Embraer, the Brazilian aerospace and defense group looking to bounce back in the wake of the pandemic, is envisioning a not-so-distant future of flying taxis and electric planes.
But the world’s third-largest commercial plane maker, struggling to double its revenue in five years, is pinning its hopes on a more prosaic forecast: A recovery in air travel will involve greater use of Small passenger aircraft in the base market.
Embraer is set to return to profitability in 2022 after two years of turmoil in the global aviation industry, according to CEO Francisco Gomez Neto.
“We expect a net profit by the end of the year. This is an important step,” he told the Financial Times in an interview at Embraer’s headquarters in São José dos Campos. “Our plan is to grow substantially . . .[it]With domestic flights resuming, this is where our planes fit in. ”
A 45% surge in shares makes the company the best performer on the local Bovespa index in 2021. After laying off 2,500 jobs during the pandemic, efficiency gains and debt reduction helped it regain positive free cash flow. The group recently announced 1,000 new vacancies as production ramps up.
But to convince investors, especially after its stock price has fallen sharply this year, it must overcome doubts about its ability to expand further in the commercial aircraft segment dominated by Boeing and Airbus.
Doubts over the future shape and direction of a business considered the crown jewel of Brazil’s industry have been fueled by a bitter breakdown in a planned partnership with Boeing. The U.S. giant terminated a joint venture agreement that would have given it an 80 percent stake in Embraer’s commercial aircraft business for $4.2 billion, shortly after airports closed early in the pandemic.
Gomes Neto ruled out any large-scale sale or spin-off, saying: “We are open to other partners, but not the kind that would dismember the company. [or] Sell a piece. He aims to double last year’s shrinking $4.2 billion in revenue by 2026, adding that the greatest potential lies in boosting the turnover of its commercial aviation division.
Embraer is the leading producer of regional jets, which traditionally have up to 120 seats, fly shorter distances and are the most popular in North America.
Gomes Neto said the company expects to deliver 60 to 70 commercial aircraft in 2022, up from 48 last year, and could reach nearly 100 by the end of the five-year period. By comparison, Airbus expects to deliver 720.
Over the past 25 years, airlines have turned to larger aircraft in order to improve fuel efficiency and reduce unit costs.
A pillar of Embraer’s strategy is its “E2” medium-range aircraft, the second generation of the E-Jet family and larger than its regional workhorse. Capable of carrying 80 to 146 passengers, they fit more into small narrow-body mainline jet cradles, which the company claims have lower noise and CO2 emissions per seat.
Embraer executives believe there will be a shift in flying patterns after Covid-19, with slower growth in air travel, less business travel and more people moving to smaller cities in favor of the smaller models it makes. “Airlines will be looking for aircraft that fit this level of demand,” predicts Rodrigo Silva Sousa, vice president of commercial aviation marketing at Embraer.
But Citi analyst Stephen Trent said the Brazilian manufacturer remained outside the seat category most in demand by operators.
“Their prospects in the global commercial aerospace sector are definitely better now than they have been in the past two years,” he said. “But in the long run, I’m still concerned that not that many airlines are super interested in this class of aircraft.“
In the decade to 2031, 13,000 aircraft are expected to deliver more than 150 passengers, according to consultancy Cirium. For the 85- to 150-seat regional aircraft operated by Embraer, the forecast is only 3,500.
Embraer will be wary of the fate of Bombardier, its historic regional jet rival. The former Canadian industrial champ all but went bankrupt after going head-to-head with Airbus and Boeing on mainline aircraft with its C-Series, a small single-aisle offering. Fierce rivals undercut the challenger, eventually spinning off the program to Airbus in 2017 and exiting commercial aviation entirely to focus on private jets.
“We still expect Airbus and Boeing’s larger aircraft to dominate the single-aisle space, including on the smaller end,” said Rob Morris, global head of Ascend by Cirium, Cirium’s consulting arm.
Embraer does not compete directly with Boeing and Airbus in most areas of its business, with the exception of the E195-E2, which overlaps with the C-Series, renamed the A220, executives at the Brazilian company said. However, the smallest of its three E2 series faces hurdles from a U.S. pilot agreement that limits the weight and capacity of aircraft deployed by the airline’s regional branches.
In addition to commercial aviation, which accounts for about a third of the group’s revenue, Embraer is riding the global craze for business jets. It expects to sell 110 by 2022, up from 93 in 2021.
Gomes Neto said that while the pace may slow over the next few years, it would be a “soft landing” for continued growth. “We sold out almost all of 2023 and are now selling in the second half of 2024,” he said.
He added that geopolitical tensions over the war in Ukraine have also increased interest in Embraer’s two military aircraft: the A-29 Super Toucan fighter jet and the C-390 Millennium transport plane – despite recent cuts by the Brazilian Air Force The latter order from the 28th to the 22nd.
Another bet for the future is electric vertical take-off and landing or eVTOL aircraft. Embraer’s Eve unit, which recently spun off into a U.S.-listed special-purpose acquisition company, or Spac, has an order backlog of $5 billion and aims to have commercial operations by 2026.
While shares of several similar air taxi Spas have fallen as experts fear the hype, analysts and executives say Embraer’s track record in testing and certification gives it an edge over the newly formed startup. Rivals Boeing and Airbus have also invested hundreds of millions of dollars in the field.
Other areas of interest include a range of low-emission aircraft under development and next-generation turboprops for regional airlines.
In the near term, though, investors will want to see further financial improvement. Embraer’s net loss narrowed to $44.7 million last year from a deficit of $732 million in 2020. But a shutdown due to the eventual reintegration of the commercial aviation division resulted in a loss of $31.7 million in the first quarter.
Embraer’s stock has lost about half its value so far this year, giving the company a market value of about $1.8 billion. Its bosses attributed this to investor frustration with its guidance, supply chain issues and the broader impact of the conflict in Ukraine on the stock market. Boeing also fell about 37% and Airbus fell more than 5%.
Marjan Riggi of Kroll Bond Rating Agency highlighted that Embraer’s order backlog has increased (to $17.3 billion, the highest level in four years) and the recovery in the US regional airline industry is encouraging.
“This [quarterly] The numbers still don’t look great, but you’re seeing a very positive trajectory,” she said.