Embraer Ecstasy Over U.S. Contract Proves Agony Losing It
Embraer SA (EMBR3) Chief Executive Officer Frederico Curado won’t forget the day he learned that the Brazilian planemaker had won a $355 million contract for a U.S. Air Force light-attack aircraft after 14 months of work.
Even more memorable was the day Curado saw in the press that the U.S. had canceled the award.
“We’re trying to stay sober. It was a huge frustration for us, and a shock, frankly,” Curado said in a March 12 interview at Embraer’s office in Sao Paulo. “We got there. We won. Then it was taken away from us.”
Embraer’s Feb. 28 loss of a contract for 20 Super Tucano turboprops quashed the elation that came with earning the business two months earlier. Now, Curado is left with only the satisfaction of knowing that warplanes from the company founded in 1969 to jump-start Brazil’s aviation industry can compete for a spot in the fleet of the world’s most-powerful air force.
“Being selected by such an organization is a recognition of quality, which to a certain extent we already got, because we were selected, the contract was awarded and we initiated the contract,” Curado said.
A deal with the U.S. Air Force would have been a “door opener” for Embraer elsewhere in the U.S. Defense Department and in other countries, said Curado, 50, who became CEO in 2007 and is only the second chief executive at the Sao Jose dos Campos-based planemaker since its privatization in 1994.
“It would be a stamp of credibility abroad for us and a chance to develop a relationship with the DoD,” Curado said.
The work, won with closely held U.S. partner Sierra Nevada Corp., included support as well as the single-engine A-29 Super Tucanos for use on ground-attack missions in Afghanistan. Supplying aircraft for specific needs, not offering a full range of military models, is Embraer’s niche, Curado said.
Best known for regional jets from the E-Jet family flown by airlines worldwide, including Air France (AF) and AMR Corp.’s American Airlines (AMR1), Embraer got its start in military aviation. Its lineup includes patrol, reconnaissance and surveillance planes based on commercial models, and defense and government sales accounted for about 15 percent of third-quarter revenue.
“I see that increasing to something like 20 percent, 25 percent,” Curado said. “This is not a goal in itself, but more or less what we see” as the potential for the business in about five years.
Now under development is a plane that would be Embraer’s biggest ever, the twin-engine KC-390 military transport jet, whose potential customers include the Brazilian air force, Chile, Colombia, the Czech Republic and Argentina.
“The KC-390 is a brilliant idea,” said Fabio Figueiredo, a fund manager and partner at Orbe Investimentos e Participacoes Ltda. in Sao Paulo. Orbe’s funds own 1.78 million Embraer shares and last bought the stock in November.
Embraer is trying to crack a segment dominated by Lockheed Martin Corp. (LMT)’s C-130 Hercules, the four-engine turboprop that entered service in 1957 and has been a workhorse in the U.S. Air Force and dozens of militaries overseas for decades.
“After the Hercules, there has been no new aircraft of the same size and capability, and the Hercules is more than 50 years old,” Figueiredo said. “Embraer was very smart to bet in this niche.”
While military exports to the U.S. and elsewhere would help, they may not be pivotal, Curado said. Embraer now gets half of its defense sales from the domestic market and sees this slice growing to as much as 75 percent in the next few years, he said.
“There’s an opportunity in Brazil itself because it is one of the few countries actually increasing expenses in defense after 20 or 30 years of no or little investment,” Curado said.
Curado worked in Embraer’s commercial business before becoming CEO, serving as executive vice president for the airline market before his promotion. He joined United Technologies Corp. (UTX)’s Pratt & Whitney Canada engine unit in 1984, working with Embraer, after earning an aeronautical engineering degree at ITA, Brazil’s most prominent engineering school.
Embraer’s fleeting win for the Super Tucano contract with Sparks, Nevada-based Sierra Nevada beat the AT-6 entrant from Hawker Beechcraft Corp., the planemaker partly owned by Goldman Sachs Group Inc. (GS) Hawker sued the U.S. military, triggering the scrapping of the Embraer contract and an Air Force inquiry into the initial award.
Air Force Inquiry
The Air Force’s senior acquisition executive, David Van Buren, was “not satisfied with the quality of the documentation supporting the award decision,” according to a Feb. 28 statement from Air Force Secretary Michael B. Donley announcing the cancellation.
Embraer hasn’t filed an appeal over the contract, Flavia Sekles, the company’s communications director, said on March 13. She declined to comment further.
The shares rose 18 percent this year through yesterday, trailing the 20 percent gain for the benchmark Bovespa index.
Embraer probably will post a fourth-quarter profit March 20; two analysts surveyed by Bloomberg gave per-share estimates of 1.11 reais and 36 centavos. Sales for 2012 will be 10.8 billion reais ($5.98 billion), based on the average of three estimates.
The company has grown to the brink of overtaking Bombardier Inc. (BBD/B) as the world’s third-largest planemaker, just as Brazil has emerged as a global economic powerhouse. The country cut inflation to 6.5 percent in 2011 from almost 2,500 percent in 1993, the year before Embraer left state control. Brazil passed the U.K. in 2011 to become the world’s sixth-largest economy.
Along the way, Embraer dodged a near-bankruptcy before being privatized and moved beyond its roots in military aviation. The company estimates that commercial sales will account for 60 percent of 2012 revenue.
Deliveries from Embraer this year probably will total 215 regional and business aircraft, while Montreal-based Bombardier will hand over 235 such planes, according to projections from the companies. That compares with totals of 204 and 239 respectively in 2011.
“We see a very strong demand for Embraer’s jets in the long term, driven by emerging markets that now are going through what happened in the U.S. in the 1990s, with airlines seeking smaller, more-efficient regional jets,” said Orbe’s Figueiredo.
Curado reaffirmed Embraer’s lack of interest in following Bombardier into competition with Airbus SAS and Boeing Co. (BA), the largest planemakers, in building full-sized airliners.
Embraer opted Nov. 10 to upgrade its E-Jet regional planes with new engines and wings by 2018, rather than build a larger, all-new model to compete with the Boeing 737 and Airbus A320 that will get new engines within the next five years.
“To come into their turf trying to capture customers, you need a breakthrough, and it has to come through technology, and the technology is just not there,” Curado said. “Today there’s no window of opportunity at all for a third player on that segment. Sometimes you have to be braver to not do something.”
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