COMPANY SPOTLIGHT: Empresa Brasileira de Aeronautica SA
by JUSTIN CARRIGAN
Bloomberg News
SAO JOSE DOS CAMPOS, Brazil -- Ozires Silva, the bureaucrat who founded
Brazilian jetmaker Empresa Brasileira de Aeronautica SA, remembers the
day he
first urged a government minister to sell the state-owned company.
``He wanted to throw me out the window,'' Silva said.
Yet Silva persevered, convincing the government to unload the money-losing
company to private investors to help it grow.
The rest is aviation history. Embraer has become a global leader in the
regional jet
market and will turn a profit this year for the first time since its sell-off
in 1994.
Now it's considering its next big step: teaming up with a global aerospace
partner.
The 67-year-old Silva, a retired colonel with the former military government
who
founded Embraer in 1972, said an international partnership makes sense.
``It's becoming much more difficult to survive in today's world market,''
said Silva,
who's just finished a book on Embraer's rags-to-riches story. ``Joining
with a
foreign company will make us much more competitive.''
Though Silva is no longer involved in the day-to-day operations of Embraer,
he
said the engine behind Embraer's change of fortunes has been its staple
product,
the 50-seater EMB-145 regional jet, launched in August 1995 after the
government got out of the airplane business.
Until then, Embraer had focused mainly on the military market, with its
chief client
the Brazilian air force.
As other manufacturers around the globe, such as Boeing Co., concentrated
on
making long-haul jets, Embraer carved out a niche for itself in the regional
market,
providing airlines with smaller planes for short flights. The EMB-145 has
helped
Embraer gain a 51 percent share of the $5.5 billion regional jet market,
followed
closely by arch-rival Bombardier Inc. of Canada, at 47 percent.
``The trend in recent years has been towards regional jets and that's where
Embraer has been really clever,'' said Sergio Goldman, head of research
at
Santander Investment Securities Inc. in Sao Paulo. ``They discovered where
the
demand would be in advance.''
Its planes are flown around the world, with customers in the United States,
including AMR Corp.'s American Airlines, British Midland in the U.K. and
Portugalia in Portugal.
Greater demand
The company recently delivered its 100th EMB-145, to Continental Airlines
Inc.,
in a ceremony at its factory in Sao Jose dos Campos. And next year it will
start
delivering a new 37-seater EMB-135, which the company hopes will enjoy
even
greater demand. Embraer also won a contract recently with the Greek government
to build four military planes worth $200 million over five years.
The results speak for themselves. In the first nine months of 1998, the
company
earned $65.8 million, compared with losses of $67.5 million in the same
period
last year. In 1994, the year it was off-loaded by the government, it lost
nearly
$340 million.
Investors have taken notice. Embraer's shares have fallen about 22 percent
this
year, but that compares well with a decline on the main Bovespa stock index
of 35
percent.
Embraer's order books are bulging too, mainly because of the 50-seater's
success.
The company's current demand backlog is worth $4.5 billion, equivalent
to about
2 1/2 years of production.
The backlog has led to speculation about a foreign partner for Embraer,
as the
company urgently looks for ways of speeding up production, especially of
the
ground-attack planes and early warning aircraft it produces for the Brazilian
air
force.
Although Embraer turns out an average nine aircraft per month, including
commercial planes, company president, Mauricio Botelho, has said the need
for a
new partner is urgent.
Analysts have pointed to Sweden's Saab AB and Dassault Aviation SA of France
as possible candidates, but neither will confirm any solid plans.
``We are always in discussions with aerospace companies around the world,''
said
Dassault spokesman, Jean-Pierre Robillard in Paris. ``We have visited Embraer
but there have been no talks about a merger.''
Good investment
Embraer's turnaround has paid off for the three controlling shareholders,
who paid
154.2 million reais (then equivalent to $182 million) for Embraer four
years ago.
The investors include Previ, the Banco do Brasil pension fund; Sistel,
the pension
fund for Telecomunicacoes Brasileiras SA and Banco Bozano, Simonsen
Privatisation Limited.
Already in the first nine months of this year, Embraer has sold $1.1 billion
worth of
aircraft, compared with $766.5 million in the whole of 1997.
To bolster sales, Embraer will raise investment by 53 percent next year
to $200
million, spending money in a range of areas including product development.
Still, Embraer faces several challenges in coming months, including a possible
slowdown in aircraft demand as the global economy slows. Boeing, for example,
is
slashing up to a fifth of its workforce, in part due to sluggish demand
in Asia.
What's more, Embraer is still locked in a lengthy trade dispute with Canada's
Bombardier over alleged state subsidies.
``We're not going to lose,'' Botelho said. ``I think in the end, both companies
will
have to compromise.''