Embraer Sees Price Pressure On E-Jets

August 1, 2012

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Embraer is facing rising pressure to lower the price of its regional E-Jets to land new orders, its chief executive said, as a weaker global economy and stiffer competition drag on sales.

"Pricing pressure is a growing concern, especially if we have to stimulate demand a little bit," CEO Frederico Curado said.

"But so far we haven't done anything outside our classic behaviour, being very conservative in the quality of the deals we have signed."

A weaker global economy, new competitors and aggressive sales campaigns by Boeing and Airbus in the narrow-body segment have made it harder to meet targets for commercial jets this year, Curado said.

But Embraer is still aiming to book a new order for every E-Jet it delivers this year, after its order backlog dropped to a six-year low in June.

"We do have some challenges in the short-term as far as sales. We are still targeting a one-to-one book-to-bill ratio," Curado said. "Of course, it is more challenging than it was three months ago, but it is still possible."

The company said in its second-quarter earnings release late on Monday that a more favourable exchange rate and solid operating performance in the first half of 2012 led it to raise the outlook for profit margins this year.

Embraer now expects earnings before interest, taxes, depreciation and amortisation to be between 12.5 percent and 13.5 percent of revenue in 2012. The company previously forecast an EBITDA margin between 11.5 and 12.5 percent this year.

Brazil's currency, the real, lost 10 percent against the US dollar in the second quarter, which analysts expect to boost Embraer's long-term profitability, as about one-third of its costs and only a tenth of sales are denominated in reais.

SCARCE NEW ORDERS

Still, analysts have warned that Embraer will burn through its order pipeline quickly if it does not land new orders or slow its assembly line.

The company booked about one new regional jet order for every three it delivered in the first six months of 2012, reducing its backlog to the lowest level since 2006, worth around two years of revenue.

A fragile global economy and Europe's debt crisis have depressed new demand for E-Jets, which are facing stiffer competition from Canada's Bombardier and newer Japanese rival Mitsubishi Aircraft.

Looking ahead to next year's production schedule, Curado said he anticipated a slight increase in business jet production.

If Embraer can fill its order book for steady E-Jet output next year, he said, overall business should be stable or expand slightly next year.

Embraer clinched a much-needed regional jet order from Venezuela on Tuesday, when Venezuela's Conviasa Airlines agreed to buy six E-190 jets during a visit to Brasilia by Venezuelan President Hugo Chavez.

The order, which was agreed in principle in December, is worth USD$272 million at list prices and could grow to USD$904 million if the airline exercises options for an additional 14 planes, according to a statement released by Embraer. The first deliveries are planned to start by the end of 2012.

(Reuters)