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This is Matt Russell and we are back in the world of aviation today breaking down
Embryer. Now commercial aviation is one of the most famous duopolis in the world. You have
Boeing and Airbus that dominate all the headlines and those large commercial jet orders.
Yet Embryer has carved out this interesting niche manufacturing, regional jets,
business jets, and military aircrafts. In comparison, Embryer has about a $5
billion market cap and did about $5 billion in sales last year as of the time of this recording
in the spring of 2024. And that's about a tenth of the size of Boeing and Airbus on both of those
metrics respectively. Our guest today is Richard Abelafia, managing director at aerodynamic advisory
and long-time aviation analyst and consultant. And we want to give a special shout out to the
Adlots podcast. We heard Richard tease the intrigue of Embryer on a recent episode and naturally
we needed to learn more. So we break down how this aviation success story grew out of Brazil.
We talk about the evolution of the regional jet market, the business jet market,
tap a little bit into military aircrafts. And of course we cover the opportunity presented by Boeing
today. As Richard puts it so well, it would take a bet the company type approach if they were
really go after Boeing's market position. And whether or not that's realistic, I really like
the framing and it's a fun thing to think about. So please enjoy this breakdown of Embryer.
All right, Richard. I'm excited to talk Embryer today in the world of aviation and aircraft
manufacturers. It's often categorized as doopoly with Boeing and Airbus, but there is space for
others clearly. And I thought we could just start there with how Embryer fits into the ecosystem.
Yeah, Embryer is a fascinating story and we can talk about its origins and what that all means.
But in terms of the here and now, it's a deeply respected niche player in three different areas.
One is business jets, the other is military. And finally commercial where it had regional
jet origins, actually regional prop origins and then regional jet origins. And then came up with
its current family of E2 series, which almost get into the bottom end of Airbus and Boeing territory,
but not quite their great products. They're certainly relevant for the markets they address.
But in terms of challenging Airbus and Boeing, they're just not quite there in terms of range and
capacity. You mentioned there, interesting origins, businesses based in Brazil came from Latin
America. I typically think of the commodities industries where they have mining operations.
You have a lot of oil and gas businesses come out of that region, certainly banking sector
to support economies, but not too many manufacturing businesses like this. So maybe you can bring us
back to the start and what created or what was the idea behind launching a business like Embryer.
If I could come up with one phrase that describes the origins of Embryer and its implications
and meaning for the future, it would be, don't try this at home. This very strange story,
not to belittle it, but it was kind of a fascist hunter hobby shop back in the late 60s.
One popular theme in Latin America and economics and politics back in the 60s and 70s was autarky.
The idea that they should cultivate homegrown industries that would allow them to effectively
sustain themselves and generate economic growth. 99.9% of this failed miserably. Embryer, however,
worked out pretty darn well. It began as a way to build military systems in some very
basic small transports. The kind of thing an emerging nation might need circa 70 or 80 years ago,
whatever it was. And well, it evolved, it worked out. And back when things were getting really good
in the 90s, they made the incredibly smart move of privatizing. And that brought them discipline,
that brought them great management. But two things about it, again, don't try this at home,
because every other cock-a-mami autarky scheme in the region pretty much failed with a couple
of other exceptions, but 99% failed. And more relevantly, globally, this idea failed. The idea
that, hey, kids, let's build a factory in the jungle and build aircraft. There were a lot of new
market entrants, even next door in Argentina. There was an effort, Chile, the most spectacularly
Indonesia had IPTN. And all of them either failed outright, globally sometimes, sometimes is cash-sucking,
corrupt parasites on society. Embryer is the only company in Brazil, is the only country,
to successfully enter this business over, well, pretty much since 1960s. It's an incredible story.
But again, don't draw larger lessons from this, because frankly, everyone else you tried it
failed miserably. The outliers are always dangerous to pull lessons from. I was wondering,
was there a key individual or personality behind these efforts that really led to that success,
any key players in the history? Obviously, my memory is a bit more recent. I joined the
industry in the late 80s. Where's your hotel, though? I believe was a very key player. He was the
last to enjoy the lavish resources associated with the government-owned operation. But he also began
to recognize that, hey, the winds of privatization are coming and it's probably for the best. So he
was a key player. Fred Carrado, I believe, was, if not his immediate successor, but right after that,
but he really did fantastic things for the company, especially back late 90s, really 2000s.
