JP Morgan has downgraded Embraer to neutral from overweight and warned investors that the Brazilian airframer's backlog for commercial jets could erode faster than expected.
The research note sent to investors on 24 September also cites Embraer's defence business as a "bright spot", while business jet sales might not return to a "healthy" outlook until 2014.
But JP Morgan's immediate concern about Embraer is a possible 10% decline in the backlog for E-Jets this year to 180. The airframer typically averages a backlog with 330% more jets than annual deliveries, but that margin has been sliced nearly in half this year to 170%, according to JP Morgan.
The equity research service now assumes that Embraer will deliver 90 aircraft in 2013, or 15-20 fewer than currently forecasted by management. That prediction is based on JP Morgan's estimate that only 75 production slots are sold next year, and deferral rates remain "persistent".
JP Morgan blames the reduction on economic sluggishness that has limited US regional traffic to 1.1% this year through August, while global traffic is up 6%.
JP Morgran's forecast also assumes that several US airlines could announce orders for new regional jets over the next several months.
Delta Air Lines is expected to order up to 50 aircraft this year, according to JP Morgan. The SkyTeam carrier has options to buy 36 E-175s, but traditionally buys Bombardier CRJs. New orders are also expected from American Airlines, SkyWest Inc, and US Airways.
But Embraer will have to compete on each order with Bombardier CRJs and new entrants, including the Mitsubishi Regional Jet, Comac ARJ-21, Bombardier CS100 and Sukhoi Superjet. The latter four aircraft types have accounted for 51% of 430 net orders from 2009-2011, versus only 19% between 2007-2008, JP Morgan says.
JP Morgan is more positive about the business jet market. The firm's analysts estimate deliveries of 15 Legacy 650 or Lineage 1000 large cabin jets this year, along with 75 Phenom light jets. Deliveries of Phenom jets will likely not enter a "healthy" market range of between 100 to 120 annual deliveries until 2014, JP Morgan says.
The defence business, which was restructured as a standalone company in 2011, is expected to generate double-digit business growth based on the ramp-up for the KC-390 and a $4 billion contract from the Brazilian army to create an integrated border surveillance system called System for the Vigilance of the Frontier (SISFRON).