Empresa Brasileira de Aeronáutica S.A. (Embraer)

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Empresa Brasileira de Aeronáutica S.A. (Embraer)

Av. Brig. Faria Lima, 2170
12227-901 Sao José dos Campos
Sao Paulo Brazil
Telephone: (55 12) 345-1000
Fax: (55 12) 345-2411
Web site: http://www.embraer.com

Public Company
Incorporated: 1969
Employees: 9,000
Sales: R 3.36 billion (US$1.89 billion) (1999)
Stock Exchanges: New York Sao Paulo
Ticker Symbols: ERJ; EMBR3; EMBR4
NAIC: 336411 Aircraft Manufacturing

Empresa Brasileira de Aeronáutica S.A. (Embraer) is one of Brazil’s most successful high tech companies. In the 1990s, Embraer became the world’s fourth largest civil aircraft manufacturer by riding the regional jet trend pioneered by arch-rival Bombardier of Canada. Half the planes in the Brazilian Air Force are Embraer products and military aircraft continue to account for ten percent of revenues.

Military Origins

Three military cabinet leaders (army, navy, and air force) took over Brazil in 1968 after elected president General Artur Costa e Silva was incapacitated by strokes. General Emilio Medici was installed as the new head of state. The military wanted Brazil to have its own aircraft-manufacturing capacity and created Empresa Brasileira de Aeronáutica S.A. (Embraer) the next year.

The Brazilian government held 51 percent of the voting shares while private investors held the rest. Embraer was based in the provincial town of Sao José dos Campos in Sao Paulo State. Operations started in 1970 and the company broke even the next year.

Embraer’s first design, the EMB-110 Bandeirante (“Pioneer”), was the first aircraft produced in Brazil. Powered by two turboprop engines, the plane could carry up to 21 passengers and was quite popular with U.S. commuter airlines. Embraer also developed military versions of this versatile plane. Another early design was the Xingu, which carried six to nine passengers. Embraer’s Neiva subsidiary built the Ipanema crop duster and various Piper light planes under license.

Embraer built a version of the Italian Aermacchi MB-326BG military jet trainer under license for the Brazilian air force. The company then teamed with Aermacchi and Aeritalia in developing the AM-X subsonic fighter aircraft to replace Fiat G-91 and Lockheed F-104 fighters in the Italian air force. The program was valued at US$600 million. Embraer also developed its own basic trainer, the EMB-312 Tucano. The Brazilian air force ordered 168 of them in the early 1980s.

A Variety of Projects in the 1980s

Embraer had been profitable from its second year in operation, but posted an annual loss in 1981. By 1982, Embraer had 6,000 workers and had produced 2,500 aircraft. The company was developing a maritime surveillance version of the Bandeirante in the early 1980s. Work had also begun on the EMB-120 Brasilia, a 30-seat turboprop with similar applications to its smaller predecessor. Embraer held more than 130 orders and options for the Brasilia before it entered production in 1985. However, airlines were slow to convert options into firm orders.

Sales were between US$170 and US$180 million in 1984. The company garnered 40 percent of its revenues abroad. Although Brazil was suffering an economic depression, trade barriers protected the company’s home market.

In the London Financial Times, company President Colonel Ozires Silva predicted the extinction of purely civilian aircraft manufacturers. (Silva went on to lead Varig, Brazil’s largest airline.) The first prototype AMX crashed in May 1983, but the program continued. Embraer began filling a large order from Egypt for the Tucano trainer in 1985. Meanwhile, Short Brothers of Belfast, Northern Ireland, was bidding to produce the Tucano under license for the Royal Air Force. Production continued on military variants of the Bandeirante.

Embraer also developed missiles, and was part of a consortium that in 1988 agreed to help Iraq develop satellite and missile technology. According to the New York Times, at the time of the invasion of Kuwait, a few of Embraer’s engineers (possibly former employees) were in Iraq helping to increase the range of the country’s notorious Scud missiles.

Embraer remained dependent on imported avionics and communications equipment. When it tried to buy a Model 3090 computer from IBM in 1990, the sale was blocked after Brazil would not guarantee that the computer would not be used for military purposes or transferred to other countries.

Privatized in 1994

The recession that followed the Gulf War affected the whole aviation industry, and Embraer suffered with everyone else. By 1994, the company was bankrupt, on its way to losing US$337 million for the year. The Brazilian government sought a world-class aerospace company to help rescue it during its privatization in May 1994. However, other makers of regional aircraft were blocked from participating.

Ultimately, a group led by Banco Bozano, Simonsen SA acquired 60 percent of the company’s voting shares. Two large pension funds joined the Rio de Janeiro-based holding company: Caixa de Previdência dos Funcionários do Banco do Brasil S.A. (PREVI) and Funda$ao SISTEL de Seguridade Social (SISTEL). Seeking to create a leaner, more efficient manufacturer, after a six-month ban on layoffs, the new owners cut a third of the company’s 5,500 jobs. Mauricio Botelho, an engineer and executive at Bozano Simonsen, became company president in September 1995.

