Embraer To Decide On New Engine End 2012

December 9, 2011

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Embraer, the world's third-largest commercial plane maker, will present plans to re-engine its lineup of regional aircraft to its board of directors at the end of next year, prolonging the wait for airlines eager to fly more fuel efficient E-Jets.

Embraer expects to have the business plan for a new engine ready a year from now, so "the official go-ahead will only come at the end of 2012," Paulo Cesar de Souza e Silva, the plane maker's executive vice president for commercial aviation said.

The first firm orders for the next generation of planes may therefore have to wait until 2013 and deliveries for the new E-Jets may begin only in 2018, a full 14 years after the first generation planes were delivered.

The reward for airlines' wait will be at least a 15 percent improvement in fuel efficiency and the possibility of a longer-bodied version of the Embraer 195, expanding maximum capacity to 132 passengers from the current 122 seats.

"We have to understand exactly what the clients are going to want. Are we going to re-engine two, three or four models? Are we going to change the wings? It's a little early to be talking about costs," Silva said.

Embraer’s approach signals its confidence in the current family of regional E-Jets, which have accumulated over a thousand firm orders since they were launched in 1999 but are now facing mounting competition from upstart rivals from China, Russia and Japan.

A new engine for the jets also reflects Embraer's decision to back away from directly challenging industry giants Airbus and Boeing with a new family of larger commercial planes in the 130 to 160 passenger segment.

Both rivals announced recently that they would install new engines in their best-selling A320 and 737, tightening their grip on the market.

Embraer chief executive Frederico Fleury Curado said on a third-quarter earnings call last month that the company saw little room to enter the larger commercial aviation segment defended by Airbus and Boeing.

Embraer's press office confirmed the following week that Embraer was looking to develop a new engine for its E-Jets at a cost in the range of USD$2 billion.

SALES CHALLENGE

With a new generation of E-Jets on the horizon, Silva recognised that it "is a challenge" to maintain the pace of 100 commercial aircraft deliveries per year, as clients may hold off contracts for upcoming models.

Embraer will continue with its strategy of "investing in performance and developing a new interior" to keep the E-Jets "up-to-date and competitive in order to minimise that risk."

Embraer's goal for commercial aircraft deliveries of 102 aircraft this year could be exceeded by "perhaps two or three planes," and next year's target for deliveries may be "a little more" than this year, according to Silva.

The European sovereign debt crisis, which is forcing dozens of private-sector lenders there to retreat from riskier lending markets, has reduced the availability of financing for new aircraft sales, he said.

As in 2008, when the collapse of Lehman Brothers froze capital markets and dried up private lending, airlines and leasing companies will depend on state-backed export credit agencies for funding for plane purchases, he added.

For next year at least, Silva said Embraer is well-positioned, with financing already lined up for nearly 70 percent of planned deliveries in 2012.

“There were banks in Europe financing planes and ships that are no longer in the market because of the crisis. French, German and English banks... That's the source of a lot of concern," he said.

(Reuters)