Embraer has postponed plans to set up a final assembly line in the USA and may drop its recapitalisation plans following the cancellation of its share of an $879 million contract to replace the US Army’s surveillance aircraft.

The Brazilian airframer was forced to clarify its position on recapitalisation late last week after the US Army cancelled the Lockheed Martin-led aerial common sensor (ACS) surveillance aircraft programme that would have used the ERJ-145 regional jet as its platform. The news was followed by fourth quarter delivery figures revealing the Brazilian manufacturer had fallen short of its delivery target for 2005.

The São José dos Campos-based company issued a notice to the São Paulo stock market on Friday stating that its study into a new capital structure has been postponed. The company had planned to use the cash to fund the expansion of its defence division and specifically the construction of a new final assembly line in Jacksonville, Florida for the military deliveries of the ERJ-145s.

Embraer now says its plans for the Jacksonville plant, announced in June 2003, are on hold “because our ability to occupy and staff the facility depends on contracts.” There are now question marks over the company’s recapitalisation plans, which had been leaked to a Brazilian newspaper last week.

Shares in Embraer rose at the end of last week by 6.22% to 20.49 reals ($8.98) after reports in the Brazilian financial digest Valor Econômico suggested the company plans to convert its preferential shares and launch a further public offering. At present around two-thirds of Embraer stock is held by preference shareholders, who could be offered an opportunity to convert their stock into ordinary shares on more attractive terms, possibly involving a cash dividend. The plan could simplify the company’s capital structure and remove future dividend payment obligations, making large capital projects easier to finance.

ERJ145 ACS

However, it is unclear whether this plan will go ahead following the US Army’s cancellation of ACS. The ERJ-145 (an artist's impression of which is pictured above), which would have been modified with extended wings and higher thrust engines, had proved too small a platform for the Lockheed system and had been under review for four months. Embraer had initially hoped to replace the ERJ-145 with the larger 190, but that hope was extinguished last week with the total cancellation of the programme. Embraer says while it is "disappointed with the current situation after having won the original competition," it intends to pursue future US government contracts "with the same determination".

Antônio Luiz Pizarro Manso, Embraer chief financial officer, says in the stock market statement: “As a global player in the aerospace industry, we are continuously seeking opportunities in the capital markets to develop new programmes and expand our business, with a view to strengthen our international competitive position.” It is unclear whether this recapitalisation will now go forward.

Embraer’s company reports state it has a capitalisation of 3.5 billion reals held by over 719 million shareholders, of which 477 million are preferred shareholders and the rest hold common stock. The report suggested Embraer could increase its share capital, issuing further common shares, raising the value of the preferred stock. Any decision would require approval from the board and Pizzarro Manso says: “The viability of this [recapitalisation] project is still being analysed and therefore, Embraer cannot confirm whether a proposal regarding the adoption of a new capital structure will be made to its shareholders.”

The company also saw a slight shortfall on expected aircraft deliveries in the fourth quarter 2005. Deliveries for the three months to December reached 40 aircraft, taking the annual total to 141. This fell four short of the company’s target. “Two 190s scheduled to be delivered in December were delivered in early January instead and two Embraer 170s sold by the defence division to a state-run airline, had their deliveries rescheduled to 2006 as a result of final negotiations between government authorities,” the company explains. Embraer says it expects to deliver 145 aircraft in 2006, rising to 150 aircraft in 2007. Embraer’s firm order backlog for all markets totalled $10.4 billion, it adds.

JUSTIN WASTNAGE / LONDON

Source: Flight International

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