Introduced the current 190, 195 series. I believe he also played a role in diversification,
because the business jet part of the company was relatively late. They didn't do that till
the 2000s. Before that, it was military and commercial, but not biz-ev. So that was a key move,
because that tends to be a more lucrative segment of the world aviation industry.
When I think about that, Aright, you mentioned where their origin story was. The
uprise of some more regional-based airlines. Yeah, that's right. Their break into the US
market was with the EMB-120, the... Brasilia, I believe, in the 1980s. And at the time,
post-eregulation, a lot of regional passenger operations were growing to feed hubs for the
large legacy airlines. As a 30-seater, the 120 was cheap and cheerful, and lots of people
adopted it. So that was their entry into the North American market. It allowed them to grow their
product support infrastructure, and of course, sales infrastructure. And it made them realize that
their past, again, Brazilian hobby shop for local needs was not their future. Their future was
an export business. It also established one of the most important principles of Embraer's evolution,
which is the Dell computer model that really... They don't want to do everything. They don't want
to be vertically integrated. They don't want people to transfer technology. They simply want their
engineers to go shopping for the best systems, best value for money as a principle. And you contrast
that with China. It's the exact opposite. People ask, well, China'd be the next Embraer. The answer
is, oh, hell no, they're doing it all wrong. Basically, Embraer said, we want to integrate your
systems. We don't want the technology. We simply want to provide best value. So it was that period
then that they established that as they're operating principle. How does that compare to a bowing
or air boss, just in terms of the integration side of things? Pretty much the same. It's just that
a lot of people who want to do it on their own, be it Indonesia or whoever else, India, China,
most notably, have this notion that, well, we need to be truly autarkic. We need to create it in
country, in country engines, in country avionics. The way to do it is air boss and bowing and also
Embraer. You integrate other people's systems and you don't demand technology transfer because
that leads people to bring you their latest invest from 20 years ago. They're not going to trust you.
So air boss and bowing are that standard. Embraer tends to be a bit more pro outsourcing, although,
of course, these are cycles that air boss and bowing go through. The regional jet market,
comparing that to when I think of the larger aircraft that bowing and air bus tend to dominate,
can you just paint a little bit of a picture in terms of maybe popular flights, obviously,
something like New York to Boston, I would assume is on a regional jet. How far does that span out?
And then how would you just classify those two markets next to one another?
New York to Boston is a trunk route. It's going to be thick. It's going to have bigger jets on it.
Really, what we're talking is say, oh, Burlington to New York, secondary cities eating into the
primary hubs. It's funny back when there were six or more large legacy airlines. As you can imagine,
this was huge business. In the 90s, the idea of a regional jet, oh my goodness, if you can imagine,
regional service with a jet before that it was all props pretty much with a few small exceptions.
But Embraer, along with their arch nemesis Bumbardi A at the time, got there first with a regional
jet, which effectively used the tube of the 120 with new wings, new engines, whatever else,
new cockpit, and created the 145 series. And this was huge. This was their real breakthrough.
It was that combination of being in the right place at the right time with the 145 coupled with
privatization. They took place simultaneously that allowed Embraer to be the great company it
is today. But anyway, adding regional jets to the mix allowed people to go further. So it wasn't
just say Burlington to New York, it would be Dayton or further out, 800, 900, a thousand nautical miles.
So thinner routes that allowed you to feed into a hub. And of course, from the standpoint of airline
operations, it's usually important. You're not going to five people to Paris from Wichita,
probably not. So you're going to want to bring them to say Chicago or Washington or whatever.
And then fly them. So you need this big hub and spoke operation to feed your primary hubs.
And how has the consolidation of the airline industry, we can focus on the US had an impact on
the regional market and maybe relative to the longer range market?
