Asian Investment Yielding Handsome Returns for Embraer
For Brazil’s Embraer, a lot has changed in the 13 years since it first laid brick and mortar in Asia. The world’s major airframe makers now consider the Asia Pacific region the biggest market for airliners in the world, and Embraer’s establishment first of an office in Beijing and later a joint-venture to build ERJ 145 regional jets in Harbin has proved prescient.
Also operating an office in Singapore, Embraer (Stand CD51) has spread its influence throughout the Pacific Rim in relatively short order, nimbly adapting its modus operandi to the needs of its customers and commercial partners in the region. In China, for example, the Harbin factory now builds Legacy business jets for a domestic market that has quickly developed into one of the world’s most promising.
Speaking with AIN last month, Embraer CEO Frederico Curado stressed the importance of the company’s decision to invest so thoroughly in the region, and yet do so in a deliberate, thoughtful way. Dividing its marketing efforts in the region between China and the rest of Asia, from India eastward, for example, has proved vital to Embraer’s ability to exploit what in some ways amounts to two distinct markets. “I think it was the right call to separate our focus,” said Curado. “China is a very specific market and demands a specific focus…I think the decision was key to our success in China.”
Joint Venture with AVIC
Curado also suggested that the company’s decision to enter the joint venture with AVIC to establish an ERJ 145 factory not only played an important role in Embraer’s ability to meaningfully penetrate the regional airline market in the mid-2000s, but it continues to support the company’s marketing efforts with network carriers there, despite the fact that the plant now assembles business jet versions of the aircraft.
“China is still a planned economy,” stressed Curado. “For example, business jets have a major application within the airlines, so take Air China, take Hainan, take China Eastern, they all operate business jets within their infrastructure, so things are kind of tied. I think in China one business helps the other maybe more than in other places…There are new players coming. For example, Minsheng, one of our customers and a very large operating lease facility, they belong to a bank. The market is just really growing right now; the major players are establishing themselves now; it’s a perfect moment to be there.”
While fortuitous, the decision to convert the Harbin facility into a Legacy business jet factory didn’t come about immediately. At one point Embraer toyed with the idea of building 100-seat E190s in China but that plan fizzled out when Embraer’s Chinese partners decided against it.
The decision appears not to have hindered Embraer’s E-Jet sales efforts in China or much of the rest of Asia. As of November, three Chinese airlines operated a total 92 E190s; Mandarin Airlines of Taiwan flew eight E190s; and three Japanese carriers flew a total 20 E170s. In Australia, Air North flew four E170s and Virgin Australia another 18 E190s. Other E-Jet operations included Air Costa in India and Myanmar’s Myanma Airways.
“You can look at it both ways,” said Curado. “[In] thirteen years in a mature market such as the U.S. or Europe, we could have done better, maybe. But by Asian standards, particularly given that we were a newcomer–we had very little exposure to the market thirteen years ago–I think we are very happy with what we accomplished over this period.”
Southeast Asia an Anomaly
For all of Embraer’s success in Asia as a whole, however, Southeast Asia remains an anomaly for the Brazilian manufacturer. Apart from the pair of E190s at Myanma, records show no other Embraer commercial airplanes in operation within the 10-member Association of Southeast Asian Nations (ASEAN), while its turboprop making competitor from Europe, ATR, has enjoyed a virtual stranglehold on the region.
“You are right, ATR has been very substantial in that region,” conceded Curado. “The way we see it, over time those markets will tend to develop more like we see in mature markets. Of course, we see turboprops being there for really short segment applications, and gradually they’ll be replaced by jets. But this is a trend we see over time, as passengers prefer jet flying. But obviously there are some routes that are best suited to turboprops.
“I think, again,” he continued,” as markets mature, you’ll start seeing more demand for right-sizing and we’ll see a better balance between turboprops and smaller jets, and larger, narrowbody jets. And, of course, we are committed to investing time and resources to try to develop that market.”
Curado expressed particular optimism about the development of the low-fare market in Southeast Asia, and stressed the fact that several of Embraer’s E-Jet customers serve the discount-fare segment. Furthermore, he noted, the Embraer E2s–re-engined E-Jets designed to offer “double digit” improvements in operating-cost per seat over the current generation–will carry as many as 12 more passengers than does the current E195, making it an even more compelling aircraft for low-cost carriers by the end of the decade.
For the nearer term, the fortunes of Embraer’s current E-Jet line enjoyed a recent upswing with the sale of 60 E175s to American Airlines. Scheduled for first delivery in the first quarter of 2015, the order helped quell any lingering questions over last year’s E190 delivery deferrals by New York-based low-fare airline JetBlue.
The move by JetBlue created concerns among securities analysts that Embraer might have to slow production to mitigate the risk of exposure to open delivery slots. Nevertheless, Curado dismissed the suggestion. “Our skyline in 2014 looks pretty good, and 2015 as well,” he said. “We are quite comfortable with 2014 and 2015. JetBlue was negotiated, so we did that together. The partnership has been there for ten years, and it’s a good as it has always been…so it’s not a problem. It’s already fully integrated into our production plans.”