Embraer SA (EMBR3) is betting on a rising U.S. economy to draw wealthy buyers to its latest business jets even as cost-conscious companies cut private air travel and some owners including former billionaire Eike Batista are forced to unload their planes.
The first of the jets, the mid-size Legacy 500 seating as many as 12 people, is due to enter service in 2014’s first half and will be the first Embraer model built for that market niche. The Legacy 450, a so-called mid-light model, is to follow a year later, Sao Jose dos Campos, Brazil-based Embraer said.
Embraer’s challenge: Even as Brazil’s biggest planemaker bets on the new corporate aircraft to reduce reliance on commercial planes, demand worldwide is running at barely half of 2008’s pace. Chief Executive Officer Frederico Curado said in a July 26 conference call that the market is “softening,” though he still expects the company to reach sales targets.
“Embraer is making a call on its expectation that United States economic growth will see a rebound up the chain for people that want to buy” mid-size jets again, said Stephen Trent, a Citigroup Inc. analyst in New York. He said the Legacy planes face a “tight” fit in a crowded market.
Until rolling out the Legacy 450 and 500, Embraer drew its mid-sized offerings from its signature regional-jet families, reconfiguring them into luxury aircraft. Now, it’s pushing the new jets in a market crowded by planes from Bombardier Inc. (BBD/B) and General Dynamics Corp. (GD)’s Gulfstream, as well as used planes such as the mid-size Legacy 600 recently sold by Batista, 56.
Batista, once the country’s richest man, has seen his worth shrink to $300 million as of yesterday from $34.5 billion last year, according to the Bloomberg Billionaires Index. Veja magazine reported last month that he sold his jet to Bank of America Corp., which then leased it.
Batista’s holding company, EBX Group Co., declined to comment yesterday when asked about the jet, and Bank of America didn’t respond to telephone calls and e-mails.
Commercial regional-jet orders, not business aircraft, have buoyed Embraer in 2013, sending the stock up 33 percent through yesterday as Brazil’s benchmark Ibovespa index fell 17 percent. Bombardier rose 30 percent. Orders from U.S. airlines helped push Embraer’s firm order backlog to 366 regional jets, topping the 279 for Montreal-based Bombardier’s competing models. Embraer fell 0.8 percent to 19.05 reais at 11:20 a.m. in Sao Paulo.
Global business-jet deliveries slid to 672 in 2012 from 2008’s 1,315, the General Aviation Manufacturers Association said. This year’s total will be 649, according to Newtown, Connecticut-based researcher Forecast International.
Within that shrunken market, planes the size of the Legacy family face a “drought” of orders, said Brian Foley, a former marketing director at Dassault SA’s Falcon business-jet unit who is now an aviation consultant based in Sparta, New Jersey.
The Legacy 450 has a range of 2,300 nautical miles (4,260 kilometers) and can carry as many as 10 passengers, while the Legacy 500 boasts a 3,000 nautical-mile range. They list for $16 million and $20 million, respectively.
That puts them out of reach for wealthy individuals who might opt for the smallest Embraer model, the Phenom, which can sell for as little as $2.98 million, according to industry website AircraftCompare.com. The planes also lack the range for corporate buyers seeking big business jets such as Bombardier’s Global 8000, which can fly 7,900 nautical miles. Embraer doesn’t have a jet in the large-aircraft, long-range segment.
While Embraer doesn’t disclose its order book, its forecast for deliveries of 25 to 30 planes from the Legacy family and the bigger Lineage 1000 this year would show only a slight gain from last year’s 22. The company predicts it will deliver 80 to 90 Phenom light jets, compared with 77 in 2012.
“We see some softening on the upper range on the Legacy 650 market and this higher-end business jet market,” CEO Curado said on the July 26 call. “I would say that we’re probably going more towards the lower end of our guidance than the higher end, but still confident that we can meet our numbers.”
Good news on Phenom sales “doesn’t really matter in terms of sales and dollars,” said Nick Heymann, a William Blair & Co. analyst in New York, in a telephone interview. “You have to sell a zillion of them to get anywhere.”
Heymann rates Embraer’s U.S. depositary receipts as market perform, while Citigroup’s Trent has a sell rating on the ADRs, citing global valuations. Embraer trades at 15 times estimated 2013 earnings, compared with a ratio of 12 for Bombardier and Falls Church, Virginia-based General Dynamics.
Curado is forecasting sales this year of as much as $6.4 billion, while the total for Bombardier, a maker of commuter trains as well as aircraft, may be $18.4 billion, based on analysts’ estimates compiled by Bloomberg. Embraer’s 2012 operating margin was 10 percent, compared with 4.7 percent for Bombardier, based on data compiled by Bloomberg.
Embraer’s effort to use business aircraft to wean itself from dependence on signature regional jets echoes a push with the defense and security division. Executive aviation should produce 25 percent of revenue this year, compared with 21 percent for defense and 52 percent for commercial planes, according to a regulatory filing.
At 3.1 percent, the executive-jet business still trailed Embraer’s others in operating profit margin, with 11.7 percent for commercial aviation and 10.9 percent for defense and security, according to a regulatory filing.
Foley, the consultant, expects that Embraer’s investment in new business jets should pay off.
“Once the small and mid-sized markets perk up a little bit Embraer will benefit,” Foley said. “As the worldwide economies are starting to get a little more stable, Embraer has a business jet family that’s brand new that’s available now. Other manufacturers took a two-year hiatus from development.”
To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at firstname.lastname@example.org