Next year will be pivotal for Embraer.
Embraer Commercial Aviation has been in a holding pattern while the proposed joint venture, revealed in late 2017. Embraer announced more than 300 commitments at the Farnborough Air Show; more than 100 have now been converted to firm orders (as of Dec. 21).
The sole order for the E175 E2, which is conditional, was removed from the backlog to comply with accounting rules of IFRS, the International Financial Reporting Standards, which Embraer follows.
This order from Skywest Airlines is conditioned on US airline labor contract Scope Clause relief. Skywest flies for Delta and United airlines and pilot contracts restrict weight, seats and the number of aircraft a carrier like Skywest can fly for the major airline.
The E175 E2 slightly exceeds the 86,000 lb maximum take off weight cap in the contracts. The pilots’ union indicated there have no intention of granting a waiver or increasing the MTOW, which would allow the E175 E2 (and the Mitsubishi MRJ90) to operate. The next contract negotiations are in 2019 and 2020.
With this uncertainty, IFRS rules scuppered the conditional order from Embraer’s backlog. The company said Skywest is still committed to the airplane. (Skywest is believed to have the right to downsize to the compliant E175 E1.)
Embraer hopes to compete a contract this year for 100 E175 E1s from Republic Airways Holdings, another US regional carrier that flies for the majors.
Due to the lack of firm contracts from the commercial division, financial results were below expectations.
The aerospace analyst for Cowen & Co. wrote, following the third quarter results announced in October, that Embraer “has ~83-85 E1’s in backlog for delivery in 2019-21, but given its prediction for 2018 book-bill near 1.5x (vs. 67 through nine months), it could get the necessary 68+ orders by year-end, likely from firming of most of Republic’s LOI for 100 E175s.
“Thus, assuming gradual lift in E2 deliveries to 15-20 planes, management guide for flat/up commercial deliveries in 2019 looks achievable. However, commercial margin may be flat/down as mix shifts to the E2.”
Credit Suisse’s analyst attributed the poor performance to timing.
“Though ERJ missed estimates on several metrics, most of the impact can be attributed to lower deliveries in the quarter, which consensus had not fully incorporated into forecasts heading into the print. Overall, the miss seems to be timing-related.”
Boeing and Embraer finalized terms of the new joint venture, which LNC calls NewCo pending a name reveal by the companies, Dec. 17.
Brazil’s president-elect assumes office Jan. 1. According to press reports, he favors the JV.
NewCo will be responsible for aircraft development of fewer than 150 seats. This means any successor to the EJet E2, the Boeing 737-7 and the sometimes-discussed new turboprop.
As far back as 2015, Embraer revealed it was studying developing a turboprop that would compete with the ATR72 and Bombardier Q400. The latter program is under a purchase contract with Canada’s Viking Air. Another step in Bombardier’s exit from commercial aviation.
It’s assumed that Embraer’s engineers will be assigned to work on the prospective Boeing New Midmarket Airplane. Authority to offer (ATO) this airplane for sale is anticipated perhaps in March. A program launch is widely expected at the Paris Air Show in June.
In addition to spinning off Embraer Commercial, the customer services unit follows and a new plan to create another JV for the KC-390 was announced.
This is an important break for the KC-390.
The airplane, which is the largest developed by Embraer, competes most closely with the Lockheed Martin C-130. Like most new airplane programs, the KC-390 is late and over budget.
Brazil, as would be expected, is the launch customer. Embraer seeks foreign sales. With Boeing’s help and planned 49% ownership in the second JV, this sales heft is a welcome boost to the program.
ECA president John Slattery sees a surge in orders once the Boeing deal closes. It’s possible, however, that 2019 could be a holding pattern until final approval of the JV, expected by the fourth quarter; it could come earlier.
Laws prevented coordination between Airbus and Bombardier over CSeries sales. There was a lot of wait-and-see by customers for regulatory approvals and what Airbus could do once a deal was done.
Slattery has first-hand knowledge of this.
Embraer was set to win an order from JetBlue, an E190 operator, for the E2 when the Airbus-CSeries deal closed. Airbus stepped in at the last minute, offering JetBlue a deal on some A321neos to sweeten the CSeries terms that had been negotiated by Bombardier. Airbus won and Embraer lost.
Embraer believes it will take most of the year for regulatory approvals, required by key governments worldwide, to be achieved.
Only then might that surge in orders take place.
In the meantime, it’s entirely possible Boeing and Embraer could enter into agreements for EMB to work on 7-Series airplanes, notably the prospective 797. These could be straight-up commercial term agreements.