Embraer S.A.

– 2013
Forest R. David

A. Case Abstract

Headquartered in Sao Paulo, Brazil, Embraer is the world's third largest aircraft manufacturer, behind
Boeing and Airbus. Embraer produces commercial jets (55%) that seat between 30-120 passengers, 7
models of executive jets (20%), and military aircraft (12%). About 40% of its Embraer sales are
in North and South America. With 17,200 employees, Embraer is Brazil’s largest exporter of
industrial products. Embraer’s CEO, Frederico Curado, received the 2012 Tony Jannus Award, given
annually for distinguished contributions to commercial aviation. With rising demand, Embraer’s
backlog of ordered planes totaled $17.1 billion during Q2 of 2013, reflecting an increase of $3.8 billion
from the prior quarter. This level of orders was the company’s highest since September 2009.
In July
2013, Embraer’s Commercial Aviation unit entered into an agreement, worth $2.85 billion, with
International Lease Finance Corporation (“ILFC”) to deliver 50 E-Jets, with an option to extend the
order to up to 100 aircraft. The company is doing well but wants to grow more rapidly globally, and
needs a clear strategic plan to achieve this objective.

B. Vision Statement (proposed)

We strive to become the global leader in designing, producing, and marketing midsize passenger
aircraft.

C. Mission Statement (proposed)

Our first responsibility is to our customers (1) who make the perpetuity of our company long-lasting
(5). We hire and train the best employees (9) and utilize the latest technology (4) to maintain and grow
our global (3) position as a leader in aerospace manufacturing (2), in particular the midsize planes
carrying around 100 passengers (7). We strive to preserve the natural environment (8) and abide by
the highest levels of integrity in all that we do (6).

1. Customers
2. Products or services
3. Markets
4. Technology
5. Concern for survival, growth, and profitability
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees
D. External Audit
Opportunities

1. There are few options for airline carriers for midsize planes seating around 100 passengers.
2. Forecasts indicate that demand will grow for E-Jets, as indicated by Republic Airlines paying
Embraer to $4 billion to provide E175 jets.
3. The middle class in Eastern Europe, China, and Latin America is expected to grow substantially
over the next 20 years; increasing GDPs in these regions.
4. China's vibrant economy has become a great market for executive jet potential.
5. The African economy is expected to outpace the world average over the next 20 years and with an
increasing number of middle class citizens needing and desiring to fly.
6. Boeing moving towards larger model planes and shying away from smaller (100 - 200 seat planes.
7. A large need for airlines to replace aging and less fuel-efficient planes to address rising fuel prices.
8. Air traffic is forecasted to grow 5.3% annually between 2012 and 2016.
9. Through 2016, the USA will remain the single largest market for domestic passengers at 710
million annually.
10. Commercial jets for 50 to 150 passengers have higher margins than executive jets.

Threats

1. Embraer’s three primary competitors are Bombardier, Boeing, and Airbus.

2. Up-and-coming aircraft manufacturing rivals such as Japan's Mitsubishi Heavy Industries,
Russia's Sukhoi, and even China's COMAC are aiming to drive down prices in coming years.
3. Embraer is only one third the size of Bombardier and one tenth the size of Boeing, which hurts
Embraer in terms of economies of scale.
4. Bombardier’s Challenger and LearJet segments provide intense competition for Embraer.
5. Bombardier received a December 2012 order worth up to $3.29 billion from Delta.
6. Volatile prices of commodities and fuel could harm profit margins for Embraer and hurt air travel
demand for Embraer’s customers.
7. Aviation consultants project that demand for business jets will not reach pre-recession levels until
2015 – 2018.
8. Governments’ taxes continually increase on airlines.
9. Lockheed Martin is a major player in the defense segment.
10. Executive jet market is closely tied to the state of the economy.
Competitive Profile Matrix

Embraer Bombardier Boeing

Critical Success Factors Weight Rating Score Rating Score Rating Score
Advertising 0.03 2 0.06 1 0.03 4 0.12
Market Penetration 0.10 3 0.30 2 0.20 4 0.40
Company Worth 0.15 1 0.15 2 0.30 4 0.60
Trains 0.06 1 0.06 4 0.24 1 0.06
Small Planes 0.06 3 0.18 4 0.24 1 0.06
Midsize Planes 0.15 4 0.60 3 0.45 2 0.30
Large Planes 0.15 2 0.30 1 0.15 4 0.60
Quick Ratio 0.10 4 0.40 1 0.10 2 0.20
ROE 0.10 1 0.10 3 0.30 4 0.40
Tax Liabilities 0.10 1 0.10 4 0.40 2 0.20
Totals 1.00 2.25 2.41 2.94

