Embraer Should Continue To Fill in Chinese Capacity Shortages

| About: Embraer S.A. (ERJ)

Last year we wrote an article called Embraer Continues to Soar With Large Chinese Regional Jet Order, in which we applauded Embraer’s (NYSE:ERJ) receipt of an order for 100 regional jets from China’s Hainan Airlines, and predicted the company would see many more orders ahead (which was true). Over the weekend, an article ran with a headline suggesting such an order, Hainan Airlines venture to buy 100 Embraer jets.

Hainan Airlines Co., China’s fourth-largest air carrier, and its parent have set up a regional airline which will buy 100 commercial jets from Brazil’s Embraer by 2012, the Xinhua news agency said on Saturday.

That wasn’t an additional order, it was the same 100 planes that inspired us to write our article. The news is more that the regional carrier is now a legal entity and the orders are thus one step closer to actually being fulfilled. It is also not an insignificant win, with China having launched its own regional jet manufacturer - a fact not lost on the Reuters writer:

Regional aviation, also known as feeder-line services, operates between small cities, with routes typically ranging from 500 to 1,000 km. The services usually use aircraft which seat less than 100 passengers, according to Xinhua. China launched production of a 90-seat passenger jet, known as ARJ21, on Friday, its first home-grown regional jet and a major step toward creating a national champion that it hopes could challenge Boeing (NYSE:BA) and Airbus (OTCPK:EADSF).

A unit of General Electric (NYSE:GE) will supply engines for the ARJ21, which will compete with aircraft from Embraer and Canada’s Bombardier.

We still think regional jets have a far more important place in the future of aviation than behemoths like the Airbus A380, particularly in China. Embraer is likely to continue to be a strong competitor there, as it will take some time for China to build the capacity to cover its own demand.