February 8, 2008 / 12:24 AM / in 10 years

Brazil's Embraer bets big on luxury business jets

<p>Aviation technicians prepare a prototype of the new Embraer Phenom 100 executive jet at Embraer's factory in Gaviao Peixoto, 270 kms (168 miles) northwest of Sao Paulo, in this January 18, 2008 file photo. REUTERS/Rickey Rogers/Files</p>

GAVIAO PEIXOTO, Brazil (Reuters) - At a factory flanked by orange groves and sugar cane fields, workers are putting the finishing touches on a new plane that will make Brazil’s Embraer a major player in the executive jet market.

The plane, the Phenom 100, is small but roomy, with a cabin outfitted by BMW Designworks that can seat up to eight people. At $3 million, it is a tad pricier than other jets in its class but has twice the lifespan.

It doesn’t take to the skies until later this year and a slightly larger version, the nine-seat Phenom 300, won’t go into operation until a year later. Still, orders for both keep pouring in.

Embraer’s foray into the executive jet market, at a time of burgeoning demand around the world, looks like the latest in a series of smart moves by the company, which once made military trainers and is now a symbol of a surging Brazil.

Embraer has received more than 700 orders for the two new planes, lifting the backlog for its executive jet line-up to more than $4.5 billion. Demand for the new models is growing so fast that it expects business jets to account for 25 percent of its revenue by 2010, up from 15 percent currently.

Like rivals such as Gulfstream and Cessna, Embraer is benefiting from surging demand for business jets. From the oil-rich Middle East to fast-growing countries like Russia and Brazil, wealthy individuals and corporations are lining up to buy Embraer’s private planes. At one air show alone last November in Dubai, Embraer rang up $623 million in orders for 51 business jets.

“I don’t think the competition ever acknowledges that it’s nervous about anybody else, but I‘m sure they are,” said Nigel Moll, editor of Aviation International News, a trade magazine that tracks the business jet industry.

Still, Embraer faces hurdles putting its planes in the air. For one, its executive jet backlog has ballooned so much that new customers face waits of up to five years for a Phenom 100 and six years for a Phenom 300. Fortunately for Embraer, buyers are likely to face similar delays with other manufacturers.

“Backlogs are huge across the industry,” said Ronald Epstein, an aerospace analyst at Merrill Lynch in New York. “This is a reality of the industry today.”

An even bigger challenge may be the slowing economy in the United States, the No.1 market for business jets. The aviation industry has long been hostage to the whims of the economy. Even so, Embraer and industry analysts say the business jet niche is less sensitive to a downturn than it used to be.

“The executive jet has gone from being viewed as a luxury to a crucial business tool in a globalized world,” said Luis Carlos Affonso, who heads Embraer’s executive jet division.

NEW KID ON THE BLOCK

Embraer is a latecomer to the executive jet business. Founded in 1969 by Brazil’s air force to make military training and patrol planes, the loss-ridden company was privatized in 1994 and shifted its focus to regional jets.

Within a few years, Embraer had grabbed nearly half the global market for 50-seat commuter planes, competing head-to-head with Canada’s Bombardier.

In 1998, Embraer identified another niche and began working on a new family of jets that could seat between 70 and 120 passengers, a burgeoning market that bigger plane makers like Boeing and Airbus had overlooked.

These jets soon became the gold standard for long-range regional aviation -- routes like Philadelphia to Kansas City -- winning big orders from carriers such as JetBlue Airways, US Airways and Air Canada.

More than any other company, Embraer symbolizes Brazil’s transformation from an exporter of commodities like coffee and sugar into a nascent industrial power with a mastery of advanced technology. It is one of Brazil’s most global companies, with almost 24,000 employees in six countries.

But Embraer’s success in commercial aviation left it vulnerable to a sudden slump in air travel like the one that followed the attacks on the United States of September 11, 2001. A year later, Embraer decided to try its luck in the executive jet market in an effort to diversify its revenue base.

Its first model was the Legacy 600, a super mid-size jet that can seat up to 16 people. By 2005, sales of the Legacy were booming so much that Embraer moved to expand its product line with the Phenoms, which are being built at a new hangar for business jets in Gaviao Peixoto, a sleepy town in the heart of Sao Paulo state’s farm belt.

“In the business jet market, they’re the new kid on the block,” said Epstein, the aerospace analyst. “But they’re also a very seasoned airplane company. They know how do this stuff really, really well.”

Customers seem to agree. Flight Options, a private jet services company based in Cleveland, Ohio, was so pleased with the Legacy 600s it bought that it decided to make the Phenom 300 the mainstay of its fleet. In December, it placed a $1 billion order for 100 Phenoms with options for 50 more.

“The fuel efficiency of the aircraft is magnificent. The baggage area is amazing. And it’s at the cutting edge of light jet technology,” said Dennis Baker, the company’s director of corporate communications.

Embraer has other models in the works. In May 2006, it unveiled the Lineage 1000, an ultra-large business jet based on the Embraer 190 commercial jet platform that will be ready for delivery later this year. It is also preparing to launch two more all-new models between the Phenom 300 and the Legacy.

In designing these planes, Embraer is using the same focus on productivity that earned it a reputation as one of the most efficient manufacturers in the commercial aviation business.

“In commercial aviation the name of the game is low operating costs, so we learned to make planes efficiently,” said Affonso, the Embraer executive. “We know it’s going to be a challenge to meet all these orders, but it’s a challenge that we’ve prepared ourselves for carefully.”

Reporting by Todd Benson; Editing by Eddie Evans

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