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CEOs Go Shopping for Smaller Jets Again in Embraer Boost

Latin American Business Aviation Conference and Exposition
Visitors walk past the Embraer SA executive jets stand on the last day of 9th annual Latin American Business Aviation Conference and Exhibition in Sao Paulo, Brazil on Aug. 17, 2012. Photographer: Dado Galdieri/Bloomberg

Aug. 12 (Bloomberg) -- A rebound in sales of business jets that began with the biggest, longest-range planes is spreading to small- and mid-size models as Embraer SA puts its newest aircraft into service.

First-half shipments of smaller jets rose about 20 percent, based on calculations by Brian Foley, a Sparta, New Jersey-based aviation consultant, signaling a revival in the market targeted by Embraer with its Legacy 500 and 450. That’s good news in a niche where deliveries fell 62 percent from 2008 through 2013.

Propelled by rising corporate profits, the purchases of short-haul planes follow a comeback for the roomy aircraft used for global flying by big companies including Exxon Mobil Corp. and Wal-Mart Stores Inc. Ralph Lauren Corp. recently bought a Legacy rival, Dassault Aviation SA’s Falcon 2000EX.

“What we’re finally seeing is that due to more confidence in the economy, people’s balance sheets are improving,” said Foley, a former Dassault Aviation marketing director. “They’re slowly coming back into the game, which is good for all aircraft manufacturers.”

Embraer missed the start of the business-jet rally because it lacks a large intercontinental offering like the Gulfstream G650 acquired by Exxon Mobil, Wal-Mart and Qualcomm Inc. The Legacy 500, which lists for $20 million, is the only all-new jet debuting this year in the mid-size segment, according to Sao Jose dos Campos-based Embraer.

Weight Limits

That category covers aircraft weighing 12,501 pounds (5,670 kilograms) to 50,000 pounds, according to the General Aviation Manufacturers Association trade group. Anything less is considered small or light; large models start above that range.

“We designed the Legacy 500 to be by far the best in class and capture a significant share of the market,” Marco Tulio Pellegrini, chief executive officer of Embraer’s business-jets unit, said in an interview in Sao Paulo. “The plane is a game changer. It’s a plane that has the technology of a $50 million jet.”

The Legacy 500 was certified today by Brazil’s aviation regulator for commercial use, and the smaller 450 will have its first flight in 2015. The 500 can fit as many as 12 people and fly 3,000 nautical miles (5,600 kilometers). That’s a step below the 7,000 nautical-mile range for the G650, which can seat 18.

Profit Comeback

Embraer will be putting the plane into service in a year when earnings among Standard & Poor’s 500 companies may jump 53 percent, according to data compiled by Bloomberg.

“Whether by accident or design, the Legacy 450 and 500 might be arriving at exactly the right moment,” said Richard Aboulafia, an analyst at Fairfax, Virginia-based consultant Teal Group. “They certainly could grab market share.”

The Legacy 500 is the first in its class to use fly-by-wire controls -- which translate stick and rudder movements into computer signals to fly the plane -- and a 6-foot (1.83-meter) cabin ceiling. Embraer is promoting the jet with what it calls a six-minute “cinematic-style film” starring actor Jackie Chan.

Embraer is showing off the Legacy 500 at the Latin American Business Aviation Conference and Exhibition that gets under way today in Sao Paulo. Brazil is the third-biggest market for business jets, after the U.S. and Canada.

Executive jets are Embraer’s second-largest business after commercial planes, with 27 percent of 2013 sales, and include the Legacy and the Phenom. First-half business-jet revenue jumped 45 percent to 1.6 billion reais ($703 million), according to filings and data compiled by Bloomberg.

Stock Rally

Embraer rose 16 percent this year through yesterday, buoyed by the comeback for small- and mid-size business aircraft and a widening lead over Bombardier Inc. in regional-jet sales. That beat the 9.9 percent gain for Brazil’s benchmark Ibovespa index and Bombardier’s 17 percent drop. The shares rose 0.8 percent to 22.18 reais at 2:02 p.m. in Sao Paulo. Embraer’s 49 first-half business-aircraft deliveries trailed Bombardier’s 81.

Industrywide jet shipments exceeded 1,300 in 2008 before the global financial crisis ravaged demand, especially for small and mid-sized models. While 2013 deliveries of all sizes slid 48 percent from 2008, shipments of large planes are back above pre-recession levels, according to the GAMA trade group.

“Light and mid-size jets are more reliant on third-party financing,” Jens Hennig, vice president of operations at Washington-based GAMA, said in a telephone interview. “With the uncertainty in the economy, that compounded that issue.”

Hoarding Cash

Casualties of the slump include the former Hawker Beechcraft, which filed for bankruptcy in 2012 and abandoned jets before agreeing to a buyout by Textron Inc. in 2013. A complete small-jet turnaround may take a while because CEOs are still clinging to their cash, Teal Group’s Aboulafia said.

“They’re scared,” Aboulafia said. “Everyone was so traumatized by the events of 2007 to 2009, they’re being very conservative.”

Kimbrell Hughes, a spokeswoman for Ralph Lauren Corp., declined to comment on the Falcon 2000EX purchase. The New York-based company fits the industry’s profile of a typical plane buyer as one with rising profits: Net income rose 3.5 percent to $776 million in fiscal 2014 from a year earlier.

At NetJets Inc., the luxury-aviation unit of billionaire Warren Buffett’s Berkshire Hathaway Inc., demand is outpacing forecasts, spurring the Columbus, Ohio-based company to accelerate deliveries of Embraer Phenoms by 30 percent to 35 planes this year, said Patrick Gallagher, the sales chief.

“We don’t see having any signs of slowing down anytime soon,” Gallagher said in a telephone interview.

Because planes take so long to develop, Embraer is reaping the benefits from decisions made more than a decade ago to commit to built-from-scratch models in an industry where buyers prize the newest, most-innovative products, according to Foley, the consultant and former executive for Paris-based Dassault Aviation.

“What’s unique and allows Embraer to stand out amongst all these other competitors is the Phenoms and Legacies are clean-sheet designs,” Foley said. “They’re not an iteration of an old model.”

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net Molly Schuetz

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