Brazil's Embraer Hits The Stratosphere

Its new class of planes are a big hit with companies from US Airways to Alitalia

The jets are lined up under the tropical sun, all freshly decked out in the colors of US Airways, Alitalia, and LOT Polish Airlines. They are the first Embraer (ERJ ) 170s to enter commercial service, part of a new family of 70- to 110-seat passenger jets this Brazilian manufacturer says will help airlines control their runaway costs -- and put Embraer permanently in the winner's circle.

You've heard about the stunning success of Airbus. But there's a new player in global aircraft: Embraer, the planemaker that was created by Brazil's military regime in 1969 and finally privatized in 1994. In subsequent years, under turnaround specialist Maurício Botelho, it trimmed fat and pushed ahead with construction of 37- to 50-seat regional jets that were an overnight success.

In the process, Embraer contended with a World Trade Organization ruling that forced the Brazilian government to scale back subsidies for the planemaker. Undeterred, Embraer since 1996 has delivered some 710 of its regional jets to airlines around the world, including American Eagle, Continental Express, and Republic. Last year, it earned $135 million on sales of $2.1 billion, and J.P. Morgan expects sales to reach $3.3 billion this year and $3.6 billion in 2005. "Embraer is one of the hottest manufacturers in the industry today," says Donald Burr, who founded People Express, the low-cost operator that revolutionized air travel in the 1980s and is now trying to start a new airline. "They're willing to push into areas that others haven't explored."

OPENING NEW MARKETS? Now Embraer is pushing a new class of planes -- jets that seat 70 to 110 comfortably and can be operated economically. According to the U.S. Transportation Dept., 61% of all flights in the U.S. take off with passenger headcounts in that range. Boeing and Airbus make jets that seat 106 passengers and above, but they come with the same avionics, flight deck, and engineering as bigger planes -- and a higher price tag. "Airlines are operating with the wrong aircraft, and they're making a loss," says Botelho, Embraer's 62-year-old president. Thus the Embraer 170/190 series of four commercial jets is designed to fill a gap between regional planes, which usually seat up to 70 people, and large commercial jets. But unlike regional jets, the 170/190 series offers the head- and legroom of a much larger passenger plane.

The market likes the pitch. Embraer will deliver 60 of the new jets this year and has firm orders for another 197. The company has already delivered nine 170s to customers, including US Airways Group Inc. (UAIR ), which broke in its new 170s with a flight from Pittsburgh, Pa., to Albany, N.Y., on Apr. 4. JetBlue Airways Corp. (JBLU ) has 100 of Embraer's 190s on firm order -- at a total cost of $3 billion -- having chosen that model over the 107-seat Airbus A318. The new jets allow customers to match aircraft capacity with passenger demand. And, with their long range and fast turnaround, they spend more time in the air.

Sounds like a hit. There are issues, though. One is the ferocious resistance of Bombardier Inc., which still has a lead in the smaller regional jet market, where Embraer's 181 firm orders lag far behind Bombardier's 307. The Canadians charge that Embraer still unfairly profits from subsidies, and that its 100-seater is late to the market. Says Bombardier spokesman John Paul Macdonald: "If we were to build a 100-seat jet, we would want it to be a next-generation aircraft that's 15% to 20% more efficient than what is on the market now."

Botelho waves off such criticism. He insists Embraer is working toward creating "a level playing field" with Bombardier. He also points out that some innovative airline CEOs are betting on the Embraer aircraft. He says the new jets help them meet passenger demands for flexibility and frequency, and open up routes between smaller airports.

JetBlue CEO David Neeleman, for example, says the 190 will open new markets as well as substituting for the airline's bigger Airbus A320s during off-peak periods. In buying the Embraers, JetBlue's board broke the convention that low-cost airlines should operate only one fleet type. "When they looked at it, it was like, 'not only is this not a risk, it's probably a risk if we don't do this,"' Neeleman says. Southwest Airlines Co. (LUV ), JetBlue's much bigger rival, says it is considering a purchase of the jets, though a deal is far from certain. Thanks to JetBlue, US Airways, LOT, and others, Embraer has $10.6 billion in firm orders for the new family.

One area that could still cause Embraer trouble is the European market. When the 170/190 project was launched in July, 1999, its main market was seen as Europe, where routes tend to be short and frequent. But European carriers have been slow to emerge from the crisis that beset the global industry after September 11. Embraer has just 45 orders from Europe. Swiss, the successor to bankrupt Swissair, has cut its order from 60 to 30 and says it wants to delay deliveries. Softness in the European order book, plus delays in getting the new jets to market, were responsible for a slump in Embraer's earnings last year, when deliveries fell to 101 planes, from 131 in 2002 and 161 in 2001.

COZY NICHE. Another issue is union resistance in the U.S. Pilots, crews, and ground staff are paid less for operating smaller jets, so airlines wishing to swap to smaller fleets meet stiff resistance. And Richard L. Aboulafia of the Teal Group, a Fairfax (Va.) firm of aviation and intelligence analysts, says bigger carriers have fought off low-cost operators from some routes. But if the market does explode, he says, "Embraer is incredibly well-positioned. There's nothing to go against them."

The roominess of the planes' new interiors should help. The clever fuselage design means the new jets have head and shoulder room normally found only in larger jets. "They're far more desirable for the passenger [than regional jets]," says George Hamlin, a Washington aviation analyst. "In the past there hasn't been any choice, but if you can get into a comfortable jet where you can stand up and sit four abreast, that's much better than a 50-seater where you have to bend over to get down the aisle."

Embraer won't always have this market to itself. In February, Bombardier hired former Boeing Co. (BA ) executive Gary R. Scott to head a new commercial aircraft program to produce a more efficient rival to the 170/190. He is due to present recommendations early in 2005.

By the time Bombardier gets a jet to market, however, Embraer may have it cornered. "The market is moving in their direction," says Burr. "The hubs are full, and a lot of people in leadership roles think that more personalized aircraft operating directly between nonhub airports are the way to get people traveling faster again." Traveling, that is, on Embraer jets.

By Jonathan Wheatley in São Paulo, with Diane Brady in New York and Wendy Zellner in Dallas

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