Podcast: Embraer’s CEO on the Breakup With Boeing and Going It Alone

Listen in as CEO Francisco Gomes Neto gives his side of Embraer’s breakup with Boeing, what he thinks of finding new partners, and how he plans to steer the Brazilian aircraft company through the COVID-19 storm.

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Below is a rush transcript of Aviation Week’s October 26, 2020, Check 6 podcast.

Joe Anselmo:             Welcome to the Check 6 podcast. I'm Joe Anselmo, Aviation Week's Editorial Director and Editor-in-Chief of Aviation Week & Space Technology. On this week's podcast, we have a very special guest. In April of 2019, Embraer selected veteran automotive industry CEO Francisco Gomez Neto as its new leader. And if ever there was a baptism by fire, he has gone through it in 2020. First, the COVID-19 crisis hit, crippling air travel and decimating demand for new airplanes. Then, Boeing pulled out of a $4.2 billion deal to acquire an 80% stake in Embraer's commercial operations -- after Embraer had shut down its operations for 40 days and torn the company apart for the carve out.

                                    So where does Embraer go from here, and how can it recover? Here to answer those questions is Mr. Gomez Neto in his first conversation with the trade media since taking the helm at Embraer. Also joining us from Frankfurt to ask questions with me is Jens Flottau, Aviation Week's Executive Editor for Commercial Aviation. Welcome, Francisco. Let's start with the obvious question. Why did the deal with Boeing collapse, and what are you doing to put Embraer's commercial operations back together?

F. Gomes Neto            First of all, it's a pleasure to be here with you. Thanks for the invitation for this podcast. Well, we believe that Boeing has wrongfully terminated the agreement, and the reason is to avoid [closing] the transaction and paying us, as you said, the $4.2 billion purchase price. Because of the reintegration of commercial aviation, I think we are progressing very well. We're doing this fast. All the administrative areas and the service areas are completely reintegrated. We have also updated our strategic plan, now including commercial aviation, and also taking into consideration the impact of COVID-19.

Jens Flottau:             How do you plan to return the company to profitability, and what initiatives are most promising?

F. Gomes Neto:           As you know, this year we are dealing with two big issues. The first one was the drop in our revenue because of the impact of COVID-19. Then the termination of the deal with Boeing made the situation even more challenging, because we are dealing with this drop in revenue combined with costs much higher than normal, because of all the costs we created with that carve out process.

                                    This year, we implemented a crisis committee and defined five new priorities for the company, to help us with the right focus, and to help us with the communication to our teams. I will go quickly through these five new priorities. Number one is to protect the health of our people because of this COVID issue, right? We kept a lot of people working at the home office, and the ones who we brought to our plants, we took all the measures we could to protect their health.

                                    The second priority is to protect our cash, so we really put a deep focus on controlling our expenses, on reviewing and reducing our investments, on improving our account receivables, payables. We did everything we could to protect our cash. We even went to the banks, and asked for some loans to help us with the liquidity to go through this situation.

                                    Priority number three was to recapture synergies. As I said before, we have to recover a lot of these synergies we had because of the carve out process. Synergies, we improved the process, and also we promoted a rightsizing of the organization. We needed this restructuring of the organization, not only to reduce costs, but to bring a new dynamic for the company, to prepare the organization to better [inaudible] our strategic planning.

The fourth priority is a compliment of this, to have a lean, more efficient, and more agile company. Priority number five is to build the basis for our future growth. There, in a very collaborative way, we do very robust strategic planning we call Embraer 2125. We want to go already in 2021 even with a very conservative approach in terms of sales, but to improve substantially our financial performance. Then from '22 on, with a market rebound we expect, then we enjoy that growth and… improve substantially our financial performance. Sorry for the long answer.

Joe Anselmo:              Francisco, part of the beauty of your deal with Boeing was the E-Jets would fit in at the lower end below their line, but you were also going to co-market with them the [Embraer] C-390 military transport. Are both those deals dead? Are you no longer cooperating with Boeing on either of those?

