ANALYSIS: Embraer needs US refleeting decisions soon to avoid production break

Washington DC
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Embraer today confirms that it must book new orders within six months to avoid a break on the production line in the second half of 2013, even as it waits for the long-awaited re-fleeting of the US regional airline system to materialise.

The Brazilian regional jet maker plans to keep production levels stable next year. The company forecasts deliveries of between 105 and 110 commercial jets this year, and has delivered 83 so far.

Open slots on the production line start in the back-end of 2013, says Frederico Curado, Embraer's chief executive. New orders "will have to materialise in the next six months or so," he says.

The company still expects Delta Air Lines to lead the re-fleeting of the US regional airline industry with an order by the end of the year, Curado adds. Analysts expect Delta, which already has 36 options for Embraer E-175s, to order up to 70 regional jets, with the Bombardier CRJ900 competing for a share or all of the order. Embraer has offered Delta an improved jet called the E-175+, boasting a 5% gain in fuel efficiency.

Follow-on orders in the US market have been anticipated for months. Earlier this year, Embraer predicted the US market alone could account for at least five deals for up to 400 aircraft in the 70-80 seat range.

Aside from the Delta order, none of the re-fleeting decisions are expected now until next year. SkyWest's announcement of an agreement in principle to buy up to 100 Mitsubishi Regional Jets stole headlines in July, but the deal, if consummated, will not yield deliveries until the US re-fleeting is well-underway in the latter half of the next decade.

Embraer's sales representatives are again reporting increased interest in the US market recently after a period of dormant activity since May.

"There is a growing activity that is definitely tangible," Curado says.

Although interest is growing, the re-fleeting strategies of the US mainline carriers have yet to take shape, as American Eagle parent AMR Corp., remains in an extended restructuring period. That has kept the rest of the industry on the sidelines, with UnitedContinental and US Airways also poised to replace a largely 50-seat regional fleet with 76-seaters over the next several years.

But the question still remains how the mainline carriers will place the orders. Delta appears in position to order new 76-seaters itself, then make the delivered aircraft available to its recently revamped regional feed network, Curado says. It is still not so clear if American Eagle, UnitedContinental and US Airways will follow Delta's example, or take a different approach.

"How each player will strategise their re-fleeting whether directly by the mainline or the regional affiliates being the one refleeting the aircraft is not completely clear," Curado says.

Meanwhile, Embraer is continuing to search for customers to fill its open production slots elsewhere. Sales campaigns are ongoing around the world, Curado says.