It's been really damaging. That's an important question. Because of course, you've gone to three majors
in four, if you count Southwest, but they don't really have that hub and spoke operations. So they
don't use regionals. A lot of those hubs were deemed superfluous. You look back 20 years,
Pittsburgh, Charlotte, why not? These are major hubs. Well, no longer, sadly. St. Louis, once the
hub before, TWA, my goodness. And TWA had regional feeders. The joke at the time was how many airlines
will there be in the year 2025? There'll be three to globally merged mega carriers and
financially troubled TWA, somehow they eventually died. All of this was devastating for regional
aircraft producers. There used to be about 10 of them. And now there is, let me count, let me think,
one, I should say two, because ATR still builds regional turbo props, which no one uses in North
America. But the only regional jet producer is Embraer. And it's surprising to me in some sense,
where as civilization moves forward, you would think that something like this, you would have more
opportunities, more access. So it just from your point of view, obviously the airlines had all
types of issues in terms of balance sheets and unions and competition. But it does just run
counter to what I would think is common sense would say that we'd continue to have more opportunities.
So when you think about the outlook for regional in the future, do you have any sense that there
will be a rebound or recovery, a rebirth of more of these hubs? Not the hubs, but the fleets.
There's a greater focus on point to point travel. In other words, people don't like being boxed
up and shunted through Charles DeGaulle or JFK or Nareta. They really don't like it at all.
They'd rather fly direct, say from Boston to Dublin, whatever. So you're getting more cities
with international service, you're getting more direct. You're getting a lot more of the southwest
effect suburban airlines, Southwest doesn't use regionals, neither does jet blue. A lot of the
new folks in town recently, a legend in Frontier, and now more recently breeze or what have you,
they just do point to point between secondary cities, Dubuque to Las Vegas. So there's last
need for regionals. However, there's this big mystery. There are thousands of 50-seat planes still
flying. Embraer has long since ceased production of the 145. Pretty much everyone has ceased production
of 50-seat aircraft, almost everyone. Water places them and the default answer is you bump up to
Embraer's smallest aircraft, which is the E-175, 75 seats or so. And they're starting to do pretty
well with that. It's not an ideal solution, but it's the only game in town. When you say it's not
an ideal solution, I assume it's because the 50-seat planes are made for aircrafts that are lucky to get
50 people on them for those flights. Is that basically categorize it? Yeah, that's right.
People do like frequency and regional operations. Having said that, there's a seat mile cost
production, the more you go up, and that's always been the problem with regional aircraft.
Now, Embraer saw all of this coming. They've got really good planning capabilities,
and that's why they diversified. The 175 is a true regional. The 195, 95 really are not. No one's
going to use it to feed a hub. There may to be point to point to aircraft. The problem is it's also
neither here nor there. It's not a regional, but it's not really a true major. It's doing well
enough. You're talking 30, 40 planes a year. So that raises the question of what they do next.
Of course, part of the diversification strategy was also business jets, and that's done very well
for them. But from their regional origins, they have done a really good job of expanding it.
In those early days, you mentioned it was a breakthrough to be able to fly on a jet, to do one of
those shorter routes or less dense routes. I'm just curious when it comes to the players like
Boeing and Airbus, was that just not an attractive opportunity? Was it actually a technological breakthrough
for Embraer, or was it something that the larger players may be just ignoring because of the
profit opportunity? Yeah, for Airbus and Boeing, these were margin destroyers. The regional jet marketplace
was regarded as this how to put it gently just distorted fantasy land of Alice and wonderland
economics where you had companies willing to lose money on each plane they sold but make up for
it somehow and volume. See, you had companies like British Airspace or Sab or Falker or whoever else
just losing their absolute shirts on these programs. And of course, Airbus and Boeing were
standing by watching giggling Embraer made a go of it because they transitioned away from it
and because they were a low cost operation back in a time when companies like say,
Sab or British Airspace were pie cost. But to get into reiterate,
regionals have historically been the land of value destruction.