Embraer trails both Bombardier and Boeing, based on the factors within the example CPM above.
Boeing scores high marks on sheer size and is a difficult competitor for Embraer to compete against.
Luckily to date, Boeing has left the midsize planes largely to Embraer and Bombardier. ROE is
particularly troubling for Embraer but after deducting Goodwill and Intangibles, which Bombardier
and Boeing are burdened with, they are much more comparable; Bombardier actually has negative
equity.

EFE Matrix

Opportunities Weight Rating Weighted Score

1. There are few options for airline carriers for midsize planes 0.10 4 0.40
seating around 100 passengers.
2. Forecasts indicate that demand will grow for E-Jets, as indicated 0.10 4 0.40
by Republic Airlines paying Embraer to $4 billion to provide
E175 jets.
3. The middle class in Eastern Europe, China, and Latin America is 0.05 3 0.15
expected to grow substantially over the next 20 years; increasing
GDPs in these regions.
4. China's vibrant economy has become a great market for 0.06 2 0.12
executive jet potential.
5. The African economy is expected to outpace the world average 0.03 2 0.06
over the next 20 years and with an increasing number of middle
class citizens needing and desiring to fly.
6. Boeing moving towards larger model planes and shying away 0.06 4 0.24
from smaller (100 - 200 seat planes.
7. A large need for airlines to replace aging and less fuel-efficient 0.05 3 0.15
planes to address rising fuel prices.
8. Air traffic is forecasted to grow 5.3% annually between 2012 and 0.04 3 0.12
2016.
9. Through 2016, the USA will remain the single largest market for 0.05 3 0.15
domestic passengers at 710 million annually.
10. Commercial jets for 50 to 150 passengers have higher margins 0.06 4 0.24
than executive jets.
 Threats Weight Rating Weighted Score
1. Embraer’s three primary competitors are Bombardier, Boeing, and
0.08 3 0.24
Airbus.
2. Up-and-coming aircraft manufacturing rivals such as Japan's
Mitsubishi Heavy Industries, Russia's Sukhoi, and even China's 0.05 3 0.15
COMAC are aiming to drive down prices in coming years.
3. Embraer is only one third the size of Bombardier and one tenth
the size of Boeing, which hurts Embraer in terms of economies of 0.04 3 0.12
scale.
4. Bombarider’s Challenger and LearJet segments provide intense
0.04 2 0.08
competition for Embraer.
5. Bombardier received a December 2012 order worth up to $3.29
0.05 3 0.15
billion from Delta.
6. Volatile prices of commodities and fuel could harm profit margins
0.02 3 0.06
for Embraer and hurt air travel demand for Embraer’s customers.
7. Aviation consultants project that demand for business jets will
0.03 2 0.06
not reach pre-recession levels until 2015 – 2018.
8. Governments’ taxes continually increase on airlines. 0.03 3 0.09
9. Lockheed Martin is a major player in the defense segment. 0.03 2 0.06
10. Executive jet market is closely tied to the state of the economy. 0.03 2 0.06
TOTALS 1.00 3.10

Embraer is doing very well in addressing external issues. The firm should continue to focus
approximately 60% to 80% of its resources to produce midsized jets from 50 to 150 passengers.
Executive Jets and various Defense projects should balance out Embraer’s strategy.

