Sao Jose dos Campos – Saying that last year’s decade-long forecast was more optimistic, Embraer’s forecast this year has been reduced by about 30% in terms of units and dollar value, according to Embraer Vice President-Executive Jets Luis Carlos Affonso, who met briefly with reporters in a pre-National Business Aviation Association session recently.

Affonso said the market has stabilized at a very low level. “We hope that from now on we will only see recovery,” he told Aviation Today’s Daily Brief. “We see some signs of recovery, especially in emerging markets in Asia Pacific, Latin America and the Middle East while the more mature markets in Europe and North America remain very slow.”

Even so, its forecast calls for a large contraction in deliveries this year, which does not include for Eclipse Aviation’s bankruptcy and cessation of production. Last year there were about 1,200 deliveries compared to the 900-1,000 deliveries expected this year, according to Vice-President Market Intelligence, Executive Aviation Claudio Camelier, who concurred with Affonso’s assessment, saying North America and Europe have been impacted by the negative perception public and press have of business aviation in general. However, he added, that executives are still looking for the mission flexibility, speed, privacy and productivity offered by business aviation.

He pointed out that this issue was not new to the industry having been faced by Former Chrysler CEO Lee Iaccocca in the 1980s. “The CEO’s of the three big car manufacturers lacked the starch of Lee Iacocca, who faced the same dilemma in the early 1980s when he appeared before Congress asking for loan guarantees to bail out Chrysler,” said Camellier. “Confronted with the same congressional grilling, Iacocca said of the corporate aircraft, 'OK, I’ll sell it, but I will be damned if I know how I will run Chrysler’s plants in small towns all over the USA. I guess I will just have to lease it back.'”

In the Very Light Jet, or entry level as Embraer calls it, deliveries are expected at 200 this year, split evenly between the Cessna Mustang and the Phenom 100. He also said VLJs are expected to take a bit of market share from the light jets, but will also reflect first time buyers. “2011 will be similar to 2006, which was not a bad year,” he said, adding the company still had faith in the air taxi market pointing to the branded charter model being used by Embraer customers Jetbird and Jetsuite.

“Between 2009 and 2018, Embraer expects 10,990 jets, valued at $188 billion to be delivered,” said Camellier. “The mix has changed. Two years ago we expected 11,000 deliveries in the decade of the forecast. Then it went up to 13,150 and has now been scaled back. Geographically, 50% will be delivered to North America with 30% to Europe, Africa and the Middle East. Twelve percent will go to Asia Pacific and 7% to Latin America.”

While China has huge market potential, he said, it will be hamstrung by infrastructure and cultural issues which puts most deliveries in the second half of the next decade. He also indicated that, while Embraer continues to track high-net-worth individuals and the requirements for ultra-long-range aircraft, it views such statistics as more helpful to determining where it puts its sales force rather than for new products.

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Camellier also noted that airline recovery would not impact the forecasts since airlines in most of the world were doing nothing to compete with business aviation and, in fact, were cutting both mainline and regional capacity, improving the market for business jets. However, the situation was markedly different in the Middle East where airlines were targeting business jet users.

Camellier said the forecast was pegged to GDP, the stock market and corporate profits and thus, as expected, the North American and European markets will trail in the recovery. He noted that in the first half of 2009 GDP was going markedly down, with a 2.5% to 3% retraction. However, there were now signs of improvement with 2010 expected to grow 1%.

“This will not be a recovery because in 2008 it was 2% so it will take three to four years for the economy to recover,” he said. “We see 2012-2013 for recovery on deliveries. One important driver for business aviation is the stock market. While there is a big contraction with the stock market worldwide last year, in the last four months there has been recovery worldwide although there is still a great deal of volatility. If stocks go up, business jet sales are expected to follow.”

Camellier also said that business jet activity was already slumping before the height of economic troubles during the summer and fall of 2008, but as of July 2009, it was down a further 15% in total operations. “The charter and fractional markets contracted at a larger percentage at 22% to 23%,” he said. “July of 2008 was also down 15% from 2007 so we are actually looking at a 30% retraction. The numbers are stabilizing, however, with monthly number of operations showing some signs of recovery. They numbers, at least, are not getting any worse. That might be a reaction to the stock market or the general mood of the economy.”

The European scene mirrored that of the U.S. Business aviation traffic was down 14% between August 2008 and 2009, Camellier reported, a contraction which, unlike the U.S., began in the second half of 2008. “Between July 2006 and July 2008 the European market grew 10% per year,” he said, “and, even with the retraction, that market is better than it was a decade ago.”

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Looking at corporate profits, Camellier noticed the contraction started in 2008 and this year, Embraer expects corporate profits to be down 17% compared to 2008. It also expects a recovery next year.

“From a sales perspective,” said one Embraer sales exec, “if you look at May of last year you see the US slide and the pipeline was just not as full as in the last three to four years. The lesson learned is not to be in denial. We chalked it up to summer doldrums and after that to the elections and then we thought the market was waiting until after President Obama was sworn in. No sooner did that happened, then he came out and said don’t fly.”

Camellier concurred. “Once Lehman collapsed we knew we had to do something, but it wasn’t clear until the New Year,” he said. “We kept thinking that the rest of the world was doing great and our back log was huge. By the New Year, it was very clear because we had never seen both sides of the Atlantic be so bad at the same time. Usually one carries the other during bad times. In January, customers began postponing deliveries on both the business and commercial sides. In 2008, we had 60 Legacy/Lineage deliveries and this year we will have 35. That will give you an idea of the level of postponements and cancellations.”

While Embraer will deliver 27 Legacy 600s and Lineage 1000s this year, Camellier said that the Phenoms presented a different picture since the company was in the middle of a production ramp up with the delivery of the first Phenom 100 last December. “Instead of delivering between 120 and 150 this year, we will be delivering 110,” he said. “However, we have no white tails. If this had to happen, it could not have happened at a better time since all we had to do was just slow the ramp up compared to our competitors which all had to slow down production. Embraer is the only OEM that has avoided building white tails.”

However, that means that Embraer is competing with all those white tails in sales, making new sales for the company difficult. “We are competing against distressed sales, not to mention the pre-owned market,” he said. “There are about 500 that are less than five years old.” He noted they were decreasing at a faster rate than older pre-owned aircraft.

As for that market, there are just under 3,000 units for sale, an all time record, representing 18% of the fleet, the same level as 2001. “However, the number of aircraft is larger because the fleet is bigger now,” he said. “A lot of people believe than many of these aircraft are not actually for sale but have a high price so they won’t sell, according to NetJet.”

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Interestingly, conversions of airliners to the business jet market is not that successful, although a new company – Phoenix – emerged last year to remarket Bombardier airliners. Not surprisingly, it is because of the high time – 12,000 or more hours – incurred by airliners compared to business jets.