State of the industry: Brazilian airframer to ramp-up production
While the industry downturn has affected airframers in different ways, in terms of deliveries, Brazil’s Embraer has managed to avoid the decline in output that has beset its North American competitors.
In this year’s first half statistics released by the General Aviation Manufacturers Association, while most bizjet makers were posting negative results compared with the first half of 2009, Embraer–based on the surging deliveries of its new Phenom 100–showed a 107-percent increase in business jet deliveries year-over-year. It delivered 60 jets during the first six months of the year, comprising 51 Phenom 100s, five Phenom 300s, three Legacy 600s and one Lineage 1000.
So far, the OEM has delivered a combined total of approximately 170 of the 100s and its larger stablemate Phenom 300, which received certification late last year.
While Embraer doesn’t publicly break down its orders between the two, it admits that it has–like most companies–suffered some cancellations. “If you remember the good times in the first half of 2008, we announced that we had about 800 Phenoms sold. So far we have delivered 170 Phenoms and our backlog is around 550 airplanes,” said Luis Carlos Affonso, Embraer’s executive vice president, executive jets. “Our guidance for deliveries this year is 120 units between the 100 and 300. So if you compare the 550 unit backlog, you’ll see it’s about a four-year backlog.”
While the manufacturer plans to continue to ramp up production of the 300 for at least the next year, Affonso said market volatility makes it difficult to predict the exact numbers of each aircraft that will be delivered in the near future. Despite the increased output, according to Affonso, the company does not have any immediate plans to increase its workforce, outside of hiring in specific technologies where Embraer feels it needs to concentrate more effort.
Legacy 650 Makes Debut Here
The airframer is also eagerly anticipating certification and deliveries of its Legacy 650, which is making its North American debut here at NBAA. The 650 is a major upgrade of the Legacy 600 with Honeywell’s Primus Elite cockpit, improved soundproofing and an extended range of nearly 4,000 nm (four passengers and two pilots, no-wind NBAA IFR reserve, 200-nm alternate).
Embraer expects deliveries of the new jet, which was first announced at last year’s NBAA convention, to commence before the end of the year. It also will continue production of the Legacy 600, which starting next year will receive the new avionics and soundproofing upgrades.
Progress is continuing on schedule for the Legacy 500, with the first metal for the new twinjet having been cut on April 19. The company’s suppliers have begun the flow of components aimed at a first flight in the second half of next year. The São José dos Campos-based manufacturer anticipates certification for the Legacy 500 around the beginning of 2013 with deliveries to commence soon after, while its 450 sibling is to follow a year later, according to Affonso. Embraer is beginning to run systems integrations rigs and is continuing to develop, through the use of an engineering simulator, the fly-by-wire system control laws for the two aircraft.
By the time deliveries of the two new aircraft begin, the industry could see a new top bizjet manufacturer in volume, if not revenue. In JPMorgan’s September business jet 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 business jets in 2012. By 2013, when the Legacy 500 joins the fleet, Embraer could land on top of the list in terms of delivery volume.
“We are certainly happy to be increasing our market share in the industry,” said Affonso, adding the reasons behind the airframer’s success are simple. “We talked to the customers, we understood the characteristics 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.”
Financing Raises Eyebrows
While Embraer has cornered approximately 14 percent of the bizjet market despite having delivered its first Legacy only in 2002, some are publicly questioning how the company has achieved this level of success without improper government subsidies. “This is an almost unbelievable feat for a company that has been manufacturing business aviation aircraft for a little more than seven years,” wrote Sen. Sam Brownback (R-Kan.), who called for a U.S. International Trade Commission review of industry competition in the U.S., China, Brazil, Canada and Europe. “Considering similar statistics from previous years that were later proven 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.”
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 protracted dispute between Boeing and Airbus, stating that the European Union illegally subsidized the entire line of Airbus aircraft.
Embraer’s official response directly refuted Senator Brownback’s statements: “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 family of commercial aircraft. Rather, Embraer financed the $1 billion 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.”
A Level Playing Field
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 treasuries of the countries, and we believe the treasuries of the U.S. or the European Union or Canada are stronger than the Brazilian treasury. 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 U.S. to remain competitive, Embraer is establishing a final assembly facility in Melbourne, Fla., for its Phenoms. The factory is expected to open early next year and provide at least 200 jobs.
Affonso also cited further domestic 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 over 7,000 jobs through this business of buying parts and components from the U.S.,” he said.
Last month, Embraer 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 the company, represents a renewal of the syndicated credit operation of $500 million announced in August 2006.