Paris Air Show poses tough test for Brazil’s Embraer

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Brazilian aircraft maker Embraer faces a tough test at next week’s Paris Air Show, as management seeks to offset worries over delays in the development of new commercial jets by capturing new orders.

The world’s largest maker of regional jets is taking an unusually low profile as some of its top executives head for Le Bourget, the location just outside Paris where the fair takes place. No Embraer jets are slated for exhibition at the fair.

Analysts expect the team led by Chief Executive Frederico Curado to seal up to US$1.5 billion in sales with Air Lease and Republic Airlines, and turn interest from Chinese, Colombian, Venezuelan and Indonesian carriers into firm orders.

Sales announcements could ease worries about Embraer’s near-term challenges. These include: a strong local currency that drives up costs for Embraer, natural disasters and geopolitical tensions around the world that could disrupt deliveries, and a sluggish global economic recovery.

Yet, investors and aerospace analysts do not have high hopes for Embraer at the Paris Air Show.
“We expect Embraer to pick up some executive jet orders … though we do not expect the Air Show to be the break-out event it was for the company last year,” Joe Nadol, an aerospace analyst with JPMorgan Securities said, referring to last year’s Farnborough International Airshow.

Embraer’s U.S.-traded shares have been flat since May, as investors see its sales strategy as an effort to protect existing orders at the expense of lower revenue.

The company did not immediately reply to requests for a comment on its sales strategy.

Brazilian diplomats have surprisingly won Embraer a handful of deals this year by securing orders for 20 commercial planes from China in April and helping market the company’s military cargo plane with South American allies.

Usually, Embraer ADRs gain 5 percent in the weeks preceding a major air show, while the S&P 500 .SPX posts a 1.9 percent drop, according to Bank of America Merrill Lynch calculations.

This time, the gains could lag those of previous years.

Embraer’s cautious approach contrasts with that of Boeing and Airbus, the giant aerospace companies that usually unveil a flurry of new deals at air fairs in great fashion.

Farnborough marked a recovery in orders for Embraer in an early sign that the global recession that began in 2008 may be nearing an end. Embraer signed US$1.6 billion in new orders in Farnborough that jumped to US$9 billion when including purchase options.

Goldman Sachs’ Noah Poponak, the Embraer analyst who has likely made the most bullish calls on the stock this year, estimates that the jet maker could close as many as 200 deals between the Paris Air Show and the end of the year.
“Embraer has 10 years of production when considering form backlog and options,” he wrote in a recent report.

Other analysts are not that optimistic, however.

Citigroup analyst Stephen Trent recently warned that Embraer’s product development for commercial jets remains almost stalled as competitors push forward.

Embraer’s lack of a comprehensive offering of planes in the growing large-jet market could hurt its chances to win orders from airlines that want to buy aircraft of multiple sizes from one provider.



He prefers Canada’s Bombardier, Embraer’s archrival in the regional jet market, because its large-cabin business jet fleet is showing promising near-term momentum.