Embraer in holding pattern awaiting JV approvals

Anti-trust immunity

Embraer and Boeing are about halfway through what is expected to be nearly a year long process to gain global anti-trust approval from regulators for the JV.

“The timetables are dictated by the various regulators in the different jurisdictions,” said Jon Slattery, CEO of Embraer Commercial Aircraft, during a pre-Paris Air Show media briefing at EMB’s headquarters in Sao Jose dos Campos. (Slattery, however, was calling in from Asia in advance of the IATA AGM meeting in Seoul.)

“Engagement has been very positive,” he said.

Carving out Embraer

“In addition to that, and parallel to that, we have what we refer to as the carve out,” he said. “The new company will have a significant number of the employees we have today. We are going through that process of carving out not only the people but also the infrastructure.”

Every piece of infrastructure Embraer has across its global franchise around the world will have to be identified whether it goes with Boeing Brasil-Commercial or it remains in Embraer.

“The tail of that carve out process pragmatically could even last a month or two longer than the anti-trust immunity,” Slattery said.

Slattery noted that no coordination with Boeing is allowed before closing the transaction. On the Embraer side, officials and the transition team are analyzing the integration of Embraer Commercial Aviation and Embraer Services with Boeing and Boeing global Services and 49% of the KC-390 program, which is in a separate JV with Boeing. No name for this has been announced.

Embraer Services

Johann Bordais, president of Embraer Services, said this $1bn business will carve out the airliner services to the new JV. About 60% of this business is commercial with the rest—which will remain with Embraer—being military and business jets. Embraer, as a 20% shareholder in the JV, will see a return of 20% of the profits and revenues of the 60% hived off.

Bordais, who is staying with Embraer after the JV becomes effective, says the expectation is that BGS will be able to grow the business, meaning greater returns to Embraer.

He also said that, as of now, there is nothing contractually that would prevent the remaining Embraer Services business from competing with BGS on, for example, military contracts.

Embraer’s Services business was one of the key attractions for Boeing. BGS, currently about a $17bn business, has a goal of hitting $50bn in revenues in five years, an ambitious target set by Boeing CEO Dennis Muilenburg.

BGS is one of the more profitably business units at Boeing. Embraer’s Services unit returns a mid-teens profit margin, Bordais says.

Synergies between Embraer and Boeing

“How we optimize the synergies for me is ensuring we access the franchise footprint Boeing has around the world for the narrowbody operators,” Slattery said. Embraer has 75 E-Jet operators in 50 countries; Boeing has more than 400 operators of the 737 and more including widebodies.

“We need to get access to some of that. Just pragmatically with the leadership we have, it’s just difficult to get in front of the airlines if you’re not an incumbent,” he said.

The first target for synergies is sales and presenting offerings to airlines to provide more flexibility than they would have, Slattery said.

Another area: cost cutting. Slattery said that Boeing will be able to negotiate “with real leverage with our suppliers” to cut the Cost of Goods Sold—something that is a key goal of Airbus after acquiring 50.01% of the Bombardier C Series program.

“We need to make sure the E-Jets are competitively priced,” Slattery said.

Embraer and the Boeing NMA

Embraer’s engineering group is winding up work on the E2 program. The 195 E2 was certified recently. Only the 175 E2 remains in development. Questions hang over the program whether Embraer—or more distinctly, the new JV controlled by Boeing—will proceed with the airplane because it does not comply with US Scope Clause restrictions.

Slattery bristles at the suggestion.

Regardless, the JV opens opportunities for Embraer’s engineers to work on the prospective Boeing New Midmarket Airplane, other aircraft in Boeing’s portfolio—performance improvement packages are always a work in progress—and its own future aircraft.

“Our engineering capability is a key part of Boeing Brasil-Commercial and a key part of the attractive feature to the Boeing Co,” Slattery said. “My vision is that BB-C will add significant value on the engineering front to Boeing as they require, whether it’s on the NMA or other platforms.

“Independently of that, and in parallel with that, it is certainly our desire for our focus on end-to-end development of new aircraft in Brazil.

“I think we can do both,” Slattery said. “I think we can add real value to Boeing when they want on various packages and other programs.”

However, for now a new turboprop is off the table, Slattery said.

Slow E2 ramp up

The E2 entered service a year ago but only six 190s have been delivered. The first 195 E2 goes to Azul shortly.

Rodrigo Souza, Embraer’s marketing chief, said the slow ramp was deliberate.

“We certified the aircraft ahead of schedule. Since the beginning, our plan was to really have a plan to make sure  we don’t suffer from existing problems; and all the supports and all the parts are in place that are necessary as we ramp up the production. This is different from what we did in the past. “This time we want to be much more careful to the way we ramp up production.”

The existing problems referred to “the more than 500 lessons learned we collected from our customers based on the current E-Jets operation” Souza said. “’Different from the past’ is that I really meant we wanted to do much better than what we did by the introduction of the E-Jets.

“In summary, we planned fewer deliveries in the beginning and a slow ramp up to make a smooth EIS.”

Embraer targets 18-22 deliveries this year.

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