Embraer

Empresa Brasileira de Aeronautica, S.A.

Global Research Integrative Project 2005

Embraer

„ Headquartered in São Jose dos

Campos, Brazil
„ $3.4 billion in sales for 2004
„ 16,500 employees
„ Product lines
‰ Commercial Aircraft
‰ Military Aircraft
‰ Corporate Jets

Global Research Integrative Project 2005

Embraer: Regional

„ ERJ 145 „ ERJ 135

‰ 50 Seats ‰ 37 Seats

Global Research Integrative Project 2005

Embraer: Regional

„ ERJ170
‰ 70 Seats
„ ERJ175
‰ 78 Seats
„ ERJ190
‰ 98 Seats
„ ERJ195
‰ 108 Seats

Global Research Integrative Project 2005

Embraer: Defense

„ Super Tucano „ AMX

Global Research Integrative Project 2005

Embraer: Corporate

„ Legacy Executive Jet „ Light Jet (LJ)

‰ 6 - 7 Passengers
„ Very Light Jet (VLJ)
‰ 4 - 6 Passengers

Global Research Integrative Project 2005

Brazil

Global Research Integrative Project 2005

Brazil and Embraer

Brazil Embraer
„ The Miracle Years (1962 – „ Birth (1969 – 1973)
1973)

„ Growth with Debt (1974 – „ Life (1974 – 1989)

1980)
„ Near Death (1990 -1994)
„ Stop and Go (1980 – 1994)

„ The Cardoso Program (1994) „ Privatization (1994)

„ Brazil Today „ Embraer Today

Global Research Integrative Project 2005

Brazil: 1962 - 1973

The Miracle Years

GDP Growth

15
Percentage Growth

10

0
1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973
Source: World Bank

Global Research Integrative Project 2005

Embraer: 1969 - 1973

„ Established 1969
„ Three Segments
‰ Defense Aircraft
‰ Regional Passenger
Aircraft
‰ Special Purpose Aircraft

Global Research Integrative Project 2005

Brazil: 1974 – 1980

Growth: GDP and External Debt

12 80000

70000
10

60000

8
50000

6 40000 gdp
debt
30000
4

20000

2
10000

0 0
1974 1975 1976 1977 1978 1979 1980

Global Research Integrative Project 2005

Brazil: 1980 - 1994

Stop and Go
GDP Percentage Growth

10
5
0
-5
-10
80

82

84

86

88

90

92

94
19

19

19

19

19

19

19

19
Source: World Bank

Global Research Integrative Project 2005

Embraer: 1974 - 1989

„ Success in Regional
and Military Aircraft

Global Research Integrative Project 2005

Embraer: 1989 - 1994

„ End of the Cold War

„ Worldwide Recession

Global Research Integrative Project 2005

Brazil: 1994

„ The Cardoso Program

ˆ Currency Reform

Global Research Integrative Project 2005

Brazil: 1994

The Real Plan

% a.m
85 Plano Collor I
75
65 Plano Verão
Plano Collor II
55 Plano Bresser
Plano Real
45 Plano Cruzado
35
25
Pré-fixação da
15 correção monetária e câmbio

5
-5
Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul-
76 77 79 80 82 83 85 86 88 89 91 92 94 95 97 98 00 01 03 04

Global Research Integrative Project 2005

Brazil: 2005
Interest Rates

Global Research Integrative Project 2005

Brazil: 1994

„ The Cardoso Program

‰ Currency Reform
‰ Privatization

Global Research Integrative Project 2005

Embraer: 2005
Current Ownership
Controlling
Shareholders
Sao Paulo Stock
6.9
Exchange
32.6
Brazilian Government
37.1
European Group

7.7 0.3 15.4

New York Stock
Exchange
BNDES

Global Research Integrative Project 2005

Embraer: Privatization

„ A New Strategy
‰ Bet on the Regional Jet

Global Research Integrative Project 2005

Brazil: 1994

„ The Cardoso Program

‰ Currency Reform
‰ Privatization
‰ Trade Liberalization

Global Research Integrative Project 2005

Brazil: 2005
Balance of Payments

Global Research Integrative Project 2005

Embraer: 2005
„ 2nd Largest Brazilian Exporter
5
4.5
4
3.5
3
2.5
2 US$billions
1.5
1
0.5
0
Pe

