Embraer SA (EMBR3), the world’s fourth-biggest planemaker, is boosting efforts to sell more jets in Asia, the Middle East and Africa as the European debt crisis saps demand in the manufacturer’s biggest market.
European revenue made up 35 percent of Embraer’s first-quarter total, the most of any company in Brazil’s benchmark Bovespa stock index, according to data compiled by Bloomberg. Embraer’s regional-jet orders in Europe dwindled to five in the period, down from 20 a year earlier.
“Last year the crisis was a financial one,” Commercial Aircraft Vice President Paulo Cesar Silva said in a May 17 interview in Sao Paulo. “Now it has reached the real economy, and there’s no doubt it can impact our sales.”
European buyers account for 27 percent of Embraer’s backlog, putting its order book at risk. While the Sao Jose dos Campos, Brazil-based company hasn’t had any Europe cancellations, airline seating capacity there is growing more slowly than in every other region outside North America, raising the prospect of deferred deliveries in case air travel declines.
“This year might be a little rocky because of the continued issues with Europe, as small-cabin business-jet sales remain soft and regional jet orders might come down,” Rama Bondada, an RBC Capital Markets LLC analyst in New York, said in a telephone interview.
Embraer rose 24 percent this year before today in Sao Paulo, closing at 14.61 reais, for the fourth-best return among 68 companies in the Bovespa index.
The shares are outpacing the index, which fell 4.7 percent, as well as Canada’s Bombardier (BBD/B) Inc., the third-biggest planemaker. European sales accounted for 46 percent of the total in the last fiscal year for train- and aircraft-maker Bombardier, whose shares dropped 7.9 percent this year.
Drumming up more customers in Asia, Africa and eastern Europe is part of the effort to insulate Embraer from western Europe’s turmoil, Silva said. The Middle East and Africa ranked first and second in 2012 airline capacity growth through March, according to the International Air Transport Association.
“What we’ve done recently was to create a director position to deal with sales in the Middle East and Africa,” Silva said. “We’re currently implementing our business plan for the Middle East and the next step will be to place staff in the region.”
African Military Sales
Militaries in Angola, Burkina Faso and Mauritania are buying Super Tucano light-attack and training aircraft, a boost for Embraer’s defense business after losing a U.S. Air Force contract to buy those planes earlier this year.
On May 30-31, eastern European carriers will be among participants at an Embraer airline seminar in Istanbul, with similar regional events planned for Africa, the Middle East and Asia-Pacific in 2012’s second half, the planemaker said.
“Worst-case scenario, what’s at risk for them is a year’s worth of revenue,” Leonardo Zanfelicio, a Concordia SA analyst in Sao Paulo, said in a telephone interview. “Chances are small they suffer such a blow, but undoubtedly even the European carriers’ fleet renovation pace will slow down significantly.”
Adjusted net income may be 926.2 million reais ($456.4 million) in 2012, rising to 1.16 billion reais in 2013, according to the average of 13 estimates compiled by Bloomberg. Embraer reported adjusted 2011 net income of $196.6 million, or 329.3 million reais based on the year’s average exchange rate.
RBC Capital’s Bondada said the two commercial-airplane categories and defense are all shaping up to be strong in 2013, and “people are starting to take notice.” He recommends Embraer’s American depositary receipts as buy, while Zanfelicio has a maintain rating on the Brazilian shares.
Deliveries in 2012 probably will total 215 regional and business aircraft, while Montreal-based Bombardier will hand over 235 such planes, according to forecasts from the companies. That compares with 204 and 239 respectively in 2011.
European carriers’ business has helped push Embraer to the brink of overtaking Bombardier in the ranking of commercial-plane makers, trailing only Airbus SAS and Boeing Co. (BA), 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. as the world’s sixth-largest economy last year while Europe’s sovereign-debt crisis accelerated.
For Embraer, the challenge will be finding markets big enough to take up any European slack.
The five regional jets ordered by European customers last quarter had a $213 million list value, 76 percent less than orders a year earlier. Airlines typically buy at a discount to retail prices.
Kenya Airways Ltd. had 10 E190 jets on order and Air Nigeria Ltd. had eight as of March 31. By comparison, U.K. discount carrier Flybe Group Plc (FLYB) had 31 E175s ordered but not delivered. That was Embraer’s second-biggest backlog, behind 33 E190s on the books for JetBlue Airways Corp. (JBLU), according to the planemaker’s order summary. Of 50 E190s bought by China’s Hainan Airlines Co. (600221), all but six have been handed over.
Embraer’s Silva said a lack of confidence grips European airline management teams because of the debt emergency and anemic economic growth.
“No one will decide on a significant investment in a scenario such as the present one in Europe,” Silva said. “Europe is not ’business as usual’ anymore.”
Financial pressure on some European airlines may benefit Embraer by spurring the carriers to park older, less-efficient planes in favor of newer models, Silva said. Alitalia SpA is “adding pressure” on Embraer to assure on-time delivery of 10 E175s, said Silva, who didn’t give a timetable.
Raymond Neidl, a Maxim Group LLC analyst in New York, said Embraer’s reach probably is broad enough to weather the tumult in Europe.
“Some airlines that are ordering Embraers will fail and not only in Europe, but others will start up to make the difference and more,” Neidl, who recommends buying the ADRs, said in an e-mailed answer to questions. “Diversifying is good.”
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