E. Internal Audit
Strengths

1. Embraer has reached a joint venture with China's AVIC II to deliver 1,000 ERJ 145 jets by 2020.
2. Embraer commercial jets are produced with seating options generally between 70 and 124 seats on the
E-Jets and 37 to 50 passengers on the ERJ jets.
3. Both Delta and JetBlue use Embraer jets to shuttle passengers short distances. Since 1969, Embraer
has delivered over 5,000 aircraft to airlines or militaries in over 100 countries on five continents.
4. Embraer’s Commercial Aviation segment accounts for over 60% of all company revenues. Embraer
has over 90 customers, including 30 of which are airline companies, on five continents.
5. The E170 and E175 models are designed for 70 to 88 passengers while the E190 and E195 jets are
designed for 93 to 124 passengers.
6. Embraer’s second most profitable segment is Executive Aviation, accounting for 19% of all revenues;
the firm offers 3 different styles of executive jet and has transitioned well into the low-end business jet
market.
7. Embraer provides 48 different nations with services and products contained under the Defense and
Security’s umbrella, including supplying the Brazilian Air Force with 70+% of its fleet. This segment
accounts for around 15% of total revenues.
8. No geographic region accounts for more than 25% of total revenues; new manufacturing plant in
Melbourne, Florida.
9. Embraer's new deal is worth up to $4 billion to supply the regional network of American Airlines.
10. Embraer is promising a jet that flies higher, faster, and more economical than Lockheed’s Hercules.
Weaknesses

1. Embraer has over 17,000 employees and over $15 billion worth of aircraft on back order.
2. A drawback with the E-Jet is that it does not have the fuel capacity to fly across the USA.
3. North America only accounts for 20% of worldwide revenues.
4. ROE is 6.7 compared to the industry average of 34.
5. Embraer delivered 19 commercial and 25 executive jets in 3rd quarter 2013, providing a bad mix, and
putting Embraer at risk of not meeting its financial estimates for 2013.
6. In October 2013, Embraer workers rejected management’s 6% pay increase offer and briefly stopped
working.
7. Legacy jets are underperforming in the USA market.
8. Since January 2011 through Q3 2013, Embraer’s stock has not appreciated in net price.

Financial Ratio Analysis

Profit Margin Percent Embraer Industry

Gross Margin 23.93 15.49
Pre-Tax Margin 7.96 7.64
Net Profit Margin 3.58 5.09

Liquidity Ratios
Debt/Equity Ratio 0.78 0.93
Current Ratio 1.95 1.34
Quick Ratio 0.98 0.55

Profitability Ratios
Return On Equity 6.70 34.07
Return On Assets 2.19 4.91
Return On Capital 3.65 17.32

Efficiency Ratios
Income/Employee 10,580 18,305
Revenue/Employee 295,473 348,138
Receivable Turnover 11.22 10
Inventory Turnover 1.79 2.68
Asset Turnover 0.61 0.97

Embraer is doing very well financially when compared to the aircraft production industry.

Net Worth Analysis (in USD millions)

Embraer Company Worth Analysis

Stockholders' Equity - (Goodwill + Intangibles) $2,300
Net Income x 5 $1,740
(Share Price/EPS) x Net Income $5,968
Number of Shares Outstanding x Share Price $5,964
Method Average $3,993
 Bombardier Company Worth Analysis
Stockholders' Equity - (Goodwill + Intangibles) -$994
Net Income x 5 $2,990
(Share Price/EPS) x Net Income $8,988
Number of Shares Outstanding x Share Price $8,994
Method Average $4,994

Embraer is a rapidly improving company with many contracts in the works and is likely worth around $6
billion.

