General Lee
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Reuters
Brazil's Embraer lays claim to regional jet market
Wednesday August 11, 6:58 pm ET
By Nicholas Winning
SAO JOSE DOS CAMPOS, Brazil, Aug 11 (Reuters) - The whine of a drill echoes around the giant hangar as engineers work on five new Embraer 170 planes already wearing the livery of Alitalia (Milan:AZPIa.MI - News) and US Airways (NasdaqNM:UAIR - News).
The planes are part of a new family of jets seating between 70 to 110 passengers that Brazil's Empresa Brasileira de Aeronautica (Sao Paolo:EMBR4.SA - News; NYSE:ERJ - News; Embraer) hopes will give it an edge over Canada's Bombardier Inc. (Toronto:BBDb.TO - News) and other rivals in the global market for medium-sized regional aircraft.
Although regulators have certified only one of the four new models, Embraer has notched up 273 firm orders and 347 options to buy the planes, including a 100-jet deal with U.S. low-cost carrier JetBlue (NasdaqNM:JBLU - News) and 85-jet order from US Airways.
"The response has been exceptional," Frederico Fleury Curado, Embraer's executive vice president of civilian aircraft, told Reuters in a recent interview. "It has been more intense than we had expected given that the market has yet to recover."
While the airline industry continues to weather the effects of the Sept. 11, 2001 attacks, the Iraq and Afghanistan conflicts, the SARS virus outbreak in Asia and record high oil prices, Embraer has seen demand for regional jets increase.
The 170 received the green light to enter operation in February. Embraer expects the 86-seat Embraer 175 to be flying by the end of this year, the 106-seat Embraer 190 by mid-2005, and 118-seat EMBRAER 195 to be in the air a year after that.
"There have been airplanes in the 70-100-seat class since jetliners have been built," said Doug Abbey, a partner in the Velocity Group, a Washington-based aviation research and strategic planning company.
"But what we haven't seen is a new generation of aircraft in this category and Embraer is certainly leading the charge in that regard," he added.
PLANES THAT FIT THE BILL
Since privatization in 1994, Embraer has grown to become the world's No.4 aircraft manufacturer and one of Brazil's top exporters on the success of its 37 to 50-seat ERJ jet range. Since privatization, the company's market capitalization has leaped to about $5 billion from $150 million.
Embraer delivered its 800th 50-seat ERJ 145 model in May. A month later, it sold its first ERJ 145 produced in China through a joint venture with Aviation Industry Corporation II.
The firm and its partners, which include General Electric Co. (NYSE:GE - News) and Honeywell International Inc. (NYSE:HON - News), are investing about $850 million on the new jets, which Embraer says are more profitable on less busy regional routes than larger planes made by Boeing Co. (NYSE:BA - News) and Airbus (Paris:EAD.PA - News).
Embraer forecasts airlines will buy some 8,450 30- to 120-seat aircraft over the next 20 years, and more than two thirds of the total will be in the 61-to-120-seat range.
Bombardier beat Embraer to the 61-to-120-seat market with the CRJ 700 and 900, stretched versions of a 50-seat jet. But analysts say Embraer's jets raise the bar with their roomy "double-bubble" fuselage design and fly-by-wire technology.
"I've not flown in the (Embraer) 170 or 190, but I have been in the aircraft. I'm six feet five inches (tall), almost two meters, and I stand up in it," said George Hamlin, a Washington aviation analyst. "In the Bombardier aircraft, I bend over getting in and out of it."
David Neeleman, head of New York-based JetBlue, shopped around before ordering 100 Embraer 190s in a $3 billion deal.
"When we had to have the economic advantages and combine that with the comfort advantages, that was really the only plane that really fit the bill," he said.
MARKET TURBULENCE
Analysts say using a big airliner on routes that attract relatively few passengers makes as much sense as a small family buying a bus instead of a car to get around town.
"The play on Embraer is that one, they are the only manufacturer that has a family of airplanes that bridges this gap completely, from 70 to 110 across the new family," said Ronald Epstein, an analyst at Merrill Lynch in New York.
"Two, they have some of the best margins in the industry because ... they are in a better labor environment," he said.
Embraer aims to deliver 160 planes this year, 59 more than in 2003, and a record 170 in 2005. Analysts say it will be some years before a new jet to rival Embraer's hits the market.
"Production is growing violently and we are going to take as much market as possible over that period," Embraer's Curado said.
But Embraer admits the aviation market is still weak and financing for aircraft remains hard to come by. A few of Embraer's clients, notably US Airways and Swiss International Air Lines (Zurich:SWIN.S - News), remain in dire financial straits.
The firm's stock has shed about 17 percent of its value so far this year, while Brazil's benchmark stock index has dipped some 3 percent.
Embraer also faces a major stumbling block in the United States where labor agreements, referred to as scope clauses, limit the amount of regional jets many airlines can operate.
Some analysts bet that once JetBlue, which has no scope clauses, starts flying the EMBRAER 190, other airlines will want to buy more regional jets. But that could take time.
Meanwhile, Russia's Sukhoi and China's AVIC 1 are both developing new regional jets. Bombardier is also looking into making jet that could seat up to 135 passengers, which would compete with Embraer as well as Boeing and Airbus.
"They (Bombardier) will sell the (CRJ) 700 and 900 regional jets as a follow-on to existing fleets, but I think it will be increasingly hard to sell that airplane versus the (EMBRAER) 170 or 190, therefore you have to make the decision -- do I invest in a completely new product?" Hamlin said.
"I don't envy Bombardier making the decision."
