, we started to market our products there, in November we had a memorandum of understanding with an airline, in April 2000 we signed a contract for five aircraft, in June we received the down payment and in September we made the first delivery. A second contract for 40 aircraft, 30 firm and 10 options, was signed in November 2000 and then a third for 10 aircraft. About the middle of last year, however, the Chinese government approved an import duty on aircraft of the range and weight of our aircraft. Import duties have to do with industrial policy. They are a way to stimulate manufacturing locally, instead of importing.
So we started to develop our connections with Chinese industry to overcome that situation by establishing a manufacturing facility in China in a joint venture with AVIC II. We intend to build our family of EMB-145 airplanes and have control of the venture with 51 percent. At this time, we don’t know when this will become a reality, but we are being patient about it.
How much does the Legacy contribute to Embraer’s bottom line?
In the first six months of this year, it represented 7 percent. In about five years, we want it to represent at least 15 percent.
We see a lot of opportunities in the executive market. We are developing a family of regional aircraft from 70 to 108 seats. These are all aircraft that could be offered to the executive market for both VIP and corporate shuttle aircraft.
How do you see the next few years developing?
In the first half of this year we delivered 60 aircraft and we expect to deliver a total of 135 this year. Next year we expect to deliver 145 aircraft, so things are moving up, but not at the same speed as before.
I believe this market will grow. It is impossible to avoid flying. At the moment, things are not that hot, but things will warm up again and people will be flying.
If you look at the regional market, you’ll see that there’s a demand. The problem is not the lack of demand, but rather how to get those aircraft financed. The financial market is very cautious.
If you look at the corporate aircraft market, you’ll see that it depends on how active the economy is because it comes from the profits of the companies. If the profits decrease, there are fewer companies who have the ability to buy an aircraft.
We are living in a moment, but that moment is not going to stay here for long.