Bigger would be better for Embraer

While annual revenues at Embraer hit $6.3bn in 2014 – up from $6.2bn in 2013 – the Brazilian OEM’s profitability fell as airlines opted for the smaller of its E-Jets where margins are smaller.

In publishing its annual results on Wednesday (March 4), Embraer confirmed that during 2014 it generated $543.3m of profit before tax and interest (EBIT). And while the OEM achieved its revenue targets, its EBIT margin of 8.6 per cent fell short of the 9-9.5 per cent margin it had anticipated for the year. 

  1. Embraer cited the “higher mix of E175 jets in deliveries coupled with lower than anticipated large jet deliveries” as the “principal drivers” of the below-guidance results. 

And the trend is set to continue. In its outlook for 2015, Embraer states that it expects to deliver a “less favourable mix” of aircraft with a higher portion of E175s than in 2014. As a result, the OEM is predicting that its EBIT margin will shrink further.

Embraer currently expects to achieve an EBIT margin of 8-8.5 per cent during 2015, despite ending 2014 with a backlog of orders worth $20.9bn – 15 per cent higher than the year before – and predicting that total revenues will hit $6.1bn-$6.6bn, which is $100m higher than its guidance for 2014.

In total, Embraer expects to deliver 95-100 commercial jets in 2015 (up from 92 in 2013) and 125-140 executive jets (up from 116). While it expects to deliver a greater proportion of large executive jets this year, it confirms that with US carriers opting for 76-seat aircraft that the E175 is likely to represent the majority of its commercial deliveries.

And for Embraer size really does matter when it comes to profit margins. The E175’s popularity is leaving the jet maker with the issue of increased revenue, more aircraft to deliver, but less profit.

Embraer’s results might also prove to be a red flag for Bombardier. With the CSeries, particularly the CS100, set to compete with the larger E-Jet models confirmation that it is the E175 that is proving most popular might give the Canadian jet maker pause.

The check comes as Scotiabank analyst Turan Quettawala told the Financial Post that a write-down on the programme was likely.

“In our view, the programme cost is way too high and the programme is not likely to be value additive even if we take Bombardier’s relatively aggressive deliveries projections,” he said.

According to Quettawala even if Bombardier hits 100 aircraft deliveries a year, the $2bn programme will not generate any positive value for 20 years.

And it seems that hitting that delivery target might be hard if Akbar Al Baker's opinions are any indication. The Qatar Airways' chief executive told Reuters this week that the carrier was no longer interested in the CSeries because of the delays it has suffered.

"We have completely forgotten about it because you cannot wait indefinitely," he said.

Meanwhile, Quettawala has suggested that Bombardier might want to consider selling the CSeries programme in its entirety.

Embraer would no doubt follow such a development very closely!

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