Losses Increase for Embraer as EU Halts Boeing Deal Review

An Embraer Phenom 300 cuts a fine figure in flight.

In an earnings call this week, Embraer (NYSE:ERJ) reported a 3Q19 net loss of $77.2 million, results that were impacted by separation costs of $34.8 million related to the carve out of their commercial aviation business in a deal with Boeing. Embraer reported an adjusted net loss for 3Q19 of $48.4 million, compared to $16.5 million for the same period in 2018.

Much of the losses were attributed to the stalled deal between the Brazilian aircraft manufacturer and Boeing, who has proposed to invest an 80 percent stake in Embraer’s commercial passenger jet division and E-Jet line. The deal was crafted to compete with Airbus in the regional jet market after Airbus acquired a majority stake in Bombardier’s C-Series of regional jets in 2018.

Originally planned to be finalized in 2019, completion of the Boeing/Embraer transaction is now being pushed to at least March or April in 2020 after EU regulators “stopped the clock” on their antitrust probe, citing “insufficient information” being presented by the planemakers. The European Union’s regulators are considered to be some of the toughest when it comes to mergers, and in halting the probe, warned that the deal could potentially remove Embraer as a global competitor to both Boeing and Airbus, which may result in higher prices and less choice.

In 3Q19, Embraer delivered 17 commercial and 27 executive jets, compared to 15 commercial jets and 24 executive jets in 3Q18. The Company’s firm order backlog at the end of 3Q19 was $16.2 billion.

Embraer’s order book was bolstered this week by the announcement of a firm order from KLM Cityhopper for 21 E195-E2 aircraft, plus 14 purchase rights. The order was previously announced as a Letter of Intent for 15 firm orders with 20 purchase rights at the Paris Air Show earlier this year. With all purchase rights exercised, the deal would have a value of $2.48 billion. KLM will configure the aircraft with 132 seats, with deliveries to begin in the first quarter of 2021. “KLM’s decision to add six more aircraft to this order is a significant vote of confidence in our E2 program,” said John Slattery, President and CEO, Embraer Commercial Aviation. “Delivering 30 percent lower emissions when compared to KLM’s current E190s, yet still providing 32 more seats, the E195-E2 will simultaneously increase capacity for KLM at Schiphol Airport which is slot constrained, while also delivering huge reductions in emissions.”

Embraer’s E195-E2 is “a significant part of our commitment to improving our environmental impact,” said KLM President & CEO Pieter Elbers. “The E195-E2 is the most fuel efficient and lowest emission aircraft in its class, and also the quietest by a considerable margin. These attributes will be a huge benefit for both our communities and our passengers.”

Investors did not seem to be scared off by Embraer’s Tuesday earnings call, and despite not meeting analyst expectations, the stock did not suffer significant losses. In trading on the New York Stock Exchange Tuesday, ERJ opened at $17.37 per share and dropped to a low of $15.86 before closing at $16.45 with 2.7 million shares traded.

Dan Pimentel is an instrument-rated private pilot and former airplane owner who has been flying since 1996. As an aviation journalist and photographer, he has covered all aspects of the general and business aviation communities for a long list of major aviation magazines, newspapers and websites. He has never met a flying machine that he didn’t like, and has written about his love of aviation for years on his Airplanista blog. For 10 years until 2019, he hosted the popular ‘Oshbash’ social media meetup events at EAA AirVenture Oshkosh.

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