F. Gomes Neto            Well, of course I think that this deal, when it was made, was strategically very good for both companies because of the complimentary [nature] of both parties. But now, it didn't work, so now we are going to move on with our own lives. In terms of E2s, I think we have a very modern product, state of the art. We are a leader in that segment of 250 seats, and it gives us this [inaudible]. We are now working on a sales campaign, and there is a potential candidate for a new partnership.

Joe Anselmo:              Beyond Boeing?

F. Gomes Neto            Yes.

Jens Flottau:                You were talking about your strategy for the next four years. Does that include looking for a new financial strategic partner for the commercial aviation business, or is that now firmly a part of the future Embraer?

F. Gomes Neto            Yes. The strategic plan has basically two main objectives: to increase our revenues, and to improve our profitability. We want to do this through three fronts of action. The first one [is] efficiency gains. The second one is the sale of our current portfolio, because we believe it's a new and very competitive portfolio. Number three is through diversification, partnerships and innovation. In terms of partnerships, to answer your question, we are working on different fronts also to open new markets for our products, or to find partners to help us, for example, to develop the new turboprop, the turboprop new generation, for commercial application. We have a good project. We believe it's a good product, and we are now looking for partners to help us to develop [inaudible].

Jens Flottau:                Since you mentioned the turboprop, that was a project, obviously, that you were very actively working on before the collapse of the Boeing deal, and before COVID arrived. You're saying you might revive that at some point?

F. Gomes Neto            Yes, that's the idea…  We are making sure that we keep the investments necessary to execute our five-year strategic plan. Then for the turboprop, we like the project. We believe that project has a future, but at this point in time, we really need a partner, one or two or three partners, to come with us and contribute funds to develop the aircraft.

Joe Anselmo:              You spoke of your belief that the commercial market will begin to climb out starting in 2022. There are some lines of thinking that when it does climb out, airlines will be looking for smaller, more efficient jets. Is the E2 going to come out of this in a better market position than it went in to this crisis?

F. Gomes Neto            We think so, we do believe. It's difficult to see when this crisis will end, but we do believe that the regional market will rebound first, and airlines will look for more versatile, flexible, and more economical jets to improve their profitability as well. So in this scenario, I think our E-Jets will fit perfectly into the airlines. That's our expectation.

Jens Flottau:                If I can add a little anecdote here, I was doing an interview with the CEO of Austrian Airlines this week. He told me that they are flying all 17 E195s they have, Embraer 195s, and have grounded the entire Airbus 320 family, because the size of the E1s fits their requirements right now in a down market. But if I may, I'd like to go to future technologies for a moment. As you know, Airbus has announced a big push into hydrogen just a few weeks ago, to many people's surprise. What's your take? Is it hydrogen? Is it sustainable aviation fuels? Is it hybrid electric? What's Embraer's strategy?

F. Gomes Neto            Well, we understand that the hydrogen propulsion is, of course, one of the [inaudible] lines of research for the future, but really, it's still in a very premature stage. At Embraer, we are working on an aircraft with hybrid electric propulsion. We have already research on this fuel. We believe that this technology will be available in a short and medium term for commercial use. We are working on this line at this point in time.

Jens Flottau:                So the turboprop that you mentioned earlier, would that be some hybrid architecture?

F. Gomes Neto            Not the turboprop yet, at least, but we are working on a new light military aircraft. This aircraft, we are working with the Brazilian Air Force, and this aircraft will have this hybrid electric propulsion at this stage of development of the project.

Joe Anselmo:              Francisco, you've been very efficient in your answers. Mind if we ask you a couple of more questions?

F. Gomes Neto            Yeah, please. Of course.

Joe Anselmo:              Okay. Executive jets, obviously it's the third leg of the Embraer business besides commercial and military. What is the future of your executive jets business? Could you see Embraer partnering with someone else? Selling it? How are you going to sustain and grow that business?

F. Gomes Neto            Well, at this point in time, Joe, we do believe we have a great product portfolio. We have basically four products. We have the two Phenoms, the Phenom 300, we just launched the Phenom 300E. The 300 is the most sold aircraft in its segment for, I don't know, seven, eight years in a row. We launched the Praetors more to succeed the Legacyss, also a very modern aircraft. We are working now to enhance our sales, and working very hard to reduce the costs of those parts to be more competitive and gain market share in those fields. We do believe we have room to grow our volume in the [inaudible] market with our products. Future partnership is a possibility, but it's not on the table at this point in time.

