Quantfury Gazette

Embraer (NYSE: ERJ) could take Brazil into big league for larger jets with a Boeing (NYSE: BA) challenger

by
Nathan Crooks
Quantfury Team
Embraer

Brazil’s Embraer (NYSE: ERJ) is sending a powerful message to airline manufacturers: “Watch out.” The company, already a leader in the regional jet market, is reportedly exploring the development of a larger aircraft model to compete directly against aerospace giants Airbus (CBOE: AIR) and Boeing (NYSE: BA), the latter of which has been under increasing scrutiny about its production processes since a door plug blowout on a 737 MAX jet earlier this year.

The possible move would not only elevate Brazil’s status among the elite group of economies capable of organizing the technological expertise and financial muscle needed to produce a brand new plane, but it would also challenge the duopoly held by Boeing and Airbus. While an Embraer spokesperson signaled there are no plans for an imminent launch, they said the company “certainly has the capability to develop a new narrowbody aircraft.” It’s a statement that should put the industry on notice and comes as Boeing is trying to recover from the slew of quality control issues and incidents that have sent its shares plunging 30% this year.

Despite Embraer’s confidence in its abilities, stepping into the bigger game wouldn’t be a guaranteed win. Canada’s Bombardier, which now only focuses on smaller business jets, had tried to gain a foothold in the sector with the introduction of the CSeries in 2008 but ended up selling the program to Airbus after cost overruns, government bailouts and mounting debts. 

While more capacity to make larger jets would surely be welcomed by airlines that have had to cut flights amid production delays and backlogs, Aengus Kelly, the CEO of leasing firm AerCap (NYSE: AER), told investors that no one would likely disrupt that market segment for at least another decade. “The financial resources required to do that are extraordinary to compete with the capability of Airbus and Boeing,” he said on an earnings call. “I think it’s a long shot, to be honest, and even if it does come off, I don’t think it’ll be relevant for the next 15 years.”

Embraer may ultimately decide to stay focused on its core market of regional jets, but the mere hint at its capability to venture into the big league should serve as a loud wakeup call to both Boeing and Airbus about the need to stay razor-focused on quality and innovation. Even with monopoly power and high barriers to entry, don’t count the country known for the most World Cup wins out.

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