Embraer Faces Continued Turbulence
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The world's third largest commercial aircraft producer and one of Brazil's top companies, Embraer SA ADR (NYSE: ERJ) is one of the few Latin American companies that has been able to compete successfully on a global scale.
Embraer has sold more than 5,000 aircraft operating in 92 countries. Annual revenues from its commercial and private jet sales alone total roughly $4 billion.
The company's stock hit an air pocket in November and dropped sharply after it was reported that the SEC was investigating Embraer for possible violations, in three countries where it conducts business, of the U.S. Foreign Corrupt Practices Act.
The SEC investigation, however, is not the only headwind Embraer faces in the years ahead as it tries to stay on course in the business jet market.
The company is just past the halfway point in its ambitious 10-year program to challenge the leaders in the aerospace industry. It has been trying to build upon it success in the last decade and a half of becoming the world's leading maker of regional jets (aircraft of up to 120 seats) and become the dominant player in business jets.
Its move into the business jet market was launched in 2005. At that time, the company revealed it was developing a new family of aircraft at the bottom end of the market to take advantage of the relatively new aerospace segment for light and very light jets.
Last year Embraer accounted for 19% of global business jet deliveries, up from 14% in 2009. Embraer's revenues in 2010 garnered a 6.9% share of the total global revenues for the industry. Its success is due in large part to its strategy of developing business jets based on its very successful regional jet line.
In the business jet sector Embraer has to face more than its competitors, which include the likes of Canada's Bombardier, Gulfstream - part of General Dynamics (NYSE: GD), and Cessna - part of Textron (NYSE: TXT).
Its business is also being adversely affected by difficult economic conditions in the business jet market for the past three years. The industry has been hit by sharply lower sales, declining prices and rapidly rising inventories of used corporate jets. Many of the smaller players in the industry have already been forced out of business by the tough economy.
Global deliveries of business jets have tumbled from a peak of 1,313 in 2008 to only 763 in 2010. There was a further 27% fall, when compared to last year, to just 261 aircraft in the first half of 2011.
Nevertheless, Embraer continues to invest into research and development in the business jet segment. Its investment will amount to around $1 billion by the year 2015. The company is also investing heavily into sales, marketing and customer support.
Of course, most of this investment will go into supplying jets for the crucial U.S. market. This market remains by far the biggest market for business jets, accounting for 43% of the global market.
But Embraer can do nothing about the state of the world economy. All it can do is proceed with its plan to advance in the business jet market and hope the global economy and business jet market pick up.
It had better hope too that nothing comes of the SEC investigation that could adversely impact its business in the key U.S. jet market.
The author has no positions in any of the companies mentioned above.