Can Embraer deliver as jet backlog grows?

updated 10:50 a.m. ET Sept. 26, 2007

SAO JOSE DOS CAMPOS, Brazil - Workers toil round the clock in Embraer's sprawling assembly plant, riveting plane fuselages and installing miles of electrical cable, as the Brazilian aircraft maker scrambles to meet delivery deadlines for its hot-selling passenger-friendly jets.

Embraer, a former state-owned company that nearly collapsed in the 1990s, added nearly 4,500 Brazilian workers and a graveyard shift this year to boost production at its vast complex of hangars next to an airport built decades ago for Brazil's military.

The company has a record $15.6 billion backlog this year, with orders pouring in for its commercial jets that seat passengers comfortably with no middle seat on medium-range trips, and for its newly expanded executive jet line.

Demand for the midsize jets Embraer makes has risen sharply in the U.S., Europe and Asia as airlines shift their regional fleets to jets that consume less fuel than models like Boeing's 737 or Airbus' A320 but are larger than the cramped 30-to 50-seat regional jets that passengers usually detest.

But Embraer, the world's fourth-largest commercial plane maker after Boeing Co., Airbus and Canada's Bombardier Inc. is struggling not to be overwhelmed by its success.

Second-quarter profits for Empresa Brasileira de Aeronautica SA plunged nearly 50 percent due largely to higher production costs, and executives were peppered with questions by analysts on delivery prospects and when the financial bleeding will end.

Embraer's chief executive, Frederico Curado, conceded that the company underestimated the production challenges that emerged with increased demand, made worse last year after suppliers of wings didn't come through on deliveries, forcing Embraer to take over wing production.

The company was also hurt by the strengthening of Brazil's currency against the U.S. dollar this year because almost all Embraer sales are in greenbacks.

But Curado predicted improved financial conditions for the company in upcoming quarters. He added in an interview that his top task is ensuring Embraer rolls out a jet nearly every other day so airlines like JetBlue, Northwest Airlines, China's Hainan Airlines, Air France-KLM and even tiny Montenegro Airlines get their planes on time.

"My focus is clearly on making sure we deliver on the commitments we have," Curado said.

The company's backlog is less than the $18.2 billion backlog of its main competitor, Bombardier, but analysts generally agree Embraer has the market cornered on passenger comfort at least for now.

"One of the biggest advantages Embraer has is cabin size compared to Bombardier," said Richard Aboulafia, vice president of analysis for the Teal Group, a Washington, D.C.-based aerospace and defense industry consultancy.

By contrast, Aboulafia said, Bombardier's jets, "feel like a long thin tube, like flying in a pencil."

The gleaming Embraer jets leaving the assembly line about a two-hour drive from Brazil's industrial heart of Sao Paulo stand in stark contrast to the planes that Embraer cranked out by the hundreds after the company was created by Brazil's military dictatorship in 1969.

Embraer gained fame in the 1970s and 1980s with its sturdy twin-engine turboprop Bandeirante for commercial and military use. But the company virtually imploded after Brazil became a democracy and the government reduced state funding.

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