End of Boeing Deal Pushes EMBRAER to Concentrate on Restructuring

RIO DE JANEIRO, BRAZIL – After an unfriendly end to the agreement with American giant Boeing, EMBRAER (EMBR3) started a major restructuring of its operations amid the scenario of chaos in the airline industry caused by the Covid-19 pandemic.

The dispute over the US$5.2 billion (R$27 billion) contract with Boeing will be resolved by arbitration. The industry’s attention now shifts to the measures the Brazilian manufacturer will pursue to overcome this setback.

Among the company’s options are international partnerships and access to a credit line from the National Bank for Economic and Social Development (BNDES), estimated at R$3 billion, which may be released in the coming weeks, according to company executives.

EMBRAER had a difficult first quarter: in one year, its losses were multiplied by six times, nearing R$1.3 billion.

Despite the drop in revenues and exchange rate losses having been the main factors for the result, EMBRAER had been spending money to isolate its commercial operation, which would be passed on to the American group – between January and March alone, it was R$96.8 million. Despite the losses, the company’s shares climbed 3.64 percent on Monday, closing at R$7.41.

As the pandemic has made clients such as Azul defer purchases, there is no point in selling now. Therefore, the focus is to review strategies for the next five years, with the reintegration of the commercial aviation sector.

According to the president of EMBRAER, Francisco Gomes Neto, this internal effort, which should be finalized in the coming months, makes way for new partnerships in product development, engineering, and production.

Speculations are growing in the market that the Brazilian company is being probed by other groups, such as the Chinese COMAC, as well as Russian and Indian companies.

EMBRAER is expected to be weakened should it decide to go it alone, as Airbus has purchased part of the C-Series jet program from Canadian Bombardier, the Brazilian company’s main competitor.

Coronavirus effect

The company also incurred losses in the quarter due to the Covid-19 crisis, such as R$108.6 million in negative fluctuations in the value of EMBRAER’s stake in Republic Airways Holdings, and R$163.1 million in reserves against potential default.

The company said it adopted “a more conservative approach in the context of the pandemic”.

Despite the long list of hardship, EMBRAER executives try to convey optimism. The executive vice president of finance and investor relations, Antonio Garcia, said that the crisis provided a favorable result.

The International Air Transport Association (IATA) estimates that resumption will start with regional flights, a line in which EMBRAER is strong. Garcia says this is currently happening in Europe. Another option is executive aviation, which tends to grow with the migration of business class to private flights.

In a report, BTG bank said EMBRAER’s poor quarterly results were expected. “With the end of the Boeing deal, investors will focus on potential partnerships with other manufacturers, as well as negotiations with the BNDES for a R$3 billion credit,” said analyst Lucas Marquiori.

UBS highlighted that, despite the challenges, EMBRAER showed good profit margins. “We are curious to see if at lower delivery levels for the whole year, particularly in commercial aviation, (the margins) will persist,” he pointed out in a report.

Source: Estadão Conteúdo