Case Details: Price:

Case Code : BSTR243 For delivery in electronic format: Rs. 500;

Case Length : 31 Pages For delivery through courier (within
Period : 1969-2006 India): Rs. 500 + Rs. 25 for Shipping &
Pub Date : 2007 Handling Charges
Teaching : Available
Note Themes
Organization : Empresa Brasileira de
Aeronáutica S.A Turnaround
Industry : Aerospace
Countries : Brazil

Abstract:

Brazil-based Embraer was the fourth largest

aircraft manufacturer in the world behind
Airbus, Boeing, and Bombardier Aerospace.
Embraer was set up as a government
company in 1969, and privatized in 1994.

This case examines Embraer's turnaround

and growth after its privatization. It
discusses the steps taken by Mauricio
Botelho (who became the CEO after the
privatization) to return the company to
profitability, as well his handling of various
strategic and human resource issues during
and after the turnaround. The case then
explores Embraer's entry into the regional
jet market, where it had to compete against
Canadian aircraft major Bombardier.

It also talks about Embraer's use of international strategic alliances to gain expertise in
aircraft manufacture, and its aggressive marketing of its new regional jets to various
airlines.

A section of the case discusses the various facets of Embraer's competition with
Bombardier in the regional passenger jet market. The implications of the dispute
between the two companies - which went before the WTO - and its impact on the
political and economic relations between their home countries are also mentioned.
The rest of the case includes a commentary on Embraer's future prospects, where
issues like airline scope clauses, the resurgence of turboprops in the early 2000s,
Embraer's problems with its E-Jets, and the company's excessive dependence on
revenues from the export of passenger jets are discussed. The case ends with a
description of Embraer's restructuring efforts in early 2006, including the company's
new capital structure.
Issues:

» To examine and understand the issues involved in the turnaround of a company

» To understand the differences in the business environments of developing and

developed countries

» To analyze the competitive advantages and disadvantages of an aircraft

manufacturer based in a developing country

» To understand the strategies adopted by a company based in a developing country to

compete in a highly volatile global market

» To examine the impact of a successful company on the economic development in its

home country

» To understand the role of strategic alliances and international partnerships in a

highly competitive and technology-intensive industry

» To study the implications of international competition on the political and economic

relations between countries

» To analyze the characteristics, structure and future prospects of the global aircraft
manufacturing industry, with a special focus on regional passenger aircraft

Contents:

Page No.
Embraer Launches New Business Jet 1
Background Note 2
Privatization and Turnaround 4
Focus on Regional Jets 5
The E-Jet Era 6
The Embraer - Bombardier Face-Off 9
Business Jets and Microjets - The Emerging Trend 11
The Outlook for Embraer 12
Exhibits 16

Keywords:

Empresa Brasileira de Aeronáutica S.A, Embraer, Brazil, Aircraft manufacturer,

Aerospace industry, Regional jets, Bombardier, Mauricio Botelho, Bonazo Group,
Turnaround, E-Jets, Strategic alliances, Microjets, Boeing, Airbus
"Embraer is one of the hottest manufacturers in the industry today. They're willing to
push into areas that others haven't explored."

- Donald Burr, the founder of People Express Airlines1, in 2004.2

"A lot of people have tried and failed. But since 1960 only one new company and one
new country have successfully entered the commercial aircraft market."

- Richard Aboulafia, an analyst at the Teal Group Corporation3, in 2005.4

"Years ago our competitors said: 'How dare those ugly ducklings from South America
try to sell a jet in the Northern Hemisphere' Fortunately, they underestimated us."

- Satoshi Yokota, Embraer's Executive Vice-President for

Engineering and Development, in 2006.5

Embraer Launches New Business Jet

In May 2006, Empresa Brasileira de

Aeronáutica S.A. (Embraer) announced the
launch of its new business jet, the Lineage
1000 (Lineage). The Lineage's design was
based on Embraer's successful E-190
regional passenger jet6 platform, and the
aircraft had the capacity to seat between 13
and 19 passengers, depending on the cabin
design. The cabin could be split into five
zones, and customers could choose from a
variety of interior design options, which
included putting in a standup shower and a
full-size bed. The Lineage was a long haul
plane, with a range of 4,200 nautical miles.

Embraer called the Lineage an 'ultra-large'

business jet, and was expected to position it
against the Boeing Business Jet7.

The first Lineage aircraft, which was priced around $41 million8, was scheduled to
enter service in late 2006.

The Lineage was the newest addition to

Embraer's range of business jets, which
included the Legacy 600, the Phenom 100,
and the Phenom 300. As of mid-2006,
Embraer was the fourth largest aviation
company in the world (in terms of aircraft
deliveries), behind Airbus SAS (Airbus),
The Boeing Company (Boeing), and
Bombardier Aerospace (Bombardier) (Refer
Exhibit I for a note on the aviation industry
and the profiles of major aircraft
manufacturers). In addition to business jets,
Embraer also manufactured commercial,
military and agricultural aircraft (Refer
Exhibit II).

Embraer was set up in the late 1960s, as a

public sector enterprise by the Brazilian
government.
Embraer Launches New Business Jet Contd...

