Embraer Wins USD$4 Billion American Eagle Deal

January 24, 2013

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Embraer on Thursday clinched a deal worth up to USD$4 billion to supply larger regional jets for American Airlines' regional network, sending shares up on hopes for stable production this year.

Embraer and Republic Airways signed a contract for 47 E-175 jets, with an option to acquire an additional 47 aircraft. The new aircraft will be operated by Republic under the American Eagle brand.

The contract provides welcome relief for the order-starved Brazilian plane maker after it lost the first major US order for regional jets under union deals allowing regional affiliates to fly larger planes. In December, Canadian rival Bombardier booked a Delta deal for up to USD$3.29 billion.

And the battle for pent-up demand in the US is just getting started, according to Paulo Cesar de Souza e Silva, the head of Embraer's commercial aviation unit.

"American is still going to buy more of that size plane," Silva said in an interview, laying out the sales campaigns ahead. "We've got American, United, US Airways and regional operators too. In the next 18 months those campaigns will determine orders for about 250 to 400 planes."

Shares of Embraer jumped over 11 percent in early Sao Paulo trading, their biggest one-day rise in almost four years, before paring their gains to be up 9 percent.

Embraer's new contract is subject to court approval due to bankruptcy proceedings at American Airlines -- approval that the plane maker said it expects by the end of March.

Delivery of the dual-class 76-seat jets would then begin in the middle of 2013, with two or three jets arriving per month, according to American Airlines. American agreed to have Republic acquire and operate the planes under a 12-year contract.

Silva said the Republic contract did not involve resale of any used planes, which was a part of Bombardier's Delta deal.

Embraer's output this year has hinged on securing demand for open production slots after a scarcity of big orders bled its order backlog, a pipeline of future revenue, to a six-year low. Some analysts had already cut their 2013 and 2014 output forecasts amid the drought of new orders.

"We are very confident that we're going to maintain production levels this year," said Silva.

The new planes flying in the American Airlines network will be the first to feature a series of mid-generation upgrades, including new wingtips and other aerodynamic changes to boost fuel efficiency by 5 percent.

Part of an industry push for more efficient aircraft, the upgrades are aimed at holding on to customers impatient for an overhauled lineup of Embraer's regional E-Jets with Pratt & Whitney's geared turbo fan, which aren't due for delivery until 2018.