And want to pull in some of the other business segments as well. The defense and military
side of things, how big of a percentage or just how important and relevant is that to the Embraer
business today? Yeah, it's pretty important. It depends how you measure it but typically 20, 30%
roughly goes back and forth depending on the years and the programs. But what amazes you is
just how ridiculously absurdly efficient they are. There's the stuff they get to do as part of
LL where Brazil's national defense champion, Brazil's buying Greek and fighters from Sweden.
We get to co-produce them in country who array. That's not really what they do best. They just have
to do it or they just want to do it whatever. But for example, they produce a series of maritime
patrol and airborne early warning special mission surveillance aircraft using the 145 and even
the 120 at some point. These were really good. These were very impressive. And then most amazingly,
there's the KC-390 story. This is a tactical military transport developed in conjunction with
the Brazilian Air Force. No one can quite figure out how they did this. I mean, it is an amazing
achievement for both the development cost and for the unit price. It's got a wing box that's
similar to a 767 wide body. Really good for tactical military operations. And the only bad thing I
can say about it is that it doesn't have the US military stamp of approval. They're working on
that. If it did, this would be a killer product. As it is, it's a good product that's finding a
niche in the world. But the fact that they did this is just a testament to really amazing and
really efficient engineering given the cost constraints. Is there something that continues to
drive that? Again, it's such a standout in a country that is certainly an economy that's
often associated with the largest emerging market players. But I wouldn't say that they're
necessarily categorized or stereotyped in this way of having this engineering prowess,
manufacturing prowess, anything along those lines. So is there something that continues to drive
that cost and technological advanced? You know, two things. One is they've always been good at
a vertical integration with engineering education. You look at operations like ITA, I forget the
acronym, but basically they were created in parallel with an engineering academy down in Brazil.
Really good at producing skilled talent. So they basically become a talent farm, if you will.
The other factor, frankly, is that corporate culture. It's been engineering driven engineering
focused, very aware of cost constraints. You look at what's going on with Boeing right now, the
decapitation that very badly needed to take place this week and did, I'm happy to say, it was the
exact opposite. It was run by people who were excellent at Microsoft XL with some skills at
Microsoft PowerPoint and very little knowledge of engineering or aircraft design and manufacturing.
Embray are the exact opposite. It's really been good at retaining that aircraft focused
engineering and design culture. Yeah, it's fascinating to learn about. On the
military and defense side, again, you mentioned it doesn't have the US stamp of approval.
I wonder about that business. How much of what their building is being exported to other nations?
It seems like it would be a very unique business line if you're building something that could be
used eventually against you potentially. How does that trend over time? Is there anything unique
about managing that business segment that you would point to? Well, just that shift away from
domestic requirements to global opportunities. You look at it start. They were building very
light planes, liaison planes like the Jean-Guy Embray 110 and then the Tukano, which was a very light
trainer for the Brazilian market, but they began to get some nice export orders and then they developed
the Super Tukano, otherwise known as the ALX. The ratio for that export versus domestic has been
roughly two to one in favor of exports. KC390, they've started to get some export traction so far.
It's roughly one to one domestic exports. They've become far more export-oriented with the big
caveat that their US market breakthroughs have been pretty limited so far, just some props sold
for US Special Forces, a few other things. But in general, their mindset is a lot more global
than it used to be. Is there an opportunity with what's happening with Boeing for
Embray or to fill in that gap a bit more? Yeah, absolutely. They're not going to be building
the Air Force's next generation Super Fighter anytime soon, but most promisingly they have
allied with, I guess, what you might call a couple of US second-tier defense primes, Sierra Nevada
respected company, L3 Harris respected company, on marketing into the US. Again, breakthroughs
have been pretty darn limited partly because of the nature of what Embray or produces. It's not
really what you call perfect for a superpower, but it's really good for second-tier countries.
Could they get a breakthrough with the KC390? That's something that I'm sure Lockheed Martin
is watching very closely. They build the C-130 Hercules Transport, which is a pretty direct competitor.
And that's continued to keep the entirety of the US military transport franchise.