IFE Matrix

Strengths Weight Rating Weighted Score

1. Embraer has reached a joint venture with China's AVIC II to
0.08 4 0.32
deliver 1,000 ERJ 145 jets by 2020.
2. Embraer commercial jets are produced with seating options
generally between 70 and 124 seats on the E-Jets and 37 to 50 0.07 4 0.28
passengers on the ERJ jets.
3. Both Delta and JetBlue use Embraer jets to shuttle passengers
short distances. Since 1969, Embraer has delivered over 5,000
0.07 4 0.28
aircraft to airlines or militaries in over 100 countries on five
continents.
4. Embraer’s Commercial Aviation segment accounts for over 60%
of all company revenues. Embraer has over 90 customers, 0.07 4 0.28
including 30 of which are airline companies, on five continents.
5. The E170 and E175 models are designed for 70 to 88 passengers 0.07 4 0.28
6. Embraer’s second most profitable segment is Executive Aviation,
accounting for 19% of all revenues; the firm offers 3 different
0.05 3 0.15
styles of executive jet and has transitioned well into the low-end
business jet market.
7. Embraer provides 48 different nations with services and
products contained under the Defense and Security’s umbrella,
0.05 4 0.20
including supplying the Brazilian Air Force with 70+% of its
fleet. This segment accounts for around 15% of total revenues.
8. No geographic region accounts for more than 25% of total
0.05 4 0.20
revenues; new manufacturing plant in Melbourne, Florida.
9. Embraer's new deal is worth up to $4 billion to supply the
0.07 4 0.28
regional network of American Airlines.
10. Embraer is promising a jet that flies higher, faster, and more
0.04 3 0.12
economical than Lockheed’s Hercules.
 Weaknesses Weight Rating Weighted Score
1. Embraer has over 17,000 fulltime workers and over $15 billion
0.07 2 0.14
worth of aircraft on back order.
2. A drawback with the E-Jet is that it does not have the fuel
0.02 2 0.04
capacity to fly across the USA.
3. North America only accounts for 20% of worldwide revenues. 0.05 2 0.10
4. ROE is 6.7 compared to the industry average of 34. 0.06 2 0.12
5. Embraer delivered 19 commercial and 25 executive jets in 3rd
quarter 2013, providing a bad mix, and putting Embraer at risk of 0.03 2 0.06
not meeting its financial estimates for 2013.
6. In October 2013, Embraer workers rejected management’s 6%
0.08 1 0.08
pay increase offer and briefly stopped working.
7. Legacy jets are underperforming in the USA market. 0.04 2 0.08
8. Since January 2011 through 3rd quarter 2013, Embraer’s stock
0.03 2 0.06
has not appreciated in net price.
0 0.00 0 0.00
9. TOTALS 1.00 3.07

Embraer is doing very well on internal issues and should continue to aggressively build mid-size planes
seating between 50 and 150 passengers.

F. SWOT
SO Strategies

1. Sell 50 ERJ 175 Jets to Spirit Airlines for a production cost of $20 million each (S2, S8, O1, O6, O9,
O10).
2. Sell 50 ERJ 175 Jets to Delta for a production cost of $20 million each (S2 S8, O1, O6, O9, O10).
3. Sell 10 ERJ 175 Jets to Croatia Airlines for a production cost of $20 million each (S2, S7, S8, O1, O3,
O10).
4. Sell 100 Executive Jets to Chinese customers by 2015 for a production cost of $3 million each (S6, S7,
O4).

WO Strategies

1. Increase Commercial Aviation segment from 60% of 2012 revenues to 80% of revenues by 2015 (W4,
W5, O10).
2. Divest Legacy jets from the USA market (W7, O9, O10).
3. Sell 50 ERJ 175 Jets to Spirit Airlines for a production cost of $20 million each (W3, O1, O6, O9,
O10).
4. Sell 50 ERJ 175 Jets to Delta for a production cost of $20 million each (W3, O1, O6, O9, O10).

ST Strategies

1. Spend $10 million to market and promote the new Hercules aircraft (S10, T9).
2. Sell 50 ERJ 175 Jets to Spirit Airlines for a production cost of $20 million each (S2, S8, T1).
3. Sell 50 ERJ 175 Jets to Delta for a production cost of $20 million each (S2 S8, O1, T1).
 WT Strategies

1. Negotiate a deferred bonus payment plan with workers (W1, W6, T4).
2. Sell 50 ERJ 175 Jets to Spirit Airlines for a production cost of $20 million each (W1, W5, T1).
3. Sell 50 ERJ 175 Jets to Delta for a production cost of $20 million each (W1, W5, O1, T1).

G. SPACE Matrix

FP
Conservative Aggressive
7

5 X = 2.2
Y = 1.4
4

CP IP
-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7
-1

-2

-3

-4

-5

-6

-7
Defensive Competitive
SP

Internal Analysis: External Analysis:

Financial Position (FP) Stability Position (SP)
ROE (Adjusted for Goodwill + Intangibles) 5 Rate of Inflation -2
Quick Ratio 7 Technological Changes -3
Company Worth 5 Governmental Regulations -5
Net Income 4 Competitive Pressure -6
Goodwill + Intangible Impairment 5 Barriers to Entry into Market -3
Financial Position (FP) Average 5.2 Stability Position (SP) Average -3.8
Internal Analysis: External Analysis:
Competitive Position (CP) Industry Position (IP)
Market Share Small Size Planes -3 Growth Potential 6
Market Share Medium Size Planes -2 Financial Stability 6
Market Share Large Size Planes -6 Ease of Entry into Market 5
Technological know-how -3 Growing Middle Class 6
Control over Suppliers and Distributors -3 Profit Potential 5
Competitive Position (CP) Average -3.4 Industry Position (IP) Average 5.6

Embraer is doing very well and is well positioned within the SPACE Matrix. The industry remains extremely
competitive with numerous government regulations, but Embraer is managing right well with its list of current
orders from major airlines. The firm should continue to expand, building an additional manufacturing plant in the
USA.

