Embraer Poised to Capitalize on Airbus' Jumbo-Jet Sized Difficulties

Includes: BA, ERJ, RTN
by: William Trent, CFA

Last week’s delay of Airbus’ new jumbo jet made clear some of the problems facing the manufacturers of the largest aircraft, particularly those hobbled from multiple companies with frequently different objectives. As BusinessWeek noted:

At the end of 2000, just as Airbus gave the go-ahead to the A380, the company announced it was completing the process of transforming itself into an integrated corporation.

Since its founding in 1970, Airbus had operated as a loose consortium of aerospace companies in France, Germany, Britain, and Spain. Now, the company said, these operations would be knit together into a smooth-running, pan-European business.

In fact, Airbus remained surprisingly balkanized—and the tangled mess inside the A380 is the disastrous result. “The various Airbus locations had their own legacy software, methods, procedures, and Airbus never succeeded in unifying all those efforts,” says Hans Weber, CEO of San Diego-based aviation consultant Tecop International, who has close contacts with the company’s German operations.

However, the smallest aircraft are also on their way out. As the New York Times reported, many of the routes flown by small turboprop aircraft see few passengers and require heavy federal subsidies.

From Lewistown, Mont., Jerry Moline, the airport manager, is used to driving 110 miles to shop at the Wal-Mart (NYSE:WMT) in Great Falls. Likewise, most of his neighbors drive 125 miles to the airport in Billings, which has jet service, rather than fly there on the subsidized 19-seaters. The Lewistown flights attracted fewer than three people a day in 2005; each passenger’s one-way ticket was subsidized with $472.78 paid by taxpayers…

Probably the biggest beneficiary in recent years has been the Raytheon Company (NYSE:RTN). It manufactured the 19-seat Beech 1900 prop planes that fly most of the subsidized routes. Tighter safety rules enacted in the mid-1990’s made operating those more expensive. And the rapid spread of regional jets preferred by passengers forced Raytheon to halt production of the 1900 in 2002.

“The average untrained traveler equates jets to safety,” said David Carter, a Raytheon spokesman. “They’re not so sure about turboprops.”

Indeed. And sure enough, once again the culprit in the demise is the regional jet. And while their success has caused Embraer (NYSE:ERJ) to encounter its own (more minor) delays, the trend is becoming increasingly apparent. And Embraer is sitting in the cat-bird’s seat.

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