Bigger planes, smaller market - Strategies

A worldwide slump in sales has given aircraft manufacturers a headache in recent months. All the more reason for CEO Mauricio Botelho to roll out a new line of aircraft at Brazil's Embraer--even as he slashes the payroll.

PART OF THE AFTERMATH of the Sept. 11 terrorist attacks on the United States was the immediate halt to many new airplane orders, a natural consequence of the overnight implosion of the air travel industry. In Brazil, the biggest aircraft manufacturer--Empresa Brasileira de Aeronautica SA, or Embraer--was caught in the same crosswind that hit US and European aircraft makers. Within weeks, CEO Mauricio Botelho announced the layoff of 1,800 workers.

But that hasn't stopped Botelho from unveiling a new line of passenger jets that he hopes will meet an expected demand from major airlines for smaller, more fuel efficient planes. Indeed, many airlines are reassessing their fleets and considering smaller jets that make more frequent stops--or serve smaller hubs--while consuming less fuel.

At a press conference Oct. 29 in Sao Jose dos Campos, Brazil, Embraer rolled out the sexy, sleek 170, the first of a new class of aircraft that CEO Boteiho says are the future not only of the straggling manufacturer but the industry itself.

With the arrival of the new jets, Embraer now makes 14 different types of aircraft. The new line of planes--the 170, for 70 passengers; the 175, for 86 passengers; the 190, for 98 passengers; and the 195, for 108 passengers--are the largest ever produced by the Brazilian manufacturer, which built its reputation on smaller, 50-seat "commuter" jet models. The new, bigger planes put the company in direct competition with Boeing and Airbus, The advantage that Embraer will enjoy is that its planes are lighter, which means fuel savings and the ability to land on shorter runways. The Embraer 170, for example, is some 30 tons lighter than the Airbus 320, which seats roughly the same number of passengers.

"We have already sold 20 planes to China Southern Airlines and hope to sell as many as 350 planes to China in the next 10 years," Botelho says. Embraer also has had orders for the 170 from Crossair (30 planes), Air Caraibes (2 planes) and GE Capital Aviation Service (50 planes), for US$24 million apiece. In all, Embraer projects it will sell 650 of the new class of jets during the next 10 years, with many going not only to emerging markets such as China, but to developed markets such as the US and Europe. The new planes, which cost US$850 million to develop, are expected to earn Embraer US$15 billion from sales during the next decade.

The arrival of the 170-195 line could not have come at a better time. Battered by the decline in worldwide air travel, Embraer will manufacture only 160 jets this year, down from the 185 jets originally expected. While orders for the newer jets will take months, even years, to fill, they will make a critical difference for the aircraft maker. "Embraer should suffer less than other airplane manufacturers and should fully recover by 2003," says Rodrigo Pereira, an airline industry analyst for Banco Pactual in Rio de Janeiro.

Botelho admits that his industry is undergoing "a difficult moment," but says, "Brazilians are specialists in crises. We have survived political, economic and financial crises and will continue to grow." Indeed, the company has seen its share of highs and lows. Botelho took over as Embraer CEO in 1995, when the company was privatized after years of bleeding millions in red ink. Under Botelho's stewardship, the company became the world's No. 4 airplane manufacturer. If current growth continues, it may surpass Canada's Bombardier Inc. to assume the No. 3 spot, behind Boeing and Airbus. Last year, revenues exceeded US$2.5 billion, up from US$1.8 billion in 1999.

That growth hasn't come easily In 1999, a trade dispute erupted between Embraer and Bombardier, which alleged that the Brazilian government's low-interest loans to Embraer were a form of subsidy and were in violation of international trade pacts. Canada in turn began providing Bombardier with similar types of loans. The dispute strained relations with Canada--Brazil's No. 7 trading partner--and landed in World Trade Organization court, which in seperate hearings ruled against both companies. The relationship between the two nations is still on the mend.

In the meantime, if demand for the new line is any indication, Embraer may be able to stem the recent loss of new plane orders. Along with orders from China and regional airlines, the company was awarded a US$700 million contract to build between 12 and 24 of the new jets for the Brazilian Air Force. Says CEO Botelho, ever the student of supply and demand: "We found a product that companies needed and we had the capacity to meet the needs of the market."

Embraer At A Glance

Revenues (US$millions)

Year  Revenue

1996      390
1997      772
1998     1362
1999     1861
2000     2859

Net Income (US$millions)

Year  Net Income

1996        -122
1997         -31
1998         114
1999         227
2000         353

Source: Company reports

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