H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Weak Strong
Competitive Competitive
Position Position

Quadrant III Quadrant IV

Slow Market Growth

Sales for both Boeing and Embraer are at record highs and continuing to grow rapidly. Embraer produces a
“right sized” aircraft and should form an alliance with Spirit Airlines or similar short haul carriers to
exclusively supply planes.
I. The Internal-External (IE) Matrix

The Total IFE Weighted Scores

Strong Average Weak
4.0 to 3.0 2.99 to 2.0 1.99 to 1.0
4.0 I II III

High

Commercial Aviation
Defense and Security

3.0 IV V VI

The
EFE
Total Medium
Weighted
Scores Executive Aviation

2.0 VII VIII IX

Low

1.0

Segment 2012 Total Sales

(in USD millions)
Commercial Aviation $3,768
Executive Aviation 1,297
Defense and Security 1,050
Other 62
Total $6,177
 Commercial Aviation leads the way for Embraer, powered by the demand for midsized commercial
aircraft. The Defense and Executive segments are both doing well internally, but the Executive segment is
more at risk to external pressures such as the market price, not allowing for high profit margins and the
dependability of a good economy and high-end customers.

J. QSPM

Sell 200 ERJ Sell 100

Jets to Delta Executive
and Spirit Jets in China

Opportunities Weight AS TAS AS TAS

1. There are few options for airline carriers for midsize planes
0.10 4 0.40 1 0.10
seating around 100 passengers.
2. Forecasts indicate that demand will grow for E-Jets, as indicated
by Republic Airlines paying Embraer to $4 billion to provide 0.10 4 0.40 1 0.10
E175 jets.
3. The middle class in Eastern Europe, China, and Latin America is
expected to grow substantially over the next 20 years; increasing 0.05 4 0.20 1 0.05
GDPs in these regions.
4. China's vibrant economy has become a great market for
0.06 1 0.06 4 0.24
executive jet potential.
5. The African economy is expected to outpace the world average
over the next 20 years and with an increasing number of middle 0.03 0 0.00 0 0.00
class citizens needing and desiring to fly.
6. Boeing moving towards larger model planes and shying away
0.06 3 0.18 1 0.06
from smaller (100 - 200 seat planes.
7. A large need for airlines to replace aging and less fuel-efficient
0.05 3 0.15 1 0.05
planes to address rising fuel prices.
8. Air traffic is forecasted to grow 5.3% annually between 2012 and
0.04 3 0.12 1 0.04
2016.
9. Through 2016, the USA will remain the single largest market for
0.05 4 0.20 1 0.05
domestic passengers at 710 million annually.
10. Commercial jets for 50 to 150 passengers have higher margins
0.06 4 0.24 2 0.12
than executive jets.
 Threats Weight AS TAS AS TAS
1. Embraer’s three primary competitors are Bombardier, Boeing, and
0.08 0 0.00 0 0.00
Airbus.
2. Up-and-coming aircraft manufacturing rivals such as Japan's
Mitsubishi Heavy Industries, Russia's Sukhoi, and even China's 0.05 0 0.00 0 0.00
COMAC are aiming to drive down prices in coming years.
3. Embraer is only one third the size of Bombardier and one tenth
the size of Boeing, which hurts Embraer in terms of economies of 0.04 3 0.12 2 0.08
scale.
4. Bombarider’s Challenger and LearJet segments provide intense
0.04 1 0.04 4 0.16
competition for Embraer.
5. Bombardier received a December 2012 order worth up to $3.29
0.05 3 0.15 1 0.05
billion from Delta.
6. Volatile prices of commodities and fuel could harm profit margins
0.02 0 0.00 0 0.00
for Embraer and hurt air travel demand for Embraer’s customers.
7. Aviation consultants project that demand for business jets will
0.03 1 0.03 3 0.09
not reach pre-recession levels until 2015 – 2018.
8. Governments’ taxes continually increase on airlines. 0.03 0 0.00 0 0.00
9. Lockheed Martin is a major player in the defense segment. 0.03 0 0.00 0 0.00
