ATN: What is the impact of the economic crisis, the Brexit the instability in Europe, new US Government, the terrorist attacks and the huge demographic changes, for Embraer?
JS: For sure, these events create various degrees of uncertainty and that typically negatively impacts travel. In the case of the United Kingdom, with the devaluation of the pound, I had hoped they would enjoy more inbound passengers taking advantage of the reduced ticket prices, on a relative basis, however this tailwind may be neutralized by less outbound traffic. But, we need to let the dust settle on that topic before we can really opine in the impact of Brexit.
Embraer believes that aviation, as a global industry, works best in an environment where people And cargo enjoy free movement. Over the years, commercial aviation has helped people and businesses overcome the physical obstacles that imparted travel, allowing greater connectivity which benefited all. As a general position Embraer favors free travel as much as possible, but we also recognize the security challenges each sovereign state must deal with to ensure safe passage.
That said, the positive relationship between GDP growth and demand for passenger travel remains robust and we expect the demand for regional aviation connectivity, and the feed of hubs to remain on an upward trajectory.
ATN: Last year E2 made its first flight ahead of schedule. Can you give an update on the program and first delivery? Is the aircraft as efficient as planned?
JS: We have three E190-E2 prototypes that are now involved in the flight test campaign. The fourth aircraft will entry the test campaign in the coming weeks. The first E190-E2 is scheduled to be delivered to Widerøe in Norway in the first semester of 2018, in line with the guidance that we gave when we launched the program. I can confirm the program continuous to be on time, on technical specification, and on budget; so the three key pillars of the program are being achieved. Some of the tests have been performed like ground low calibrations stall climb performances, break system evaluation and others are all in line with expectation. Very importantly, so is the fuel burn!
One benefit for the E2 program is our ability to take advantage of the data collected over 17 million flight hours from the E1 operations with over 1,300 examples in service,. this valuable learning helps us in our goal to deliver the market an aircraft with a high level of reliability.
In relation to the E195-E2, which is now in final assembly, we will have more news in the coming weeks, in terms of first flight. This aircraft is on schedule to enter into service the first semester of 2019.
ATN: Do you plan to fit a cabin interior in the E2 test aircraft?
JS: Yes we will have flight test aircraft number four equipped with an intermediate version of the interior to perform some of the certification tests. The final interior configuration will be available only by in the second half in this year.
ATN: How exchange rates affect Embraer sales?
JS: We price our aircraft in US dollars, over 90% of our revenues come from outside of Brazil and 80% of our expenses are denominated in US dollars. We have a substantial workforce in Brazil, of course, but we are largely hedged with revenues against costs so Embraer is not as exposed to the Brazilian economic issues including the currency fluctuations. However, as a company we must do everything we can to maintain our competitiveness and are always looking to improve our efficiencies and our workforce supports this initiative very meaningfully.
ATN: Do you focus on a specific market area in the world that you want to invest more, in order to attract more customers?
JS: We are a global organization today. We have 100 commercial jet customers in over 50 countries around the world and we have a core objective of continually broadening our franchise footprint in terms of operator base and geography. We have very large markets in the US and in Europe, but I would say that one area we will have a lot of focus on in 2017 and 2018 is Asia-Pacific and I include of course China in that region. It is a market that we are spending a lot of time understanding the customer requirements in that region, and are investing a lot of human capital resources into our regional offices in both Beijing and Singapore in addition to local onsite warehouse and logistics support. I'm excited about the opportunities for Embraer in Asia-Pacific. The insightful China regional aviation policy issued by the CAAC looks to develop aviation links to the secondary and tertiary cosmopolitan areas, similar initiatives in India all speak to the governments in the region becoming increasingly focused on the proven benefits of regional aviation.
It's likely we will continue to see opportunities in US market as existing customers review their fleets with a view to replacing older equipment from our competitors with the more fuel efficient and increased passenger appeal E-Jets platform. Similarly, in Western continental Europe we see renewed activity with the flag carriers, we have a good activity again in Middle East, so I would say there is a balance of activity across our regional offices.
ATN: How do you manage the process of selling the E1 or the E2?
JS: One of the key success for Embraer is our focus on listening to the customer; the fact that we pay attention to what they telling us and then try to come up with a solution that addresses their requirements. For example, if the requirement is in the US and to compliment and existing E1 fleet, we can deliver that option to them in the form of the E175. Similarly, if an airline is looking for a larger aircraft later in the decade it’s possible the E195E2 is the better solution.
When we think about oil, let’s say at $50 a barrel, then oil account for 25-35% of an airline cost base. Given the low margins airlines outside the US are experiencing, any incremental savings or hedge against rising oil prices are not only very valuable indeed, but critical to remain competitive and perhaps even viable as an ongoing concern. If you don't have the most fuel efficient aircraft in the long run you will be disadvantaged, and in a low margin environment that can mean the difference between surviving or not. Having a more fuel efficient aircraft is ultimately best from an environmental and cost perspective.
But, in the end, it's a decision for our operators and our job is to address their decisions.
ATN: Do you targeting LCC players?
