Insight – Embraer’s Challenges |

Embraer is a plucky company that has overcome several shocks and challenges. It looks like another is looming and this will test its management. Embraer is facing another round of challenges. The company has demonstrated creativity and resilience. Its products are highly regarded and product support is as good as any OEM. This week's RAA convention in Washington highlighted something. Embraer's commercial aviation division (the largest at Embraer) is heavily dependent on the US regional airline market. It is good news that Embraer has a monopoly on new regional jets. It is also good that the US regional airline market is the world's largest with ~70% market share. Being #1 in the #1 market should be great. Cloudy Skies There are some items that cloud this good news scenario. Scope Clause - an increasingly illogical market constraint to protect pilots at mainline US airlines. Pilots have so much negotiating power these days, the Scope limits are, frankly, out of date. Airlines need to improve fuel efficiency. But they can't because of scope limits on how their regional fleets are made up. It's true US pilots have been shafted by management time and again through business cycles with several bankruptcies. (Does Scope still protect them?) Embraer markets its E-175 in this market and as it consolidates and shrinks the future looks wobbly. Embraer is unlikely to ever see an ROI on its E-175 E2 as it falls outside Scope. Outside the US there are few markets that find the E-175 attractive. That is why nobody has ordered the E-175 E2. E2 - Embraer developed a fine update to its E-190 and E-195 with the E2 versions. Whereas the E-190 was by far the most popular of the "E1" models, the E-195 E2 is now the more popular. The E-190 E2 was kept at the same dimensions as the "E1" version at customers' request. Yet the E-195 E2 is now the betters seller. As mentioned the E-175 E2 has, so far, been a market dud. Competition - Embraer used to compete with Bombardier in regional jets and crossover jets (~100 seats). Embraer did well enough that they saw off Bombardier in regional jets. But Bombardier's C Series was a winner under newer leadership at Airbus. Now Embraer has to face off against Airbus and, frankly, that is about as tough as it gets. Airbus uses the A220 (as the C Series is now named) and the A321 to drive a wedge in the market that neither Boeing nor Embraer can match. Moreover, OEMs depend on their home governments for export credits. Brazil can't compete with the EU and US in this arena. Embraer's best seller is the E-175 with 848 orders to date. Of those, 705 have been delivered and the backlog is 143. Based on 2022 deliveries, that means ~5 years of E-175 production to go. That production focuses on the US. And the US market may see some changes that may impact that backlog. The level of exposure Embraer has to the US is demonstrated by the fact that since 2017 among its top 10 customers, eight are US-based and much of this is based on one model. Transactions Looking at 2022 transactions (new deliveries and second-hand trades) notice below the E2 with only 4% of 164 deals YTD. The E-175 is at 13%. There has been unusual trading in pre-owned E-145s this year because JSX took these from Brazil for its growing business in the US. Embraer also has a new line of freighter conversions of the E-190. A good move, no doubt. But still, we see that new builds are not big enough. Embraer must sell more E2s. The recent upsized order from Canada's Porter is of significant value beyond the revenue. But ask anyone in Canada where these aircraft will be flying and you draw a blank. Porter can't use these aircraft anywhere in Canada without running into stiff competition from much larger airlines, including aggressive ULCCs like Flair or startups like Canada Jetlines. Not only does Embraer need more E2 orders, but it also needs them from the likes of its key EU customer KLM. Order quality is a crucial factor. Here's an example of what happens when you have a relatively weak customer like Air Astana. The airline would never try that with Airbus, its other OEM. We continue to watch this case closely. Orders & Deliveries Looking at Embraer's orders and delivery numbers through 2Q22: Embraer has delivered a total of 1,688 commercial aircraft to date. 52% of these went to the US and 51% of the backlog is for the US. That is a lot of risk in one market. Of the 312 aircraft backlog, 52% is for the E-195 E2 and 46% is for the E-175. 98% of the backlog is two models. Embraer's exposure to the US and the E-175 is an issue to note. Embraer is, as we noted above, resilient and creative. The company is developing a new line of hybrid-powered aircraft. This is clearly a good strategy. There are many questions about the powerplants and the entry into service time horizon. But Embraer already has initial customer interest. It helps this airline gets Norwegian state funding to support air service to small communities and Norway is blessed with an abundance of hydroelectricity. But it would be far more compelling if they could assemble more customers - for example, its E2 customer in Switzerland, Helvetic. Energia and the future The Energia line needs customer endorsements and given the rush seen from airlines to startups like Heart Aerospace, this becomes obvious. Has Heart ever produced and certified an aircraft? Airlines and lessors can bank on Embraer's track record. Where are they on Energia? We can see customers lining up for the Embraer EVE program, where Embraer has a lead that is impressive. Embraer is bankable, yet in the segment where we would expect more support, there is little. Embraer has proven itself a leader in the regional airline business. Between eVTOL and regional airlines, there is no big gap. Embraer clearly has both covered. The current E-175 is unmatched and earned its monopoly spot. The aircraft can use SAF, giving it state-of-the-art ESG credentials. Current customers keep topping up their fleet as they retire older models as Scope allows. As we learned from the RAA event this week, US airlines are sanguine about the promised hybrid and electrically powered aircraft. As they look forward to a greener future why aren't they endorsing Energia? Conclusion Embraer is exposed to the US market with one model. Currently, the risk is manageable. A significant challenge is to keep its big US customers "onside". Several important customers show disturbing interest in OEM startups (example) that are big on promise but with no track record. There is an argument that much of this interest is greenwashing. Even so, it is not Embraer-focused. We see Embraer's challenges as building a bridge from its current position of strength in the US to its next programs. It must also use this opportunity to expand its footprint beyond the US. For example, where it is able to secure new E2 business (example) or market its freighter conversions (example) these customers should be given a path to Energia and the future programs Embraer will develop. These customers need to be doing what Widerøe is doing and joining the Embraer advisory board.

US Flight Planner - US DoT On-Time Data	Airbus vs Boeing - Official OEM Data
US Airline Schedule Performance - US DoT Data	Daily OEM Production & Deliveries -

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