But this is something that people have to watch if they're in the business of being a US military
prime. And I would say that I would put the Bizjet business in a different category, but for
the commercial side of the business and the defense and military side of the business,
when it comes to customers and their interest in diversifying fleets, does that play a role
in terms of giving them an opportunity or is there more desire to concentrate in a certain aircraft
type? Can you just talk about the benefits or negatives that would be associated with customer
fleets and how they manage them? Yeah, there's a completely different business with completely
different customers. Every so often you'll get an airline talking about operating a business
jet unit. And it began with Pan Am and SO Falcon jet. It didn't work out around 20 years ago.
You had United with its operation called Avalar. It didn't work out. You're getting people
talking about it now. It's not going to work out. Business jets go to high net worth individuals,
corporations and fractional and charter providers who are generally not affiliated with airlines.
It's just a completely different customer base, completely different set of operating specs.
So this was a real, I don't want to say gamble, but it was a really, shall we say, different move
when they went into the space. It was, okay, this is out of our comfort zone. We're going to meet
some new people when we do some new things with completely new airframes. This is about 20 years
ago. And they created the phenom, 100 and 300. Later the legacy, 450, 500 now, the pray tour. I
don't know why they renamed it the pray tour, but they renamed it the pray tour. They based the
business in Florida. A lot of the manufacturing isn't in Brazil. It's in Florida. And they've
done incredibly well. That kind of arbitrage. They basically said regional jet margins suck.
Business jet margins, they're pretty darn good. What if we accept better margins than
regional, but not as good as what say Gulf Streamer Sessner are getting. And sure enough, that worked
brilliantly. For example, the phenom 300, which sells for roughly 12 million or so, has become
the product of reference for a lot of fractional charter providers. They've been building about
five per month of those things. That's a really good business. And you mentioned that customers
completely different. Do you have a separate sales team that are interacting? Like, is there a
brokerage that really controls a lot of this? You go to events like National Business Aircraft
Association convention, either in Vegas or Orlando, depending on the year. You see how hand-to-hand it is.
A lot of it comes down. It was like, Mark Wahlberg, what can I do to get you in, etc.
It's not the same as talking with people looking at spreadsheets and airline fleet departments.
It's not that at all. It's not economics. A lot of it is sentiment-based. A lot of it is the rich
Corinthian leather coupled with our gorgeous executive dining option facilities. On this jet,
are just going to be so much better. And I know you're probably not dumb enough to believe that,
because all business jet primes are pretty darn nice. But come on, we golf together, we're friends.
Don't you like our jet? It's just a completely different set of selling stuff.
Yeah, I can only imagine. It's a fascinating addition to other businesses, which seem very
traditional in terms of the sales cycle, but would go into them. Going back to commercial,
I think of this as a backlog type business where you have orders. You place those orders in.
What does the typical cycle look like just in terms of when they're announcing that there's
an order book, when those actually come into service or when they recognize the revenues,
and then we'll get into the lifecycle of the planes as well.
Typical to build a jet takes a year depending on the jet. Wide body is longer, but they don't
build wide bodies. However, the one funny thing about this business is that orders are placed
many years out depending upon airline requirements. The old joke is if an airline makes money,
it orders planes. If it keeps making money, it takes delivery of those planes. There isn't
always a connection here. You could see an order appear and it won't be delivered till 2028.
In the case of some Airbus jets that are usually popular, 2030s aren't uncommon.
But in terms of manufacturing time by the year, in terms of payments, your revenue question,
typically there is some tiny amount upfront. It could be one gricle. It could be 1%, or 2%.
Then you make progress payments as manufacturing begins. Then at handover, typically it's about 50%
roughly. Delivery is a big event from a revenue standpoint, but there are milestones on the way
that do give you money. When I see the list price for some of these new planes, I know that's not
what he's being paid. Is there a rule of thumb in terms of what discount airlines might get relative
to? List price. Yeah. On the business, you had front, list prices are pretty normal,
as a matter of fact, they're typically inflated by options, rust proofing and air hockey table and
whatever else. But generators, list price is a great work of fiction. Typically you get 50% off
for showing up and wearing a tie. Obviously, a lot depends on the equipment, the timing,
the circumstances. This represents one of Embraer's few vulnerabilities. Years ago, they were going
ahead to head with Bumbardi A on what was the Bumbardi A C series against the 195, 195, and Bumbardi A
had exactly the same cost base that Embraer did. They were both niche players. The C series was
given away to Airbus, where it became the A220. Airbus has enormous supply chain muscles, so they've
been able to get cost down. They're continuing to drive cost down. Embraer is having a hard time
competing with that. That factor was a key driver behind the abortive tie-up with Boeing
back, I believe, about four years ago. Interesting. From a cost perspective, one thing that
jumps out to me is Brazil. You do have a lot of volatility in the currency that can take place.
