Embraer’s executive jet unit has proven itself a market disruptor, but whether it can sustain that level without new announced products in development and with discounted pricing remains to be seen, particularly as it is separated from the Brazilian manufacturer’s commercial aviation business, market analyst UBS Global Research said in an August 15 market report. Earlier this week at the LABACE show, Embraer executives expressed confidence, saying the business jet division is refining existing models and has plans for developing new products, as well as expanding its customer support.
UBS believes that Embraer as a whole is positioned for improved earnings ratios next year, even without the commercial aviation unit. It estimated as much as an 18 percent improvement in EBITDA for its combined defense and executive jets segment. For Embraer Executive Jets, this estimate is buoyed by a business jet market that is “on the mend,” with improved used inventory and pricing stabilization. The slow growth in utilization and OEM competition, however, dampens that outlook.
The company's executive jet business “has clearly cemented itself as a disruptor,” with deliveries rising from a handful in 2003 to more than 100 each year over the last five years, UBS said. But the analyst provides a more cautious outlook for the unit, expressing doubt that the Executive Jets unit will gain additional share “as they currently have no significant new products on the horizon and they will not be able to continue to undercut their competitors on price.”
According to UBS, the rise of Embraer Executive Jets over the past 15 years is impressive as sales ballooned from $300 million in 2005 to more than $1.7 billion in 2015 and 2016. “Unfortunately, despite the growth in sales, the company has struggled with profitability,” UBS said. “The business cannot continue to operate at a loss, especially if the commercial jet business is no longer helping to offset those losses.”
Deliveries softened 7 percent in 2017 to 109 and have been down 20 percent in the first half, UBS noted, adding, “losses have mounted again.”
Embraer has refocused the business to improve the bottom line and move away from pricing. “It remains to be seen how, if at all, end-market demand returns and if the company can successfully transition the business,” UBS said. “As they move away from pricing, it could prove to be a double-edged sword as volumes could be impacted and what we’ve seen from Embraer over the years is that operating performance is heavily dependent on volume.”