JS: To date, we have not penetrated that market with the breath of operators I would like to see. However, thanks to the amazing operating cost per seat and per trip of the E195-E2 and its enlarged size (three extra rows) I believe we now have a very competitive proposition to present to the LCCs. As the LCCs continue to develop, we expect they are going to look for new markets to serve. LCCs’ have ordered a lot of 737s and A320s; both aircraft are good for the larger metropolitan areas they want to serve. But, as the LCCs model demands continued grow we believe that these airlines will now look to serve secondary and tertiary cosmopolitan areas that can be done more profitable and sustainably by right sizing the aircraft. With the E195-E2, we have changed the paradigm of operating costs that exists and coupled with the extended range and operating performance of the aircraft therefore I believe we now have a very attractive offering for the LCCs.
ATN: Are cargo airlines an important market for Embraer?
JS: We don't have a dedicated freighter example of the E-Jets, but looking ahead I believe there could be a passenger-to-freight conversion program of E190-E1. Today we have a number of operators considering that application. I'm excited about that because it’s another potential support for long term residual values for E1.
ATN: There are more and more leasing companies opting for Embraer aircraft. Is it important for you to have close ties with the leasing companies?
JS: Support from the lessors is very important to our growth strategy. We have crafted a defined strategy for our lessor engagement that today is executed by a dedicated team supporting our lessors around the world. For our market space, we don't believe you should have an excess of lessors with speculative orders, I would say three or maximum four lessors any one time. Additionally, we don't believe it's prudent to sell more than a particular percentage of your inventory to that distribution channel, we estimate that to be between 20-30% on a mature basis. Today with the E1 we have one lessor, NAC, with an outstanding order and on the E2 program we have three lessors, AirCap, our launch customer, Aircastle and ICBC with outstanding orders. However, I think it’s very important to remind your readers that our customer finance team continues to work with other leasing companies that are looking for sale/leaseback opportunities. So, today we have about a third of our fleet owned by over 30 leasing companies and I expect that will probably will grow to 40 percent in the coming years.
ATN: Embraer ended 2016 with 108 aircraft delivered to the commercial aviation market and 117 to the executive aviation market, totaling 73 light and 44 large executive jets. Are you satisfied with the levels of 2016 productivity and what is your estimation for 2017?
JS: In 2016 we delivered in commercial aviation 108 aircraft which was right in line with the guidance that we gave to the market place. We are not yet giving guidance to the market place for 2017, our Chief Financial Officer will likely give that guidance to the market next month. Although, what I would say more generally is that I wouldn't expect any big surprises in terms of 2017. Our intention is to have as smooth a profile of deliveries as possible until the EIS of the E2 and indeed maturity of production of that product. We have successfully avoided the steep valley in deliveries some OEMs experience when launching a new generation of aircraft. Moreover, it’s interesting to note the demand for the E1 remains robust and could be delivered for many years yet - that decision rests with our customers.
ATN: Do you plan with the E2 to have capability to fly out of London City Airport and expand airport’s network?
JS: Yes, the E190-E2 will be certified for LCY operations. Of course today, London City Airport is already served by the E-Jets, the E190s in particular but also the smaller versions of the aircraft like the E170. Many of the European flag carriers use the E-Jets to serve London City. It's very common as you flying in the London City you see several E190s and E170s in different liveries, parked at the gates and on the runway.
ATN: What are the main challenges for Embraer in the next year?
JS: It’s pretty straightforward actually; we have two main challenges at Embraer Commercial Aviation. The first is to ensure we maintain our program excellence and project management around the E2. Our customers are expecting us to be in time and on spec. Our shareholders are expecting us to come in on budget.
Secondly, we must continue to “feed the beast” meaning we need to maintain our momentum on sales to keep the supply chain busy and our production lines full. We are lucky in this regard as we have customers looking for both E1s and E2s, and we can deliver both, whichever the best solution is for the given customer.
ATN: How do you see regional air transportation?
JS: We project in the next 20 years 6,400 aircrafts been delivered between 70-130 seats. Today we have 60% of the aircraft delivered in our segment and our team will work hard to maintain that market share as we go forward. I believe regional aviation will continue to play a meaningful role in North America and Europe as it’s essential for the hub and spoke system. When we look around the world the E175 has been the preferred choice in those regions.
When we look at the emerging markets, we see enormous opportunities in China, India, Mexico and in even in Brazil. Our E190 is the perfect 100 seater and airlines that wish a larger platform can go up to the E195-E2. That family concept with the best operating economics is what I believe will continue to position a Embraer well in the competitive market. I expect new airlines will join the E-Jets program, new countries, new business models; I see a lot of opportunities.
ATN: Are there any final thoughts you would like to share with ATN readers?
JS: We are almost 50 years old and have a 100 jet customers in over 50 countries. One of the cornerstones of excellence is our reputation in services and support after EIS. In fact, in Embraer we call it the "customers care” department. We are a company defined by our values and these values drive our actions. We pay attention to the needs in the market place and we are working with our engineers and try to deliver solutions that best work for the customers. We believe that competition forces us to listen even more attentively to our customers and that can only be a good thing.
We are very excited about the new technologies we have on the E2, we are excited that the fourth test vehicle of the E190-E2 will take to the air shortly to join her brothers and also in a matter of weeks the bigger sibling; the E195-E2, we will take it to the skies sooner than planned. We just announced Wideroe as the E190-E2 launch operator and will shortly announce the launch operator for the E195-E2.
Finally, I would share that our success at Embraer is driven by our culture matched with the engineering and program excellence we have developed over the last number of decades. We will always work tirelessly to listen to our customers, deliver the right solutions and support to the highest level the aircraft after each unit leaves our factors and enters service.