Is there anything that they do to manage the FX exposure that they have? Obviously, question, I guess.
To a very great extent, jetliners organically hedged. I think it was the economist Jeffrey Sachs,
who made the point that Embraer's Brazil's largest exporter, one of the largest exporters.
It's also one of their largest importers. You think maybe 70-80% of the value of a jet is imported.
There's your organic hedge. Currency fluctuations also help you or hurt you, depending upon
which end of the transaction. They have gotten over the years a little bit of assistance from
export credit agencies in Brazil Pro X, I believe, is the name of their XM that helps a bit. Of course,
whatever hedging they might engage in as a company, although I can't imagine very much because of
that organic hedging factor. That's a good point. I had not considered at all, but it makes total
sense. On the defense side of the business, is there anything unique about how those orders come
in and backlog built up and actually seeing them come into service, particularly when you would
compare it to the commercial side of the business? Obviously, it tends to be a bit more geopolitical.
And this is another hesitate to call it a weakness, but Brazil is not the US. It's not even
France or the UK or a country that you might want a strategic relationship with. There's no
Brazilian aircraft carrier that's going to be riding to your rescue in the event of conflict.
Nevertheless, you do have Brazilian statesmen out there. I remember living in Britain during the
Focalins War and one popular rumor in Britain, which could be true for all I know, was that the
big breakthrough order of two Kano traders to the Royal Air Force in the 1980s was as a thank you
for Brazil massing forces on the Argentinian border. I can't verify that. And again, it's 40
years old for God's sake, but it was a fascinating rumor at the time. But yeah, geopolitics just
plays a much bigger role in these sorts of transactions. Would not surprise me in the least
way more crazy things have happened. And we see all types of favors returned in a variety of ways.
So quite interesting there. And of course, the final proof that it's a conspiracy, the conspirators
were so good they left us exactly zero proof of what they had done.
Precisely. Yes, not in this day and age. There'd be a way to track that for sure.
When I think about the monetization of this business, you have the sale of the plane.
Is there any revenue that's coming from services or parts and repair after the sale of the plane?
And if so, how much of the business is driven by that?
Yeah, typically if you look at the life of an aircraft, say on average 25 years or so,
the aftermarket revenue is somewhere around 125% of the sales price over that period of time.
Which is significant, but of course, far less lumpy than the big cash payment you get from
delivering the damn thing. Having said that, a lot of it goes to the subsystem providers.
Nothing Embraer does moves. You don't make brake pads, they don't make turbine fan blades.
So a lot of that aftermarket revenue goes on to the people who do make those things.
And when I think about the replacement you mentioned 25 years, I would imagine there's some things
that can either pull that forward or push that back mainly oil prices if you see major spikes and
you have inefficient fuel planes. But are there other drivers of that when it comes to whether
it's technology in a certain type of aircraft or anything else that has an impact on the replacement
cycle? Oh, absolutely. It's a key thing to look at. It's fascinating. One of my favorite
shirts is the ratio between fuel prices and interest rates. From the standpoint of selling new
aircraft and getting older ones out of the mix, you want a world where basically cash is free.
Because most jetliner transactions are in fact third party finance. And where fuel is quite expensive.
So you have an incentive to bring on new more fuel efficient equipment. But are there other
factors? Absolutely. Technology. But with the caveat that this is not a disruption prone business.
Most technology improvements are incremental. Another factor of course is simply demand relative
to supply right now. We're in this fascinating dynamic where the industry is badly supply
constrained, particularly at Boeing. Demand is high. See, you're getting a lot of stuff hauled out
of the desert, refurbed. And that's why you find yourself in the back of a 757 that looks like
it's got cigar burns on it or something. That's blind to men, pure and simple.