Bye Bye--General Lee
Brazil's Embraer lays claim to regional jet market
Wednesday August 11, 6:58 pm ET
By Nicholas Winning
SAO JOSE DOS CAMPOS, Brazil, Aug 11 (Reuters) - The whine of a drill echoes around the giant hangar as engineers work on five new Embraer 170 planes already wearing the livery of Alitalia (Milan:AZPIa.MI - News) and US Airways (NasdaqNM:UAIR - News).
The planes are part of a new family of jets seating between 70 to 110 passengers that Brazil's Empresa Brasileira de Aeronautica (Sao Paolo:EMBR4.SA - News; NYSE:ERJ - News; Embraer) hopes will give it an edge over Canada's Bombardier Inc. (Toronto:BBDb.TO - News) and other rivals in the global market for medium-sized regional aircraft.
Although regulators have certified only one of the four new models, Embraer has notched up 273 firm orders and 347 options to buy the planes, including a 100-jet deal with U.S. low-cost carrier JetBlue (NasdaqNM:JBLU - News) and 85-jet order from US Airways.
"The response has been exceptional," Frederico Fleury Curado, Embraer's executive vice president of civilian aircraft, told Reuters in a recent interview. "It has been more intense than we had expected given that the market has yet to recover."
While the airline industry continues to weather the effects of the Sept. 11, 2001 attacks, the Iraq and Afghanistan conflicts, the SARS virus outbreak in Asia and record high oil prices, Embraer has seen demand for regional jets increase.
The 170 received the green light to enter operation in February. Embraer expects the 86-seat Embraer 175 to be flying by the end of this year, the 106-seat Embraer 190 by mid-2005, and 118-seat EMBRAER 195 to be in the air a year after that.
"There have been airplanes in the 70-100-seat class since jetliners have been built," said Doug Abbey, a partner in the Velocity Group, a Washington-based aviation research and strategic planning company.
"But what we haven't seen is a new generation of aircraft in this category and Embraer is certainly leading the charge in that regard," he added.
PLANES THAT FIT THE BILL
Since privatization in 1994, Embraer has grown to become the world's No.4 aircraft manufacturer and one of Brazil's top exporters on the success of its 37 to 50-seat ERJ jet range. Since privatization, the company's market capitalization has leaped to about $5 billion from $150 million.
Embraer delivered its 800th 50-seat ERJ 145 model in May. A month later, it sold its first ERJ 145 produced in China through a joint venture with Aviation Industry Corporation II.
The firm and its partners, which include General Electric Co. (NYSE:GE - News) and Honeywell International Inc. (NYSE:HON - News), are investing about $850 million on the new jets, which Embraer says are more profitable on less busy regional routes than larger planes made by Boeing Co. (NYSE:BA - News) and Airbus (Paris:EAD.PA - News).
Embraer forecasts airlines will buy some 8,450 30- to 120-seat aircraft over the next 20 years, and more than two thirds of the total will be in the 61-to-120-seat range.
Bombardier beat Embraer to the 61-to-120-seat market with the CRJ 700 and 900, stretched versions of a 50-seat jet. But analysts say Embraer's jets raise the bar with their roomy "double-bubble" fuselage design and fly-by-wire technology.
"I've not flown in the (Embraer) 170 or 190, but I have been in the aircraft. I'm six feet five inches (tall), almost two meters, and I stand up in it," said George Hamlin, a Washington aviation analyst. "In the Bombardier aircraft, I bend over getting in and out of it."
David Neeleman, head of New York-based JetBlue, shopped around before ordering 100 Embraer 190s in a $3 billion deal.
"When we had to have the economic advantages and combine that with the comfort advantages, that was really the only plane that really fit the bill," he said.
MARKET TURBULENCE
Analysts say using a big airliner on routes that attract relatively few passengers makes as much sense as a small family buying a bus instead of a car to get around town.
"The play on Embraer is that one, they are the only manufacturer that has a family of airplanes that bridges this gap completely, from 70 to 110 across the new family," said Ronald Epstein, an analyst at Merrill Lynch in New York.
"Two, they have some of the best margins in the industry because ... they are in a better labor environment," he said.
Embraer aims to deliver 160 planes this year, 59 more than in 2003, and a record 170 in 2005. Analysts say it will be some years before a new jet to rival Embraer's hits the market.
"Production is growing violently and we are going to take as much market as possible over that period," Embraer's Curado said.
But Embraer admits the aviation market is still weak and financing for aircraft remains hard to come by. A few of Embraer's clients, notably US Airways and Swiss International Air Lines (Zurich:SWIN.S - News), remain in dire financial straits.
The firm's stock has shed about 17 percent of its value so far this year, while Brazil's benchmark stock index has dipped some 3 percent.
Embraer also faces a major stumbling block in the United States where labor agreements, referred to as scope clauses, limit the amount of regional jets many airlines can operate.
Some analysts bet that once JetBlue, which has no scope clauses, starts flying the EMBRAER 190, other airlines will want to buy more regional jets. But that could take time.
Meanwhile, Russia's Sukhoi and China's AVIC 1 are both developing new regional jets. Bombardier is also looking into making jet that could seat up to 135 passengers, which would compete with Embraer as well as Boeing and Airbus.
"They (Bombardier) will sell the (CRJ) 700 and 900 regional jets as a follow-on to existing fleets, but I think it will be increasingly hard to sell that airplane versus the (EMBRAER) 170 or 190, therefore you have to make the decision -- do I invest in a completely new product?" Hamlin said.
"I don't envy Bombardier making the decision."
Bye Bye--General Lee
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