Although Embraer executives haven’t publicly characterized the decision by Boeing to terminate their merger agreement in April 2020 as anything other than a setback, the Brazilian company didn’t spend a lot of time wallowing in disappointment. First, the OEM moved quickly to start the reintegration of its commercial aviation division, an exercise complicated by the Covid crisis but one that it managed to execute to plan. Today, the company’s organization has become simpler and more agile, allowing for faster decision-making, according to CEO Francisco Gomes Neto.
“It was, as you might realize, a painful and expensive project,” said Neto as he briefed reporters at the company’s main facilities in Sao Jose dos Campos, Brazil. “I think we did a good job to bring our commercial division back to the family. So we are ready in all aspects—technically, operationally, and with systems as well.”
In fact, one of the commercial division’s highest-profile projects—a proposed new 70- to 90-seat turboprop—likely would have never seen daylight if not for the collapse of the Boeing deal. Embraer has set a launch target of early to mid-2023 and during the event in Brazil reiterated its intention to establish a strategic partnership for the program, in line with one of five pillars on which its “fit for growth” ethos stands.
Neto highlighted the company’s controlling interest in eVTOL developer Eve as a prime example of its commitment to partnerships. Spun off from the company’s Embraer X “market accelerator” in October 2020, Eve went public last month with a listing on the New York Stock Exchange that generated $377 million in proceeds. Originally expected to draw closer to $500 million, the initial public offering confronted an unfortunate set of trading conditions stemming from economic shock associated with the war in Ukraine, interest rate hikes, inflationary pressures, and continuing global supply chain fragility. Nevertheless, executives on hand in New York expressed confidence that the amount raised will prove sufficient to fund the eVTOL’s certification and entry into service, now expected in 2026.
As a whole, the company has seen its financial condition improve dramatically since a nadir in 2020, when it instituted workforce reductions to address Covid and duplicate positions created during the preparation for the failed Boeing deal. As part of a new five-year plan established that year, the company targeted 2021 and 2022 as recovery years and 2023 to 2035 for growth, explained Neto. The results proved dramatic, as the company saw EBIT improve by $260 million and free cash flow by $1.2 billion.
“The good results we saw in 2021 was not because revenues grew a lot, because in terms of revenues in 2021 compared with 2020 we saw growth of about 12 percent,” said Neto. “And we had a drop of more than 30 percent the year before. The good results we had [in 2021] were because of enterprise efficiency. In the years 2023 on we want to capture the benefit of the recovery of the market, especially in commercial aviation and other businesses as well.”
For Embraer, the elements of enterprise efficiency include higher inventory turns, production cycle cuts, a reduction in the cost of goods sold, focus on productivity, footprint optimization, and strong cash generation. According to Neto, an improvement in inventory management “contributed a lot” to the strong cash flow results, as have cuts in production lead times.
“We gave an internal target to triple inventory turn of the company and we are working pretty well in that direction,” he said. “We also want to reduce production lead time of our aircraft by 40 percent. This will help us to reduce the working capital, reduce the cost of our products, and allow more flexibility to our sales team and our customers to receive our products much quicker than our competition.”
Late last month Embraer said it signed an agreement with Toyota do Brasil to incorporate Toyota Production System (TPS) principles and concepts into its own industrial operations. During the first phase of the joint work, a team of TPS specialists from Toyota do Brasil will immerse themselves in Embraer’s daily operations to evaluate and suggest improvements for the company’s main manufacturing area at the Ozires Silva Unit in São José dos Campos, Brazil.
Embraer last year already managed to cut lead times by 17 percent, added Neto, after conducting a value stream mapping of the production process and identifying waste and inefficiencies. Of course, supply chain inefficiencies have constrained the process, he added, sometimes requiring it to increase rather than reduce inventory levels. “So maybe we’ll have some difficulty this year in terms of inventory terms reaching the target we had defined before, but we are still putting a lot of focus on bringing in just the materials we need, with some reserves, to avoid the issues [stemming from] the supply chain,” he explained.
Meanwhile, Embraer has done its best to address inflationary pressures with its cost-cutting efforts and by encouraging similar internal cost reduction and productivity measures at suppliers. The company also continues to search for alternative sources of parts supply “where applicable.”
“I think we are doing pretty well considering the circumstances,” said Neto. “But inflation is a negative impact for us.”
