Embraer S.A., 2013

Headquartered in Sao Jose dos Campos, Brazil, Embraer specializes in developing and manufacturing civilian and military aircraft as well as providing aeronautical services. Embraer has more than 18,032 full-time workers (16,325 in Brazil) and more than $15 billion worth of aircraft on back order. One of the largest aerospace firms in the world, Embraer has carved its niche on what many airline companies are calling “right-sized” aircraft. To date, Embraer commercial jets are produced with seating options generally between 70 and 124 seats on the E-Jets and 37 to 50 passengers on the ERJ jets. By producing quality jets, sized right at affordable prices, Embraer is one of the largest exporting firms in Brazil. Both Delta and JetBlue use Embraer jets to shuttle passengers between New York, Boston, Atlanta, Washington, and similarly distanced locations. Since 1969, Embraer has delivered more than 5,000 aircraft to airlines or militaries in more than 100 countries on five continents. In mid-2013, SkyWest places an order for 200 Embraer 175 aircraft worth about $4.1 billion to begin being delivered in Q2 of 2014. SkyWest is headquartered in Utah and is the largest regional airline in the world operating such companies as United Express, USAir Express, Delta Connection, American Eagle, and ExpressJet.

On 8-27-13, RBC Capital Markets published an initiation report on Embraer S.A. (ERJ) with a stock price target of $42. Embraer had last traded in New York at $33.37, representing a 25 percent upside. There were two main reasons for RBC’s Buy recommendation. First, RBC projected strong demand for regional jets and Embraer has been gaining market share from rival Bombardier, from 29 percent in 2003 to 76 percent in 2013. RBC forecasted a 17 percent year-on-year Embraer earnings growth in 2014. Second, Embraer at the time was trading at a 20 percent discount compared to rival firms, even though the company reported the second fastest earnings growth at 14.3 percent for 2012–2015 (estimated), versus its commercial aircraft rival firms at 6.1 percent and its defense peers at 1.2 percent.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

Embraer was founded in 1969 as a state-owned civilian and military aviation company known at the time as Empresa Brasileira de Aeronautica. Brazil’s Aeronautics Ministry signed a contract for the purchase of 80 Bandeirante aircraft that were produced in a hanger capable of producing two planes per month with a workforce of 500 employees. After growing during the 1970s, Empresa Brasileria de Aernonautica obtained an office in Florida and formed a subsidiary named the Embraer Aircraft Company to better serve the U.S. market. In 1983, the company started Embraer Aviation International in Paris to better serve European markets and markets in the Middle East and Africa. Despite growth, macroeconomic conditions and the burden of being state-run culminated in the company struggling and facing possible bankruptcy by 1990. To avoid bankruptcy, and to cash in on revenues received from the demand for smaller aircraft in the early 1990s, the company was privatized in 1994 with a handful of financial institutions acquiring ownership in the company. The company name was also officially changed to Embraer S.A. in 1994.

After rapid growth for 15 years, Embraer opened its first plant in the USA in Melbourne, Florida, in 2011. The hanger was 7,500 square feet and designed for final assembly and included a modern paint booth. Also in 2011, Embraer’s Defense and Security segment backward integrated by purchasing 64 percent of the shares of OrbiSat da Amazonia SA’s radar division and created Harpia Sistemas SA to focus on unmanned aerial vehicles research. Embraer holds a 51 percent stake in Harpia with AEL Sistemas owning the remaining 49 percent.

In January 2013, Embraer and Republic Airways Holdings Inc., operator of the largest E-jets fleet in the world, revealed a contract for the sale of 47 embraer 175 jets, with options for an additional 47 aircraft, providing a potential for 94 E175s, which could reach a total value of approximately U.S. $4 billion, in 2013 economic conditions, at list price. The new aircraft will be operated by Republic Airlines, a Republic subsidiary, under the American Eagle brand in the American Airlines’ regional network. The deal was approved in early 2013. The E175 is a dual-row layout, seating up to 76 passengers; the first delivery was in mid-2013.

“It is significant that our long-time, valued customer Republic Airways—a true innovator in the regional transport business—is the first customer for the enhanced E175,” said Paulo Cesar Silva, President and CEO, Embraer Commercial Aviation. “The E175 is the most comfortable, technologically advanced and efficient aircraft in its class and it represents the best value for airlines because it also delivers the lowest total operating cost.”

Internal Issues

Vision and Mission

Embraer in late 2012 developed a vision statement as follows: “Embraer will continue to consolidate its position as one of the primary powers in the global aeronautics and defense security industries, with market-leading positions in the segments in which it operates, and a reputation for excellence.” The company’s mission statement is as follows: “Embraer’s business is to generate value for its shareholders by fully satisfying its customers in the global aviation market. By ‘generate value,’ we mean maximizing the Company’s value and ensuring its perpetuity, acting with integrity and social environmental awareness.”

Organizational Structure

As indicated in Exhibit 1 , Embraer has two primary segments (1) Defense and Security and (2) Commercial Aviation. Instead of a Chief Operations Officer, note that the company has an Executive Vice-president of Operations.

Finance

Embraer’s EPS increased 336 percent in 2012 to 0.96 as the company delivered 221 aircraft that year. Among the 221 were 106 commercial jets, 99 executive jets, 14 Super Tucanos, and 2 EMB 145 jets. Embraer’s revenues increased 6 percent from 2011 to 2012, and net income increased 212 percent. American Airlines filed Chapter 11 bankruptcy protection in 2011, and they utilized ERJ 145 jets, forcing Embraer to lose up to $293 million.