The global airline industry has made a strong recovery since 2010, which means more orders for commercial and executive planes. Brazil's Embraer (ERJ), the world's third-largest commercial plane maker, has ramped up its production of regional and executive jets and is diversifying into other segments, including defense and security.
Embraer delivered 45 commercial jets and 31 executive jets in the first six months of the year and has more than 1,000 firm orders. On June 30, the order backlog totaled $15.8 billion.
As a result of the recovery in the commercial aviation industry, and new orders for executive and military jets, Embraer has raised its target for net revenue this year to $5.8 billion from $5.6 billion. “Initial signs of a recovery in the commercial aviation segment have been observed since the middle of 2010 and a recovery is well under way,” says Embraer management.
Embraer also has diversified its revenue into executive aviation, which accounted for 18 percent of revenue in the second quarter, up from 11 percent a year before.
The firm booked a 51 percent rise in second quarter net income from a year earlier to $98 million thanks mainly to lower income tax due to the impact of the stronger real on Embraer’s dollar-denominated assets.
But the strong local currency has caused some turbulence. The company has about 80 percent of its revenue pegged to the dollar, which has lost 12 percent against the real in the past 12 months.
Meanwhile, about 30 percent of Embraer's costs are in reals. This might be a problem, but the cost-cutting measures that it began implementing more than a decade ago have enabled Embraer to ride out the currency's appreciation, Embraer President Paulo Cesar de Souza e Silva said at the recent Paris Air Show.
Embraer has maintained its margins “more or less the same” despite the appreciation of the real, said Souza e Silva.
Diversifying revenue streams
Headquartered in São José dos Campos, São Paulo, Embraer also supplies defense aircraft for armed forces in Europe, Asia, and Latin America. Its defense and security business accounts for a growing share of revenue.
Embraer recently received orders for five military aircraft, including an Embraer 190 jet and two Airbus C-295 planes from Ghana with delivery due in 2012.
Embraer’s expansion into Ghana indicates its strategic diversification into the world’s broader defense market.
But the plane maker has scaled back investments in product development this year to $160 million from $210 million as a result of increased investment by partners. Embraer faces stiff competition from rivals targeting its core market of regional jets to offset declining orders for larger aircraft.
The company’s product portfolio and diversified global footprint make it a tough competitor for rivals such as Boeing (BA), Lockheed Martin (LMT), and Northrop Grumman (NOC).
Standard & Poor's has affirmed Embraer’s BBB- long-term corporate credit rating with a stable outlook. Embraer reports next on Oct. 31.
© 2017 Newsmax Finance. All rights reserved.