Embraer Takes Long View Following Boeing Deal Debacle

 - July 21, 2020, 4:00 AM
Embraer CEO Francisco Gomes Neto (Photo: Embraer)

As Embraer emerges from what it might want to consider a forgettable period in its history, the Brazilian company has turned its attention to restructuring the business at a time of upheaval throughout the industry. Since its planned deal with Boeing to sell 80 percent of its commercial airplane division to Boeing fell apart, Embraer has begun to reintegrate the unit with the rest of the company and named a new division CEO to replace John Slattery, who has accepted the top position at GE Aviation. Meanwhile, the company continues to ready its case for a lawsuit it filed against Boeing for wrongful termination of the $4.2 billion transaction.

Answering written questions from AIN on the eve of FIA Connect, Embraer CEO Francisco Gomes Neto noted that the company has already reintegrated commercial aviation’s service and support with the division dedicated to those functions and that he expects the company to “recover synergies” over the next few months.  

“We made some changes in top management as part of the review of strategic planning and reintegration of the commercial aviation business,” explained Neto. “We consolidated the vice-presidencies of engineering and strategy and changed the leadership in the areas of operations, commercial aviation, and [advanced technology division] EmbraerX. We are working on reviewing the strategic plan and we will have more clarity in the coming months. Since the beginning of June, all administrative areas have already started to work in a more integrated way.”

On addressing the wider issue of the effects of the Covid pandemic on the business, Neto stressed the need foremost to preserve liquidity. The company in June finalized the terms of contracts providing for up to $600 million in working capital and export financing. The Brazilian National Bank of Economic and Social Development (BNDES) has committed to providing half of the financing, up to a value of $300 million, while the balance comes from private and public banks under the condition that the financing plan maintains a 50/50 split between BNDES and the other banks.

“This type of operation is exclusively debt and does not alter the shareholding structure of Embraer,” stressed Neto. “In parallel, we are reviewing our strategic planning to incorporate current market conditions and establish strategic initiatives, potential partnerships, goals, and indicators as well as a structured execution process focused on growth, cash generation, and profitability.”  

Part of the growth plan could involve alternative partnerships with other aerospace companies on engineering or products, added Neto. On June 1 Embraer confirmed its interest in discussions with more than two potential partners for its commercial aircraft business as part of a five-year strategic plan still under development. Speaking during the company’s first-quarter earnings call with securities analysts, Neto named companies in China, India, “and others” as potential partners.

“There is nothing defined yet,” he noted last week, however.

Now preparing for a 2021 introduction of the E175-E2, the last and smallest of its family of Pratt & Whitney geared turbofan-powered jets, Embraer will eventually need to consider what comes next in terms of product development. For his part, new Commercial Aviation CEO Arjan Meijer won’t rule out a new large turboprop after Slattery in January basically rejected the possibility absent a deal with Boeing.

“As market leader in the up-to-150-seat segment, Embraer is always assessing the market,” Meijer told AIN. “Being pragmatic, Embraer is open to discussing partnerships aimed at specific projects, such as the development of a new generation turboprop.”

On the prospects for its current regional jet lineup, Meijer expressed confidence—as one might expect—that the E-Jets will play a vital role in airlines’ recovery from the Covid crisis.  

“We are continuously evaluating the scenario and talking to customers,” he said. “Regional aviation has been a key element in maintaining essential services and the airline network during the crisis and it is already possible to observe some airlines gradually resuming commercial flights using E-Jets in the United States, Europe, and other parts of the world.”

During the pandemic, Embraer has yet to suffer an order cancellation, although deferrals undoubtedly will force it to adjust production rates significantly downward. Still, Meijer wouldn’t estimate just how far deliveries will fall.

“Embraer received some requests from customers to postpone deliveries,” he confirmed. “We are adjusting our production to the new delivery schedules for 2020 and 2021. At the moment, the situation is stable and we cannot anticipate delivery guidance for the year yet.”

With Bombardier’s exit from the regional airliner business, Embraer stands as the last regional jet maker in the Western world, and with Mitsubishi’s troubled SpaceJet program facing yet another delay, analysts have reasoned that the Brazilian company might benefit from the Japanese airframer’s latest stumble. Nevertheless, Meijer thinks Mitsubishi eventually will become a competitive threat.  

“We believe that the lower pace of development of the Mitsubishi aircraft is only temporary,” he said. “During the next years [China’s] ARJ21 and the E175 will be the main aircraft to be delivered but most of those deliveries were already contracted in previous years, during the time of extremely aggressive competition against Bombardier. By the time that the market recovers we will probably see Mitsubishi accelerating again their product development.”