Jens Flottau:                If you look at what used to be called the regional space, there's been so much change. The [Airbus[ A220 seems to be growing into the main line segment. Mitsubishi has halted development of the SpaceJet. You're kind of in a monopoly for now. How's that going to play out longer term?

F. Gomes Neto            We respect our competition and we believe we have to be prepared to compete with the new players in this society. So as I said before, we are doing our homework, those of efficiency gains. We are working very hard. We use the production cycles of our air parts, reducing costs to be more efficient. In our material management, we are reducing our inventory to be competitive, and to face the situation in case we do have to face new competition with Mitsubishi or other ones.

Jens Flottau:                A lot of the airlines are being helped by their governments. There's huge research funds available to Airbus and the Europeans here for hydrogen in particular. Are you going to the Brazilian government to ask them about help?

F. Gomes Neto            Embraer does not need to be saved. We did a great job in terms of financial strategy, with loans from the Brazilian bank BNDES to support our work and capital. Not only BNDES, but complemented by Brazilian and foreigner other banks we have reached out. More recently, we issued some bonds to [inaudible] our debt profile.

I think we are in a very comfortable liquidity situation to go through the next two or three years, and have time to do the homework we are doing already to fix the organization, to be the right focus on the results, on the execution of the strategic plan. That's why I'm very confident that Embraer will have a bright future ahead, even better than we used to show before. I believe in this five year plan. In the course of this plan, we will achieve revenues higher than the highest ones we achieved in the past, because now we have new products. We have this C-390, we have the products for the Brazilian Navy, Brazilian Army, cyber security, [inaudible] services in our service area. We have more service and products that we had before, but with an all new structure, more efficiency, and focus on sales of new products. I think we will be better than before, and the result of partnerships and innovations are not included in this plan, but upsides, so this might take Embraer to even higher levels of growth beyond 2025.

Jens Flottau:                So for the commercial aviation division which was carved out completely, is it going to remain separate, or will you completely reintegrate it into the group structure?

F. Gomes Neto            Oh, it is being reintegrated into the group structure. Of course, some systems… If it's more expensive to reintegrate that as it is, we will keep it as it is, but all the business has been reintegrated. We have no intention to sell commercial aviation or any other business unit anymore. We are open to partnerships, but not one so complex or radical as we tried to do with Boeing. No, we want to look for partners to open new markets, new productions, services, and new projects as I mentioned, the TP, and so on. We're not [going[ to sell a complete unit anymore.

Jens Flottau:                When you say partnerships, that means partnering in projects, and not someone else taking a stake in some part of Embraer, right?

F. Gomes Neto            Well, we are working in different business models. What I'm telling you is that we do not intend to sell a complete unit as we did with Boeing. We might have a partnership for one price, like the TP. We are now working different business models for the projects, but not a complete business unit anymore.

Jens Flottau:                Got it. Joe?

Joe Anselmo:              Francisco, I wanted to wrap up this podcast by bringing the interview full circle. I interviewed Boeing CEO Dave Calhoun in July, and he told us, this is a quote, "This deal fell apart because what we thought we bought didn't turn out to be exactly what we got." He also said certain conditions in the deal were not met. I wanted to give you equal time. What's your side of the story? Is that a fair characterization by Mr. Calhoun?

F. Gomes Neto            No, that's not. Embraer believes it is in full compliance with its obligations under the wing. At the end, we do believe that Boeing has wrongfully terminated the agreement to avoid closing the transaction and pay the proper $4.2 billion purchase price.

Joe Anselmo:              Okay. Francisco Gomes Neto, thank you so much for taking the time to share your thoughts with Jens and me. That is a wrap for this week's Check 6 podcast. Special thanks to our producer in London, Guy Ferneyhough. Join us again next week for another edition of Check 6, which is available for download on iTunes, Stitcher, Google Play, and Spotify. If you like what you've heard, please give us a positive review. We appreciate your feedback. Thanks for your time, and have a great day.