By the mid-1990s, the Brasilia had become the most widely used turboprop in the United States, according to the New York Times. However, since the introduction of Bombardier Aerospace’s Canadair Regional Jet (RJ) in 1993, the whole category was being displaced by regional jets—small airliners that were less noisy, more spacious, and faster, yet still economical to operate on short routes.

Embraer’s entrant, the EMB-145 (also called the ERJ-145), took its first test flight in August 1995. The planes sold for US$14.5 million each—somewhat less than the Canadair—its only direct competitor—but twice as much as the Brasilia. Embraer’s own regional jet had originally been conceived in 1989, according to the Financial Times, but was slower to market due to organizational sluggishness. (Fairchild Aerospace, formed when U.S.-based Fairchild Aircraft took over the German Dornier Luftfahrt in 1996, also made airliners with fewer than 100 seats.)

Continental Express ordered 25 of the EMB-145s for US$375 million in the fall of 1996, and reserved options for 175 more. Within a year, American Eagle had ordered 42. (A number of smaller foreign operators had been the first to sign up for the jet.) At the time the 50-seat EMB-145 was launched, plans for 35-seat and 70-seat jets were already in the works.

The regional jet would help save the company, but it would take time. Embraer, which still carried US$600 million in debt, posted a loss of US$40 million (R 42 million) in 1996 and a loss of US$30 million (R 33 million) in 1997.

Competition between Embraer and Bombardier—and between Brazil and Canada—was intense. Bombardier ran want ads for engineers in Brazil, luring them to Canada with superior pay and quality-of-life benefits. Embraer alleged that in 1997 Bombardier dropped the company from a US$100 million NATO contract to supply Tucano trainers due to the success of Embraer’s EMB-145.

Embraer and Bombardier each accused the other of thriving because of government subsidies. Bombardier criticized the special financing the Brazilian government offered through its Proex export promotion program. However, Brazil countered that as a developing country it was not required to follow World Trade Organization (WTO) rules until 2002. The country did agree to modify its Proex program to comply with a WTO ruling in 1999, however the WTO ruled that Proex still kept financing rates below international levels, and ordered Brazil to stop this subsidy. (Brazil had not complied as of April 2000.)

Embraer had become Brazil’s second largest exporter, with foreign sales of US$1.2 billion in 1998. It was the fourth largest aircraft manufacturer in the world.

The Brazilian Real lost 40 percent of its value in the first few weeks of 1999. Although most of Embraer’s revenues came in hard currency, rising interest rates accompanied the Real’s devaluation, making money to finance sales and develop new designs harder to find. Ultimately, though, Embraer benefited from lowered manufacturing costs.

Embraer pressed on with plans to develop larger versions of the EMB-145, dubbed the EMB-170 and EMB-190. The project was expected to cost US$750 million; Embraer expected to contribute US$250 million itself, and to raise another third each from a strategic partner and the international financial markets.

In June 1999, Embraer announced a record US$4.9 billion order from Crossair, a Swiss regional airline. Crossair placed firm orders for 15 ERJ-145s, 30 ERJ-170s, and 30 ERJ-190s. The latter two had delivery dates of 2002 and 2004. Crossair also placed options on another 125 aircraft.

Company Perspectives

Embraer is a customer-oriented company with 30 years experience in designing, manufacturing, selling, and supporting aircraft for the world’s commercial and defense markets.

New Capital for the New Millennium

A consortium of four French aerospace companies—Aerospatiale-Matra, Dassault Aviation, Snecma, and ThomsonCSF—acquired 20 percent of Embraer’s voting shares in 1999. The Brazilian government retained 20 percent under a “golden share” provision. Brazilian air force officials were wary of letting a foreign aerospace company own part of Embraer. However, Embraer seemed more likely to benefit from applying French technology in its military jets. At the time, the company was only devoting ten percent of its production to jet fighters. In the same year, Embraer created a landing gear and hydraulics joint venture with a German company, Liebherr International.

Embraer realized record earnings of R 412 million (US$240 million) in 1999 due to strong sales in Europe as well as the United States. According to the New York Times, the company sold 100 jets during the year, and sales were expected to rise by 50 percent in 2000. Revenues and profits doubled for the first half of 2000. Embraer was listed on the New York Stock Exchange in July 2000. The company had a US$20 billion backlog and was developing its Legacy business jet.

Principal Subsidiaries

Embraer Aircraft Corporation (U.S.A.); Embraer Australia Pty. Ltd.; Embraer Aviation International (France); EmbraerLiebherr Equipamentos do Brasil S.A. (60%); Indústria Aeronáutica Neiva SA.

Principal Competitors

Bombardier Aerospace; Fairchild Aircraft, Inc.; Gulf stream Aerospace Corporation.

Key Dates

1969:: Embraer is founded by Brazil’s military dictator-ship.
1981:: Embraer posts only the second annual loss in its history.
1994:: Nearly bankrupt, Embraer is privatized.
1995:: Embraer begins testing its ERJ-145 regional jet.
1999:: French aerospace consortium buys 20 percent of company’s voting shares.
2000:: Embraer attains listing on the New York Stock Ex-change.