Embraer marginally profitable in 2023; E2 secures 120-minute ETOPS approval
The Brazilian aircraft manufacturer Embraer reversed its fortunes in 2023, reporting a full-year profit as it expanded aircraft production, grew various order backlogs, and enjoyed a series of one-time tax benefits.
Revenue at the company grew 16.0% year-on-year, to USD5.3 billion, with all of Embraer's business segments reporting double digit revenue growth.
Revenue at Embraer Commercial Aviation, the company's largest business segment, grew 19.6%, to USD1846.7 million (35.1% of total revenue), due to 12% growth in aircraft deliveries. Services and Support revenue rose 11.9%, with the company reporting MRO capacity expansion in the US and the rest of the world. Defence revenues were up 25%, and Executive Aviation revenue grew 13%.
Adjusted EBIT at Embraer was USD350 million - compared to an Adjusted EBIT loss of USD110.5 million in 2022. Adjusted EBITDA was USD561.9 million. Adjusted EBIT margin was 6.7% and EBITDA margin was 10.7%, which met company guidance for the year.
Net income was USD79.5 million, up from a net profit of USD38.5 million in 2022. Embraer reported that it had enjoyed a series of tax efficiency gains in several of its business segments, including Executive Aviation, Commercial Aviation and Services & Support.
Summary:
- Embraer reversed its fortunes in 2023, reporting a full-year profit as it expanded aircraft production, grew various order backlogs, and enjoyed a series of one-time tax benefits.
- Revenue at the company grew 16.0% year-on-year, to USD5.3 billion, with all of Embraer's business segments reporting double digit revenue growth.
- Embraer delivered 64 commercial aircraft in 2023, which was up 12% year-on-year. This was just under the company's 2023 target of 65 to 70 aircraft.
- Almost 95% of Embraer's order backlog is concentrated with two aircraft types - the E175 and the E195E-2, which is the largest commercial aircraft that Embraer makes.
- Embraer has received ETOPS 120-minute approval from Brazil's ANAC, the FAA, and the EU's EASA for the E190-E2 and E195-E2.
- At present, Asia Pacific customers are notably absent from Embraer's firm order backlog.
- The 2024 outlook points to an increasingly optimistic Embraer.
Aircraft commercial deliveries up 12% year-on-year
Embraer delivered 64 commercial aircraft in 2023, up 12% year-on-year. This is one under the low end of the company's 2023 target of 65 to 70 aircraft.
The 4Q2023 deliveries were just 25 aircraft, comprising seven E170s, a single E190-E2 and 17 E195-E2s - this was the lowest final quarter output for the OEM since 2021.
At a time when airlines are struggling to get capacity to meet continued growth in demand, Embraer underperforming on deliveries is another blow for the industry. Embraer reported that although there has been a general improvement in the health of the supply chain, the company continues to face component bottlenecks that are limiting production and deliveries.
The Brazilian manufacturer has set a target of 72 to 80 commercial aircraft deliveries in 2024. Approximately 40% of deliveries are expected to be first generation E175-E1 aircraft, with the remaining 60% being second generation regional jets (E190-E2 or E195-E2). This is an increase in output of between 12.5% and 25%.
However, this is still well under pre-pandemic volumes. In the decade to 2019, Embraer's commercial aircraft deliveries averaged around 100 aircraft p/a.
Embraer: annual commercial aircraft deliveries (2023-2023)
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Embraer president and CEO Francisco Gomes Neto reported that in addition to building output, the company has been working to reduce the seasonality in production and deliveries at its commercial and executive aviation divisions.
He also noted that while the OEM has already seen some delays in early 2024, the company's production plan is based on conservative estimates.
Embraer remains optimistic about meeting its deliveries guidance for the year.
Backlog growing - but only slowly
Embraer reported that it had achieved a book-to-bill ratio "in excess of 1.1:1" for 2023, implying that it had won firm orders for at least 71 aircraft in 2023.
The OEM finished the year with 298 commercial aircraft in its firm order backlog, valued at USD8.8 billion. This in an increase of approximately USD200 million compared to the end of 2022.