After some initial successes, the company

ran into trouble in the late 1980s, and was
privatized in 1994. Under private
management, Embraer concentrated on
developing regional jets, which pitted it
directly against Canada-based Bombardier
(the first company to introduce regional jets)
in the aviation market. Embraer made a
major foray into business jets with the
successful launch of its Legacy 600 in 2000.
After this, analysts said that the company
was well positioned to take advantage of the
rapidly growing market for small and mid-
sized aircraft and business jets in the early
2000s. In 2005, Embraer had a net income
of $446 million from revenues of $3.8
billion, and employed nearly 17,000 people
(Refer Exhibit III for Embraer's key
performance indicators).

Background Note

Embraer was set up on July 29, 1969 by Brazil's Ministry of Aeronautics. It was the
culmination of the country's aviation ambitions,9 which began to take shape in the
1940s when the Brazilian government formed the General Command for Aviation
Technology (CTA - Centro Técnico Aeroespacial) in 1946, and the Aeronautics
Technological Institute (ITA - Instituto Tecnológico de Aeronáutica) in 1950.

The CTA was a unit of the Brazilian Air

Force, and was the national military research
center for aviation and aerospace. It
coordinated all technical and scientific
activities related to aerospace on behalf of
the Brazilian Ministry of Defense. The ITA
was a government-sponsored engineering
institution and one of the most prestigious
colleges in Brazil. It was set up by the
Brazilian government to nurture and develop
engineering talent in the country. It was a
part of the CTA, and its facilities, including
its laboratories and R&D centers, were
located on the CTA campus. Both the CTA
and the ITA played an important role in the
1950s with respect to aeronautical training
and development in Brazil...
Privatization and Turnaround

In December 1994, Embraer was privatized

by the Brazilian government. Even after the
privatization, the government retained a
golden share with veto power which gave it
control over strategic issues like sale of
shares to foreign investors, employee
relationships, and the terms of sale of
aircraft to the military.

Control over the company was acquired by a

syndicate of Brazilian investors, consisting
of the Bonazo Group (a holding company
with interests in industrial and financial
ventures) and two of Brazil's largest
government-owned pension funds, Previ and
Sistel. Each of these investors held 20
percent of the voting capital of the
company...

Focus on Regional Jets

When Botelho became the CEO of Embraer, with projects running behind schedule,
most of the company's new product development initiatives were in a shambles.
Consequently, Embraer had few products that showed commercial potential. An
exception was the ERJ-145 project , which had been launched in 1989. The ERJ-145
was a 50-seat regional passenger jet, which was being designed to compete against
Bombardier's comparable CRJ-200 aircraft...

The E-Jet Era

The success of the ERJ-145 demonstrated

the potential for regional jets and prompted
Embraer to consider manufacturing a full
range of regional jets to tap more segments
of the market. For a better understanding of
the regional jet market, Embraer surveyed
more than 60 airlines around the world. The
survey indicated that the segment for mid-
sized regional jets was greatly under-served.

Bombardier was the leader in the 50-seat jet

segment, while Boeing and Airbus competed
in the 130-seat segment.

However, no aircraft were available in the 70 to 110-seat segment. This also seemed
to be the segment with the maximum potential. (According to analyst estimates, more
than 60 percent of all flights in the US had been taking off with passenger headcounts
in this range.)...

Excerpts Contd...

The Embraer - Bombardier Face-Off

Competition in the market for regional jets

intensified in the late 1990s. Until the launch
of the ERJ-145, Bombardier had been the
dominant player in the regional jet market,
with its family of CRJ aircraft.
(Bombardier's CRJ-100, delivered to
Lufthansa in 1992, had been the first 50-seat
jet aircraft in aviation history.) At the end of
2005, Bombardier had more orders and
deliveries than Embraer. But Embraer had
more orders on hand. Besides, the net
increase in the number of orders over the
previous year was higher for Embraer than
for Bombardier. The regional jet market had
also been growing very rapidly since the
mid 1990s (According to Fortune, a
prominent business magazine, the market for
regional jets had grown by 1,000 percent in
Europe and around 1,400 percent in the US
between 1995 and 2005)...

Business Jets and Microjets - The Emerging Trend

In the early 2000s, analysts were predicting a growing market for microjets - small
aircraft with a takeoff weight between 5000 and 10,000 lbs, seating less than 20
passengers. These aircraft were usually bought by companies for their higher level
executives, or by operators of air taxi services, although some were bought for
personal use as well. Business jets, on the other hand, were not necessarily small,
although they too were used for similar purposes...

The Outlook for Embraer

Embraer was one the largest and most

successful companies in Brazil. In the years
1999, 2000 and 2001, it was Brazil's largest
exporter. According to the company's
website, between 1995 and 2005, Embraer
had accounted for eight billion dollars of
Brazil's trade balance.

Analysts acknowledged that Embraer

contributed significantly to Brazil's
 economic development and had had a
positive impact on the country's
international image...

Exhibits

Exhibit I: The Aviation Industry and Profiles of Major Aircraft Manufacturers

Exhibit II: Embraer's Products
Exhibit III: Embraer: Key Performance Indicators
Exhibit IV: Brazil and its Economy
Exhibit V: Deliveries and Order Backlog: Regional Jets Versus Turboprops
Exhibit VI: Orders and Deliveries of Regional Aircraft
Exhibit VII: Embraer: Revenue by Region and Segment
Exhibit VIII: Embraer's Restructuring
Exhibit VIII A: Embraer's shareholding pattern as of December 30, 2005
Exhibit VIII B: Embraer's shareholding pattern after the restructuring
Exhibit VIII C: Embraer's capital structure after the conclusion of the
first stage of restructuring
Exhibit VIII D: New Embraer's structure after the Merger