With the world economic situation expected to continue to impact Airbus and Boeing jetliner orders in the near future, Embraer this week may bid to be the star of Farnborough '98 with significant ERJ-135/145 orders at the show. Announcement of the orders will commence at 1030 hours today and continue at 1300 Tuesday, according to CEO Mauricio Botelho, and will be timed to accommodate stock markets in Brazil, Europe and the U.S.

"Things are developing quite nicely," he told Show Daily in an exclusive interview. "We expect to have good news." He indicated there could be more than two orders, but declined to elaborate.

Potential customers include American Eagle and Continental Express, which already operate the 50-seat 145, and USAirways Express, which is expected to make a regional jet move this fall. Northwest Airlink Mesaba also is evaluating smaller regional jets to mate with its Saab 340 turboprop and BAe RJ85 quadjet fleets.

Mauricio sees the regional jet manufacturers benefitting from the world economic crisis, a crisis he said is still warming up. "It is getting hotter. Industry as a whole is starting to feel the impact.

"The bigger challenge will be how Japan handles the crisis," he said. "It will have a major impact. Russia is small by comparison." Mauricio said that regional aircraft manufacturers are in a better position than the larger aircraft manufacturers, as an economic downturn is expected to lead greater demand for smaller rather than larger aircraft.

"Furthermore," he said, "regional jets allow companies to create new markets they cannot service with turboprops. The market will be firm for a long time. The major airlines, on the other hand, have started to be impacted, traffic to Asia from the U.S. and Europe. The downturn has started," he added.

"The regional airlines have spread their networks and created new markets, not only hub and spoke, but between city pairs that would not support them in a good economy. Passengers want to fly jets." Embraer, Mauricio added, "is very strong in profitability, backlog and customers. Production is committed for nearly two years out and the ERJ-135 may represent additional benefits for existing 145 operators." Airlines that operate both may realize a savings of 10% over those that operate two types of different manufacture.

Mauricio said the company "is very happy to celebrate 12 months of profitability." Embraer recently reported six-month revenues of $560 million for the period ended June 30 with a consolidated profit of about $41 million after taxes-a margin of 7.3%. The company previously reported profits for the last six months of 1997. The last company profit was in 1989 and for the first time since 1981, Embraer will distribute dividends this year.

One cloud hanging over Embraer is the spread of "Asian Contagion" into Latin America and the threat of a devalued Brazilian real. Mauricio sees little threat to devaluation because Brazil currently has hard reserves of $76 billion, of which only $16 billion is volatile-migrating from country to country in investments. He said that $10 billion to $13 billion left the country in the last month, which he said was "nothing extraordinary. The government has already taken some action on taxing the gains. I do not see any significance." Embraer is further protected against currency devaluation because the company buys in U.S. dollars and sells in U.S. dollars, as does the rest of the world's aerospace sector.

Production-wise, Mauricio said the company is prepared to go to 12 aircraft per month for both types from 1999 onward along the same production line--144 units per year. It will reach 100 aircraft in 1999. The production rate was only three per month in December 1997. Increasing production rates is at tremendous costs in engineering and industrial investment, so it is necessary to know how long those rates will last, he said. The company is investing $140 million in manufacturing this year, of which $50 million is in production lines, revamping management systems and installing new machinery.

Some areas of the company, such as the machining center, are operating three shifts per day, while others are operating two shifts and some are on one shift. Manpower dropped from 6,200 when the company was privatized in December 1994 to 3,200 in April 1997. It is now up to 5,400 and could reach 7,000 by the end of 1999. Productivity per employee has grown from $40,000 in revenue per employee to $240,000 this year. Mauricio said that when he arrived at Embraer in 1995, 50% of the employees had been with the company 20 years or longer and 80% for 10 years or more. "Motivation was very low because they had reached the higher level of their careers. So we brought in younger people [and balanced it out.]"

Complete throughput time for both the Brasilia and 145 is down to six months, but assembly-to-delivery time for the 145 is now 31 days. "It is not a ride in the park; it is much tougher than that," he said. Mauricio said the Brasilia would probably be in production for another five years, albeit at lower rates. The company is developing a cargo version targeting special military operations such as unimproved-runway operations and the ability to transport F-16 engines, for example.

Unlike competitor Fairchild Dornier, Embraer has no desire to enter the corporate or business jet market for either the 135 or the 145. "We will introduce a VIP version of the 135, but very softly," Mauricio said. It will be a corporate shuttle, but geared toward military and government customers. "Some governments have shown interest, Brazil and other countries," he said.

By Arnold Lewis