Em a s

CV

Bu

Vo Ali

Ca

Ha

Fo

Sa
en gr ic
tro

ng

lk

rg

rd

bi
RD

lli
br

er
sw e nt

bu

a
ill
br

ae

al
A

rt
ag
r

on
en
m

ot
or
ol
a

s
os

Source: Industry and Trade Ministry

Global Research Integrative Project 2005

Aircraft Industry Worldwide

„ Major Industry Divisions

‰ Commercial
‰ General Aviation
‰ Military

Global Research Integrative Project 2005

Commercial Aircraft Industry:
Worldwide 2003 Demand

$42 billion US$

Large Jets
$6.2 billion US$
Regional Jets

„ Forecast to grow at 5.7% CAGR

Source: Airbus Global Market Outlook 2004-2023

Global Research Integrative Project 2005

Market Segments:
Large Commercial Jets

„Includes aircraft with more than 120 seats

„Generates $42 billion in sales annually
„Forecast to grow at 5.2% CAGR

Global Research Integrative Project 2005

Market Segments:
Regional Commercial Jets
Regional Jet Market Share

Bombardier

70% Embraer
58%
42%
30%

2003 2004

„Includes aircraft with fewer than 120 seats

„Generates $6.2 billion in sales annually
„Forecast to grow at 6.6% CAGR Source: Boeing Commercial Market Outlook 2004

Global Research Integrative Project 2005

Competitive Analysis of the
Commercial Aircraft Industry

„ Highly competitive industry

„ Fierce rivalry between two dominant players

Global Research Integrative Project 2005

Capital Requirements

„ $500 million to develop the ERJ 170

‰ Additional $850 million to complete the family
„ Seven years from initial design to first
delivery of the Boeing 777

„ 12 to 20 years to breakeven on new model

Global Research Integrative Project 2005

Suppliers

Global Research Integrative Project 2005

Risk-Sharing and Partnering

Source: Boeing website

Global Research Integrative Project 2005

Buyers

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Total Care Package

„ Bundled Services
‰ Financing of aircraft purchases
‰ Maintenance programs

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Intensity of Rivalry

„ Competition among manufacturers to secure the

initial launch orders is heated.

„ Barriers to exit are high.

Global Research Integrative Project 2005

Rising Breakeven Points in the
North American Market
85

80

75 72.4 72.2
70.9 71.1
70.3 70
69.3
70 67

65

60
1995 1996 1997 1998 1999 2000 2001 2002
Passenger Load Factor %
Break Even Point

Source: IATA

Global Research Integrative Project 2005

Change in Regional Jet Networks

January 1995 January 2003

76 Routes 1,874 Routes

January 1995 January 2003

Source: Embraer Market Outlook 2004-2023 104 Routes 1,072 Routes

Global Research Integrative Project 2005

Key Success Factors (KSF)

„ Market Analysis
„ Design/R&D
„ Access to Capital

Global Research Integrative Project 2005

KSF: Market Analysis for the
ERJ170 Family

Global Research Integrative Project 2005

Demand

„ Domestic airline traffic is rising in the U.S.

„ More than 50% of North American flights
carry fewer than 100 passengers
„ 38% of United’s routes carry 80 – 100
passengers
„ 95% of U.S. flights are within 1,700nm range

Global Research Integrative Project 2005

Major Airline Fleets

Global Research Integrative Project 2005

Tap the Gap

„Market Segment Identification

Global Research Integrative Project 2005

Outlook for 70 – 110 Seats

Segment 2004-2013 2014-2023 2004-2023

61-90 1300 1600 2900
91-120 1250 1700 2950

Total 2550 3300 5850

Global Research Integrative Project 2005

KSF: Design/R&D
„ Embraer has focused on:
‰ Shortening development cycles
‰ Quick entry into new markets
‰ Flexible production capacity

Global Research Integrative Project 2005

Engineering Expertise
„ Government Support
‰ R&D labs
‰ Engineering research
„ Employee Development
‰ 18-month training in aeronautical engineering
„ Employee Participation
‰ Painting of the ERJ190

