Embraer Sees Long Slump For Jet Market
The current global economic crisis is hurting the aviation industry more than the downturn that followed the September 11 attacks of 2001, leaving a recovery of the commercial jet market unlikely before 2011, according to Embraer CEO Frederico Curado.
Speaking at the Reuters Latin American Investment Summit in Sao Paulo, Curado also said that the business jet market could take up to six years to fully rebound from the credit crunch that has prompted people and companies to scale back on pricey luxury items such as private planes.
"You have two elements interacting, the recessive environment and the dearth of credit, and the prospects are definitely not for a V-shaped recovery at all," said Curado, 47, a lifelong Embraer employee who took the reins of the company in 2007.
"This situation will persist for another two years."
Curado added that Embraer, the world's leading producer of regional jets for commercial airlines, is in talks with some clients about potential cancellations and delivery delays.
Just last week, China's Hainan Airlines slashed an order for 50 ERJ 145 regional jets to 25 and asked Embraer to delay the remaining deliveries until the first half of 2011.
But Curado played down the Hainan cancellation, stressing that the company's delivery forecast for this year of 242 planes is not at risk. For 2010, he expects a similar amount of deliveries.
"That isn't representative of the overall situation... Some clients are facing difficulties, but nothing of that scale," he said.
To ride out the crisis, Embraer has been cutting costs aggressively in several areas with the exception of product development and engineering, an area that Curado said is a priority for the company to remain competitive in the face of rivals such as Canada's Bombardier.
In February, Bombardier laid off more than 4,000 employees, or about 20 percent of its workforce, to partially compensate for an expected drop in revenue and a dearth of new orders.
"We are basically burning through our backlog because we don't see anything related to an uptick in sales or any new sales at all," he said, adding that there were "faint signs" that the slump in demand is starting to level off.
"It appears that it has stopped getting worse," he said.
BOOSTING MILITARY LINE-UP
To reduce its dependency on the commercial and business aviation markets, Embraer has been investing heavily in recent years to beef up its line-up of military planes, which is best known for the Super Tucano, a turboprop trainer and light-attack aircraft.
Last month, Embraer unveiled a USD$1.3 billion program to develop a military cargo and refueling plane as part of a broader push to increase its revenue in the defense market.
Curado said the company hopes to get up to 15 percent of its total revenue from the defense market by the time the KC-390 cargo plane takes to the skies in 2016, up from just 8 percent last year.
"This crisis has proven the necessity for us to expand our defense business," he said.
Curado acknowledged that a more challenging credit market has put the company's finances under stress. But he vowed to keep Embraer's financing strategy unaltered.
He also said Embraer would not give in to the temptation to allow clients to finance jet purchases directly with the company, a strategy that could spark a pick-up in production but might have adverse cash-flow effects.
Instead, Curado said Brazil's state development bank BNDES should undertake "a more active lending role" to help fund Embraer's deliveries. BNDES loan disbursements reached a record BRR18.7 billion reais (USD$9.03 billion) in the first quarter, part of a policy by President Luiz Inacio Lula da Silva to provide affordable credit for Brazilian companies as the world endures the toughest borrowing conditions in seven decades.
In March, the BNDES announced plans to fund the sale of up to USD$700 million of Embraer jets to Aerolineas Argentinas.
"The importance of BNDES in our funding mix has been growing, especially in the past two years," Curado said, adding that the bank could finance up to 30 percent of its deliveries this year, compared with 11 percent in 2008.