10. Executive jet market is closely tied to the state of the economy. 0.03 1 0.03 3 0.09
 Sell 200 ERJ Sell 100
Jets to Delta Executive
and Spirit Jets in China
Strengths Weight AS TAS AS TAS
1. Embraer has reached a joint venture with China's AVIC II to
0.08 0 0.00 0 0.00
deliver 1,000 ERJ 145 jets by 2020.
2. Embraer commercial jets are produced with seating options
generally between 70 and 124 seats on the E-Jets and 37 to 50 0.07 0 0.00 0 0.00
passengers on the ERJ jets.
3. Both Delta and JetBlue use Embraer jets to shuttle passengers
short distances. Since 1969, Embraer has delivered over 5,000
0.07 4 0.28 1 0.07
aircraft to airlines or militaries in over 100 countries on five
continents.
4. Embraer’s Commercial Aviation segment accounts for over 60%
of all company revenues. Embraer has over 90 customers, 0.07 4 0.28 1 0.07
including 30 of which are airline companies, on five continents.
5. The E170 and E175 models are designed for 70 to 88 passengers
while the E190 and E195 jets are designed for 93 to 124 0.07 4 0.28 1 0.07
passengers.
6. Embraer’s second most profitable segment is Executive Aviation,
accounting for 19% of all revenues; the firm offers 3 different
0.05 1 0.05 4 0.20
styles of executive jet and has transitioned well into the low-end
business jet market.
7. Embraer provides 48 different nations with services and
products contained under the Defense and Security’s umbrella,
0.05 0 0.00 0 0.00
including supplying the Brazilian Air Force with 70+% of its
fleet. This segment accounts for around 15% of total revenues.
8. No geographic region accounts for more than 25% of total
0.05 0 0.00 0 0.00
revenues; new manufacturing plant in Melbourne, Florida.
9. Embraer's new deal is worth up to $4 billion to supply the
0.07 0 0.00 0 0.00
regional network of American Airlines.
10. Embraer is promising a jet that flies higher, faster, and more
0.04 0 0.00 0 0.00
economical than Lockheed’s Hercules.

Weaknesses Weight AS TAS AS TAS

1. Embraer has over 17,000 fulltime workers and over $15 billion
0.07 0 0.00 0 0.00
worth of aircraft on back order.
2. A drawback with the E-Jet is that it does not have the fuel
0.02 0 0.00 0 0.00
capacity to fly across the USA.
3. North America only accounts for 20% of worldwide revenues. 0.05 4 0.20 1 0.05
4. ROE is 6.7 compared to the industry average of 34. 0.06 3 0.18 2 0.12
5. Embraer delivered 19 commercial and 25 executive jets in 3rd
quarter 2013, providing a bad mix, and putting Embraer at risk of 0.03 4 0.12 2 0.06
not meeting its financial estimates for 2013.
6. In October 2013, Embraer workers rejected management’s 6%
0.08 0 0.00 0 0.00
pay increase offer and briefly stopped working.
7. Legacy jets are underperforming in the USA market. 0.04 2 0.08 3 0.12
8. Since January 2011 through 3rd quarter 2013, Embraer’s stock
0.03 3 0.09 2 0.06
has not appreciated in net price.
0.00 0 0.00 0 0.00
9. 0
TOTALS 3.88 2.10
 Focusing on expanding the Commercial Aviation segment in the USA market is a run away winner as
revealed by the QSPM. However, focusing on business jet customers in China is not nearly as capital
intensive and would also benefit the firm.

K. Recommendations
1. Sell 50 ERJ 175 Jets to Spirit Airlines for a production cost of $20 million each.
2. Sell 50 ERJ 175 Jets to Delta for a production cost of $20 million each.
3. Sell 10 ERJ 175 Jets to Croatia Airlines for a production cost of $20 million each.
4. Sell 100 Executive Jets to Chinese customers by 2015 for a production cost of $3 million each.
5. Increase Commercial Aviation segment from 60% of 2012 revenues to 80% of revenues by 2015.
6. Spend $10 million to market and promote the new Hercules aircraft.