Embraer: commercial aircraft firm order backlog development (4Q2009 to 4Q2023)
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Assuming that Embraer meets the upper end of its 2024 production target, the backlog is equivalent to just short of four years of output.
This is well under the bulging backlogs at Airbus and Boeing - particularly for narrowbodies.
Almost 95% of Embraer's order backlog is concentrated with two aircraft types.
There are 100 outstanding E175 orders, concentrated around US airlines which are limited in their aircraft choices, thanks to scope clauses.
There are also 182 orders for the E195E-2, the largest commercial aircraft Embraer makes, with capacity for up to 146 passengers in a high-density configuration.
The remaining 16 orders are for the E190-E2 aircraft, although Embraer has delivered just four of this variant since the start of 2021.
The E195-E2 is now Embraer's largest programme, both in terms of annual deliveries and orders. The popularity of the aircraft, along with the huge narrowbody aircraft backlogs at Airbus and Boeing, suggests that without artificial limits in place, demand continues to transition towards larger aircraft types in short haul markets.
More capabilities for Embraer regional jets to prop up future sales prospects
Shortly before its 2023 results announcement, Embraer reported that the E190-E2 and E195-E2 had received ETOPS 120-minute approval from Brazil's ANAC, the FAA, and the EU's EASA.
Embraer Commercial Aviation president and CEO Arjan Meir expects that the approval could support sales in the Asia Pacific.
The clearance will make it possible to operate more direct overwater routings. This could support connectivity throughout large sections of the Asia Pacific and make Embraer's regional jets more appealing to customers in the region (a region where aircraft are required to operate long, thin routes).
At present, Asia Pacific customers are notably absent from Embraer's firm order backlog
As of the end of 2023, the only Asia Pacific regional orders in the backlog were the last three of 10 E195-E2s ordered by ICBC Leasing of China and a single E190-E2 to Air Kiribati.
Embraer: firm order backlog (as at 31-Dec-2023)
However, Asia Pacific airlines are making use of the lease market to fill out their regional jet fleet.
The Singapore Airlines LCC subsidiary Scoot has signed a deal with the US-based lessor Azzora to lease nine E190-E2s. These are expected to start delivery in Apr-2024, with the airline planning to operate these aircraft on routes to Thailand and Malaysia, including Koh Samui, Hat Yai, Krabi, Sibu, Kuantan and Miri (replacing A320s).
Embraer's latest market outlook ultimately projects demand for 11,000 commercial aircraft of up to 150 seats over the next 20 years, including 8,790 regional jets and small narrowbodies. The largest section of this demand - 2,270 jets and 910 turboprops - is expected to come from airlines based in the Asia Pacific region.
Embraer is banking on growth in traffic and network connectivity across Asia Pacific to continue to drive demand for its aircraft, along with greater demands for efficiency as airlines attempt to decarbonise their operations.
The 2024 outlook points to an increasingly optimistic Embraer
Embraer expects to generate USD6.0 billion to USD6.4 billion in revenue in 2024, which translates to midpoint growth of approximately 17.5%. Free cash flow is expected to be at least USD220 million, and the company is targeting adjusted EBIT margins of between 6.5% and 7.5%.
This is expected to be supported by higher output of commercial and executive aircraft, as well as the growth of the Services & Support unit.
Embraer is entering the testing phase of its passenger to freighter conversion programme and is adding substantial executive MRO support capacity across North America, as well as GTF engine MRO capabilities through its OGMA subsidiary in Portugal.
With the departure of Bombardier out of the commercial aircraft space, Embraer is essentially the only remaining western manufacturer of regional jet equipment. The company retains a strong liquidity profile, is relatively unencumbered by short term debt obligations, and has only minimal capital expenditure requirements.
As the supply chain continues to normalise, operational and financial performance is expected to improve.
Aircraft deliveries are expected to rebound towards pre-pandemic levels by the end of 2025 - and for many customer airlines the additional capacity can't come soon enough.