Embraer warns of production dip in 2018 ‘transition year’

Embraer is viewing 2018 as a “transition year” in which commercial aircraft deliveries and production will dip as the E190-E2 achieves entry-into-service (EIS) and the Brazilian manufacturer contends with the “learning curve” of a new aircraft rolling off the assembly line.

The outlook was presented to investors as Embraer released results for the 2017 third quarter, for which the company posted a net profit of $111.3 million, reversing a $32.5 million net loss in the 2016 September quarter.

Embraer delivered 78 commercial aircraft through the first nine months of 2017 and forecasts 97-102 deliveries for the full year. Last year, it delivered 108 commercial aircraft. But CFO Jose Antonio Filippo said commercial aircraft deliveries will dip into the range of 85-95 in 2018.

“We really think 2018 will not be a typical year,” Filippo told analysts on a conference call. The E190-E2 will enter service in April 2018 with Norwegian regional airline Widerøe and the E195-E2 is slated for a 2019 EIS with Azul Brazilian Airlines. Embraer projects 10% of the commercial aircraft it produces in 2018 will be E2s.

“It is important to mention that the aerospace industry is a capital-intensive business with longer product cycles of 15-20 years,” Embraer stated in guidance provided Oct. 27. “In general, the cycles include a development phase of five years or more followed by a transition period with production ramp-up of one to two years before reaching higher maturity levels where cost efficiencies and scale gains are fully captured. In this context, we see Embraer in the middle of a transition phase with negative impacts on short-term results.”

Next year “will be the learning piece of this process,” Filippo said, adding that “tailwinds” from production efficiencies should begin to be present in 2019 and lead to positive results for the company into the early 2020s. In the early part of the next decade, he expects Embraer to reach an annual production rate of more than 100 commercial aircraft and earn increasingly higher revenue from aftermarket services.

Embraer’s third-quarter 2017 revenue fell 13.5% year-over-year to $1.3 billion “primarily [because of] lower deliveries in the Commercial Aviation and Executive Jets segments,” the company said. Embraer delivered 25 commercial aircraft during the quarter, down from 29 delivered in the prior-year quarter. But deliveries through nine months (78) are slightly ahead of last year’s pace for the first three quarters (76).