L. EPS/EBIT Analysis (in millions expect for EPS and Share Price)
Amount Needed: $500 (initial amount needed of $2,700)
Stock Price: $ 8.06
Shares Outstanding: 740
Interest Rate: 5%
Tax Rate: 43%

Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom
EBIT $300 $500 $800 $300 $500 $800
Interest 0 0 0 25 25 25
EBT 300 500 800 275 475 775
Taxes 129 215 344 118 204 333
EAT 171 285 456 157 271 442
# Shares 802 802 802 740 740 740
EPS 0.21 0.36 0.57 0.21 0.37 0.60

20 Percent Stock 80 Percent Stock

Recession Normal Boom Recession Normal Boom
EBIT $300 $500 $800 $300 $500 $800
Interest 20 20 20 5 5 5
EBT 280 480 780 295 495 795
Taxes 120 206 335 127 213 342
EAT 160 274 445 168 282 453
# Shares 752 752 752 790 790 790
EPS 0.21 0.36 0.59 0.21 0.36 0.57

Once EBIT moves past $300 million, debt financing becomes a more attractive option for Embraer to
finance its expansion of the Commercial Aviation segment.
M. Epilogue
In June 2013, Embraer and Boeing partnered on the sales and marketing of Embraer’s KC-390 – a military
aerial refueling aircraft with advanced capabilities. Under the agreement, Boeing is the lead for KC-390
sales, sustainment and training opportunities in the U.S., UK and select Middle East markets, but Embraer
manufactures the aircraft and collaborates on sales, sustainment, and training. This agreement strengthens
the level of cooperation between both companies and both countries (Brazil and the USA) in the defense
industry. The potential market for KC-390 is 700+ aircraft. Boeing and Embraer are also collaborating on
aircraft efficiency and safety, research and technology, defense products and sustainable aviation biofuels.

Also in June 2013, a new commercial airline in Europe, Air Lituanica of Vilnius, Lithuania, purchased two
Embraer E-Jets. In July, Air Lituanica purchased another E-Jet, an EMBRAER 175, leased from ECC
Leasing Company, Ltd., a wholly-owned subsidiary of Embraer. In addition in June, SkyWest ordered 100
E175-E2 aircraft, with another 100 Purchase Rights, bringing the total potential of the order to 200 aircraft.
The SkyWest contract has an estimated value, at list price, of USD 9.36 billion. This new purchase is in
addition to SkyWest’s previous order in May 2013, for up to 200 current generation E175 aircraft, and
therefore the potential order of E-Jets from SkyWest may reach 400 aircraft.

In April 2013, United Airlines purchased 30 EMBRAER 175 jets, with options for an additional 40 of the
same model, taking the firm order and options to a total of up to 70 aircraft. United Air’s combined order
has an estimated value of USD 2.9 billion at current list prices.

In October 2013, Embraer union workers rejected the company's wage-increase offer of about 6 percent
and temporarily stopped work at an airplane factory in Brazil. This bad news, however, came amidst some
good news in October 2013 when the company announced the sale of three of its E195 jets to two European
airlines, Belavia of Belarus and Guernsey-based Aurigny Air Services. In a contract with Minsk-based
Belavia, Embraer will supply two 122-seat E195s for $80 million. Aurigny Air Services is also taking
delivery of an E195 in 2014. Aurigny Air Services mainly flies between London Gatwick airport and
Guernsey, a British dependency in the English Channel. Embraer is to receive $40 million from the
Guernsey-based Aurigny for each E195. Deliveries of the first E195 are scheduled for the second half of
2014.

Chapter 22: Embraer

10 Basic Questions

1: C

2: B

3 D

4: A

5: C

6: A

7: B

8: B

9: A
10: C

15 Applied Questions

Internal Factor Evaluation (IFE) Matrix

1: D

2: A

3: D

4: C

5: A

Strengths, Weaknesses, Opportunities, Threats (SWOT) Matrix

1: B

2: C

3: C

4: A

5: C

Foreign Business Culture

1: C

2: A

3: B

4: C

5: D