Q: Can you tell us a bit about how Embraer is structured, with respect to its military, regional jet and business jet portfolios and what the interaction is between them?
A: We have three separate divisions in Embraer, namely the commercial division, the executive jets division and then defence and security. Each is fairly autonomous and the commercial sales team has been having very good success in North America particularly. It’s a big continent, well supplied with airports and constitutes an ideal market for regional jets. However, there are real synergies between narrow body regional and large business jets and we hand off sales between our divisions. If a scheduled airline is looking to buy a number of regional jets, that is our commercial division. But if a particular company wants to run a regional jet as a shuttle for its employees that falls into business aviation and our guys take the lead for the sale. And if the customer wants to operate a very specific service we look to the commercial team to provide their flight profiling experience, and so on.
Q: Embraer’s history has been shaped by the successful redeployment of regional jet designs into the business aviation market. How much technology cascade is there between the divisions?
A: Clearly, technology does cascade down. The obvious instance of this is the Lineage 1000. The head-up display (HUD) in the Lineage came to us directly from the commercial division. Some of the airlines wanted HUD in their Embraer 190 aircraft and we, that is the executive jet division, were able to piggy-back on that development and to get certification for it on the Lineage.
Q: You use a range of avionics systems across your portfolio. Can you tell us about that?
A: We use Garmin in the Phenom, Rockwell Collins in the Legacy 450 and 500s and Honeywell in the Legacy 600 and Lineage 1000 at the top end. At the light jet end the avionics that we use fulfil all the dreams and wishes of the individual buyers. We call the Garmin 1000 the Prodigy system. We were the first people to put Garmin into corporate jets when we announced the programme for the Phenom back in 2005. Garmin is, of course, very well known and understood in the turboprop market and the entry level Phenom 100 is a great jet for people transitioning from turboprops. So giving them a cockpit avionics system that they are familiar with in the turboprop market made perfect sense. This decision has been supported by the advances Garmin continues to make in its avionics. We have also proved that our ability to innovate in this space continues. The first delivery of our Phenom 300s to Netjets introduced the Garmin 3000, which we call Prodigy Touch, which was the first time that a jet aircraft per se had a touch screen in the cockpit.
Hondajet have also announced that the Garmin 3000 is going to be their avionics system of choice, but they have not brought their aircraft to certification yet. Garmin are in fact doing very well indeed. They have announced that they have been chosen for the new Learjet and for the Citation Latitude, so they are really branching out and growing up in the business jet space. We value our relationship with them just as much as we love our relationships with Honeywell and Rockwell Collins. At the entry level for light jets, with the Phenom 100, probably around 60% of buyers are owner/pilots and they know their avionics and their airplanes back to front.
On the Legacy 500 and 450, one of the reasons why we chose the Rockwell Collins Proline Fusion was the synthetic vision capabilities. Garmin also have this capability. You cannot put a price on anything that gives pilots a better view of the terrain when they are approaching an airport.
Q: The Lineage 1000 has been very carefully positioned to offer more cabin space than any other aircraft at its price range. Can you tell us a bit about the strategic thinking behind the introduction of the Lineage?
A: We looked at the aircraft available to the market at the US$53 million mark, taking into account factors such as the aircraft’s range, what the cabin was like and what the optimum wings and engines combination would be. Looking at that, our choice was to base the Lineage on either the 170 or 190 regional jet and it seemed clear that the 190 had more to offer. The 170 would not have had the fuel range to go the longer distance and the 190 allowed us to put together the best airframe, wings and engines combination to make the Lineage 1000 a true home away from home for its owners. It is not as wide as the Boeing or Airbus business jets, but the fuselage is longer, which enables us to have five distinct cabin zones. So we can make the entrance foyer by the front door and once you are through the galley area, the rest of the aircraft is available for the owner to design as he or she sees fit.
