Brazilian aircraft manufacturer Embraer S.A. (ERJ) clinched a major contract with the world's largest regional airline group SkyWest Inc. (SKYW) to sell as many as 200 aircrafts. This deal − valued up to $8.3 billion − would revive the Brazilian company’s stressed commercial aircraft unit.
The latest contract is considered as one of the largest in Embraer’s history and involves an initial order of 40 E-175 jets from Embraer, with deliveries set to begin in the second quarter of 2014 and ending in mid 2015. SkyWest will fly the 40 E-175s for United Continental Holdings Inc. (UAL) under a 12-year contract.
SkyWest also placed a provisional order to buy an additional 60 aircrafts, depending on securing contracts with other airlines operators. Per the deal, SkyWest has the option to purchase 100 more aircrafts that would bring the total potential value of the deal to $8.3 billion.
Upon exercising the order for 100 jets − with an estimated value of $4.1 billion at current list prices − Embraer’s backlog will be boosted by 20% from its first quarter 2013 backlog of $13.3 billion. For now, the company is putting only the initial 40 jets in its backlog.
The deal will be a shot in the arm for Embraer’s commercial aircraft division, which has struggled amid weak global demand. The unit now accounts for only about half of the Brazilian group’s revenue.
The company’s first-quarter earnings also went down drastically by more than 98% from the year-ago profit. The reported figure also missed the Zacks Consensus Estimate by 60.5%. The lower number was mainly due to the lower number of aircraft deliveries and product mix.
However, a recovery in demand will help the beleaguered company to boost its backlog to the levels seen in 2008 when it peaked at $21.6 billion.
In Apr 2013, Embraer received an order from United Airlines, a subsidiary of United Continental for 30 E-175 jets, with deliveries scheduled for the next year and the year after. The order is worth a combined $2.9 billion at list prices and includes options for 40 additional E-175 jets.
Although the company’s earnings in the last reported quarter were hurt by rising labor costs and a fall in commercial aircraft deliveries, fresh contracts will likely provide Embraer the impetus for future growth.
Embraer currently has a Zacks Rank #3 (Hold). We would advise investors to accumulate its Zacks Rank #1 (Strong Buy) peer Erickson Air-Crane Incorporated (EAC).
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