Global Research Integrative Project 2005

Utilization of Suppliers

Source: Embraer Website

Global Research Integrative Project 2005

KSF: Access to Capital

„ Government Supported R&D Labs

„ BNDES
‰ Finance suppliers
‰ Export financing
„ Supplier Financing
„ Traded on NYSE and BOVESPA

Global Research Integrative Project 2005

Industry Opportunities

„ Growth of regional airlines and discounters

„ Emerging markets, especially Asia
„ Subcontracting

Global Research Integrative Project 2005

Industry Threats
„ Terrorist attacks
‰ Boeing lost 600 orders
after 9/11
„ Failure of legacy airlines
„ New entrants into
industry
‰ China, Japan, Russia

Global Research Integrative Project 2005

Embraer’s Current Strategy

„ Building on brand identity

„ Developing the regional jet market
„ Expanding maintenance facilities
„ Moving into the Chinese market

Global Research Integrative Project 2005

Embraer’s Current Challenge
Revenue Distribution

Source: Embraer Annual Report 2004

Global Research Integrative Project 2005

Embraer: Diversification Strategy

„ Military

„ Legacy Corporate Jet

„ May 3, 2005 Headline:

“EMBRAER EXPANDS ITS BUSINESS JET PORTFOLIO”

Global Research Integrative Project 2005

May 3, 2005: Embraer announced
Very Light Jet and Light Jet offerings

Item Embraer VLJ Embraer LJ

Price US$ 2.75 million US$ 6.65 million
Size 4-6 Passenger 6-7 Passenger
Entry Into Service mid 2008 mid 2009

R&D Investment US$ 235 million

Global Research Integrative Project 2005

General Aviation Market

18% Cessna

16% Gulfstream

Bombardier

Raytheon

40% Dassault
15%
Other
1% 10%

Market Share by Manufacturer – 2003

(number of deliveries) Source: Planemarkets website

Global Research Integrative Project 2005

General Aviation Dynamics
Projected Demand 2004 – 2023

Very Light Jets - $1 to $3 million ea.

4-6 Passengers

Light Jets - $3 to $8 million ea.

5-8 Passengers

Medium Jets - $8 to $20 million ea.

8-10 Passengers

Large Jets - Over $20 million ea.

10-20 Passengers

0 2000 4000 6000 8000 10000

Units Source: Rolls Royce website

Global Research Integrative Project 2005

Competition in the General Aviation
Industry
„ Greater number of manufacturers
„ Brand loyalty
„ Lower price sensitivity
„ Focus on performance
„ Alternative options in transportation

Global Research Integrative Project 2005

Key Success Factors

„ Market Analysis
„ Design/R&D
„ Access to Capital
„ Importance of Bundled Services
‰ Finance
‰ Service & Maintenance

Global Research Integrative Project 2005

GRIP Recommendations:
General Aviation
„ Create brand identity
„ Develop bundled services offerings
„ Build sales competencies & distribution network
„ Initially, focus on fleets

Global Research Integrative Project 2005

GRIP Recommendations:
Regional Jets
„ Maximize first-mover advantage
‰ No direct competition for 170/190 family

Global Research Integrative Project 2005

GRIP Recommendations:
Regional Jets
„ Erect Barriers to Entry
‰ Promote entire regional jet family
‰ Flexible switching options

Global Research Integrative Project 2005

GRIP Recommendations:
Regional Jets
„ Develop new markets for mature products
‰ Introduction of ERJ145 to the Chinese market

Global Research Integrative Project 2005

GRIP’s View of Embraer

„ Positioned to grow
„ Viable diversification strategy
„ Great opportunities for success

Global Research Integrative Project 2005

GRIP 2005

„ Questions?

Global Research Integrative Project 2005

GRIP 2005

„ Full copy of our report:

‰ http://www.ciber.business.ku.edu/students/grip_presentation_2005.pdf

„ GRIP homepage:
‰ http://www.ciber.business.ku.edu/students/grip.php

Global Research Integrative Project 2005

GRIP 2005

„ Thank You!
„ Obrigado!

Global Research Integrative Project 2005