This has given us a tremendous space per price advantage, with very similar running costs to the competition and our challenge now is to gain visibility in our key markets. Wide body ultra-large business jets are not exactly flying off the charts in sales, and the Lineage 1000 is the perfect replacement aircraft for owners of Global 5000s and Falcon 7x aircraft. We did a study that showed us that the owners of the very long range business jets are not in fact using them to fly extraordinarily long distances. They are flying them mainly because they like the cabin size. With the Lineage we are able to say to them, instead of taking five of your friends, you can take 19 passengers and not have them get in each other’s way. We are able to offer a very large cabin, but without the cost of the wide body ultra large jets or similar costs to the narrow bodied competitors. If we succeed in getting the word out that we have more cabin size to offer for less cost, with very similar life cycle and fuel costs, this will play very well for us.
Moreover, the 190 regional jet has already sold between 400 and 500 aircraft, so the amortisation of the design costs has already happened. This, together with the buying power that Embraer has, drives down the cost of maintenance for 190 and so, also for the Lineage. There are many similarities between the two aircraft. The Lineage has fuel tanks in the belly hold, but from a reliability and cost of parts standpoint the pricing is to airline requirements, not the US$50,000 per windshield pricing you find on business jets! Airlines just will not pay that kind of inflated pricing and our owners benefit from this market discipline. What we find is that when potential buyers look at the total cost of ownership of the Legacy and the Lineage as against our competitors in the market, then if you get that opportunity to do those comparisons, the rest of the sale is quite simple!
You cannot put a price on anything that gives pilots a better view of the terrain when they are approaching an airport
Q: You took the decision recently not to ship green aircraft for completion elsewhere, but to do all the cabin outfitting to the end user’s specifications, at your own completions shop. What prompted that decision?
A: We originally had PATS De Crane doing the completions for us. They were the original installers of Lineage interiors. We would build the aircraft in Brazil, install the long-range tanks and fly it to PATS’ Georgetown, Delaware, completions facility, where the designs were done by the UK company Priestman Goode. However, we found that to be an inefficient way of doing things, since the customer had to come down to Brazil to take delivery of the airplane and the De Crane team would have to come to Brazil to do any additional works that were required on the aircraft or to fix any snags. So we decided to take completions 100% in-house, and we made the decision not just for the Lineage, but for the entire fleet. This gives us a tremendous scale through our completions facility and allows us to develop all the expertise that we need, from designers to craftsmen and cabinet makers. We started doing completions in-house on the Legacy in 2006 and our team are highly proficient. Customers still have the option of having a green aircraft delivered to the completions facility of their choice, but so far no one has opted to go that route. The cost efficiencies and quality of work that we provide in-house more than meet client expectations. We’ve had a few customers start off wanting to take a green aircraft to completion houses in Europe or the United States, but when we price out a green airplane and they add the interior costs from an external completions house to the price, then compare it to a completed aircraft from us, it just doesn’t make financial sense, particularly when you look at the quality that we produce.
Q: Is the number of planes on the pre-owned market a continuing drag on new sales?
A: That would have been a very appropriate question in 2012, but what we are seeing is a rapid diminution in the numbers of high quality, low useage time, pre-owned aircraft in the mid to large size market. What is left is a large number of lowish quality, high time airplanes that banks are not particularly keen on refinancing. Overall, the pre-owned market is pretty analogous to the used car market. You get some potential owners who will never buy new, some that will only buy new and everyone who will consider a pre-owned aircraft wants the one-old-lady, scarcely driven vehicle – there just are not that many of those about any more.
Q: How do you see the future of the business aviation market over the next few years?
A: We are predicting that the economic recovery we have all been waiting for could be in full swing by 2016 and sales of executive jets could be at an all time high by 2017 – that is a conceivable scenario with a good chance of turning into a reality. However, sales are not sales until money changes hands. The OEMs have learned from the 2008 crash that just because they have a full order backlog of two to four years, doesn’t mean that all those sales will materialise. Those order books were swollen with speculative purchases that melted away in the economic downturn. One thing that is for sure is that some of those speculators that were flipping orders at the pre-delivery stage and turning a profit on paper transactions will not be invited back to the game. OEMs have become very shy of those sorts of deals – they are the first to bail out when money gets tight!