Embraer: High hopes for new planes
Botelho has spread his business risk out by asking suppliers to take on some of the burden.
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(CNN) -- Ten years ago Brazilian airplane manufacturer Empresa Brasileira de Aeronautica S.A., better known as Embraer, was building turboprops and losing money.
Now it is the world's fourth-largest passenger plane company and the country's biggest and most important manufacturer and exporter.
CEO Mauricio Botelho talked to Global Office about the turnaround in the company's fortunes and the development of its new 170/190 range.
CNN: Tell us what you were thinking about when you first started the 170/190 family?
MB: We always have to look at the market. Following the successful introduction of the Embraer ERJ 145 50-seater regional jet (in 1996) we started to see how the market was performing in terms of the sort of aircraft that were serving different needs. We realized that there was a lack of alternatives when you look at the reach from 70 seats to 120 seats.
Then we approached about 45 different airlines in the world and we realized that there was really a need for a new product. New in terms of what had been built before, but also in terms of a new vision of what was being anticipated.
At that time we were talking about 90-seaters and 110- or 115-seaters but with a wide cabin with that terrible middle seat. We had also seen existing aircraft stretched to provide more seats but with terrible comfort for passengers. Or you had bigger aircraft designs shrunk to fill a niche. When you reduce an aircraft the structure remains the same so it's heavier and more expensive to operate.
We designed this family of aircraft with commonality in mind, allowing for airlines to save on costs by having the same crew operating any aircraft, the same logistics, the same spare parts. At the same time they offer superb comfort for passengers. I don't call it a regional jet; I call it a small-large jet because that's the feeling that you get when you enter.
CNN: How much money did you invest in the project and what steps did you take to keep costs down?
MB: It is a very large investment for us -- in total around US$1 billion and I'm very proud to say with no support from the government. All of these funds were brought from market solutions, coming from an IPO of our shares on the NYSE and Sao Paulo Stock Exchange; cash generation from our own operation; investment from our main suppliers who became risk investors in the program.
From day one our suppliers had full confidence in our ability to develop, market and sell this aircraft. Of course when you plan and then start to develop you have to keep a close eye on spending and keeping the costs on target. We've benefited in fact because a large percentage of our development costs are in Brazilian reals. We had very strong devaluation so that helped us to keep the investment at the same levels even when we were developing the fourth aircraft which was not planned at the beginning.
CNN: Perhaps you could speak a bit more about the relationship with the suppliers - you've got more heavily involved with your suppliers than in the development of previous planes.
MB: We developed the concept of a re-sharing partnership from the ERJ 145 and that was caused by necessity. At that time, at the beginning of the '90s, Embraer was in a very bad financial situation and it is interesting to notice that the concept of the regional jet which was not something acceptable in the '80s because no-one would conceive of developing a jet to operate in short-hauls in a thin market. But by the end of the '80s, simultaneously in Brazil and Canada, this concept started to be worked on. What promoted the success of this concept was the development of engines that could be successfully operated in such conditions. And in Canada it was developed earlier than in Brazil because of the situation that Embraer was living with at the beginning of the '90s. After the company was privatized in '94 we then fully backed its development and eventually reached today's successful products.
But when we started funding was a big problem. So then we asked some of our suppliers to invest in the program rather than paying us, and that proved to be a good approach. For the 145, we had about 145 suppliers and about four re-sharing partners. For the 170/190 family, we have 22 re-sharing partners and about 40 suppliers. So as the scope of work of the re-sharing partners grew, their responsibilities grew bigger -- not just providers of equipment but also providers of subsistence. This approach has worked very, very well.
CNN: How many planes will you deliver this year?
MB: We are forecast to deliver 160 aircraft this year and 170 next year. And this is a lot because of the introduction of this new family of aircraft. In total value, we start the year with a total backlog in the range of $10.6 billion. If we include the options, it would go to $28.5billion. It is a very significant order book. Furthermore, for the 145 family in the range of 190 aircraft to be delivered, firm orders, and 245 firm orders on the 170-190.
CNN: What's your competitive advantage over, say, the 717 or the 318?
MB: Just economics. As I said, the A318 is of course a very good aircraft but it is shrunk from the A290 which is already shrunk from A320. So this means that the A318 will weigh something around 10 to 12 tonnes more than our Embraer-190. As you know, in air transport, weight means dollars not only to acquire but also more importantly to operate. This is our competitive advantage: we are providing an aircraft that is, in my view, more comfortable than an Airbus A318 because you don't have middle seats. You are at the aisle or at the wing in a very wide cabin with seats that are wider as well.
CNN: Looking back over the last 10 years, to what do you put down your success? The last two years have been iffy but generally speaking you've had a pretty stunning decade.
MB: Doing the proper things at the proper moment. Not being shy in taking decisions. Not being afraid of taking on the responsibilities of making decisions. And I think not losing the sense of the business, which is not to produce aircraft but to serve your customer. That is what really makes and creates value because the rest is just a means to that end.
CNN: How important is Embraer to Brazil? I'm thinking both in terms of its prestige company but also perhaps its importance in terms of trade balance?
MB: I think it is important. We have been ranked in the first position among the Brazilian exporters for five or six years. We were ranked in the first place for three consecutive years but after 2001 we've come down. Last year, we ranked third so it is a significant contribution. Since the company was privatized in 1994 in January '95 up to last year we've exported something around $15billion with a net contribution for trade balance in the range of $5.5billion. We have taken a company that was in dramatic situation with losses and lack of investment and we have built up a company which is very strong in the world market and has a very good image with customers from the financial community and the industrial community.
We have been creating jobs in Brazil. We have contributed to the development of the universities and the teaching systems. We have our own aeronautical engineering graduate school at a Masters level, which is outstanding. Each year and a half, we graduate 200 specialists in aeronautical engineering, totally cost by us. We make a very strong social contribution not only in terms of paying tax but also to the communities in which we operate.
I say that no matter what we do for social reasons there's no better benefit than the good development of your own business because that is when you really promote growth for all the employees, their families, those that you hire, companies that you sub-contract and so on. There are forecasts that the total number who are impacted by our activity in Brazil is more than 150,000 people. And that really gives us a lot of satisfaction.
Mauricio Botelho was talking to CNN's Andrew Carey.