I was going to ask when you mentioned supply constraint. My assumption was that there were a lot of
aircrafts that were out of service from the airline consolidation. Obviously, COVID played some
role in some of this. But when you think about not just new supply coming into the market, but maybe
those parked aircrafts, is there still a substantial amount of those available to the extent they're
needed to come back into fleets? Oh hell no. This is a really tight market. We tend to look at parked
aircraft under, I guess, two headings. One is relevant and the other irrelevant. There's a lot
of stuff that's permafrost. That's not coming back. That's a beer can waiting to happen.
And then you've got the stuff that's maybe it's undergoing a D check. Maybe some airline went bankrupt
and they're waiting to repo it. But normally that part of it, the relevant part, fluctuates with
supply and demand. We've had many supply and demand cycles since the great airline mergers. That
problem has all been taken care of. COVID, oh god, that was fascinating. The number of parked
aircraft was nothing like we'd ever seen before. But they're gone. This is a really tight market.
When you mentioned before that some of Ember Air's bigger planes don't quite compete with
Boeing and Airbus, but they're starting to have some overlap. When you think about the strategy
from here, is that something that you think they would continue to try to inch up in terms of size?
Do they seem quite comfortable in the segment that they're in? Just trying to predict their aspirations
to the extent possible. Where do you think they go from here? And does the Boeing issues present an
opportunity to do that? This is the biggest question in the industry. First of all, they have done
everything they can to their existing product back about a decade ago or so. They redid the 195,
is the 195 E2 with new engines and pretty much new wings too. So that tube is at everything
two-class 120-something seats, a couple thousand nautical miles. That's it. And they're great for
that mission, for that role. They're terrific. But that's really not Airbus and Boeing territory.
Okay, to do something new in Airbus and Boeing territory, that would be a bet the company moment.
And given Boeing's dumbbells, I'm sure there are people considering this. And that is fascinating
because again, until Boeing gets a new management, Embraer is the exact opposite of Boeing. They're
really good. Pure and simple. However, unless they ally themselves with some other very large
companies, it's too big a stretch. They would have to be maybe a US defense prime, maybe a US
mezzanine supplier, like RTX or GE or someone like that, or maybe all of these. But it would take
an alignment of very large companies, all of which, frankly, dwarf Embraer and size, to make an
Embraer jet happen. The only thing Embraer would bring to the table is, hey, we're great in execution.
Let us do it. Give us a lot of the money to do it.
Yeah. Aside from the budget dynamics, which I think you phrase that well in terms of bet the
company moment, when you think about what they're great at and then the ability to transfer that
into the Boeing and Airbus territory, is there any way to gauge whether that's a realistic
aspiration, just from your sense and your opinion on this, the likelihood of success, just in
terms of execution, putting budget aside. Don't be sad, but two out of three ain't bad, as I think
Nate Loves said. Execution, they'd beat them all. Cost efficiency of production, they'd beat them all.
Ben with needed to get there. Oh, Christ. I mean, two out of three ain't bad. You look at
how much they've historically spent on new product development and what they need to spend to get there.
It's a different company. So again, if they were allied with much bigger partners who treated
them as equals, which would be necessary, it would be a fascinating possibility. But until that
happens, they're not doing this alone. Capital requirements can be a great barrier to entry
still to this day. Pretty much. And also frankly, I think a lot of investors were expecting
the harvest cycle now from an Embraer standpoint. Rather than a actually we're tripling our
expenditures or quadrupling our expenditures on your product development. They were expecting
some returns after a period of investment. Yeah. Maybe you can tap into that a little bit when I
hear harvest cycle. What I assume is we've developed what we want to develop in terms of new offerings.
That requires a lot of capital expenditures. Now we get to actually just put those into service,
sell those. And it's a lot less capital intensive ones who've done it so you can go through that
harvest period. Is that a fair designation? Am I missing anything obvious there?
Yeah, but with the big complication that this is a delayed harvest period in part because of
COVID and the downturn in aircraft orders and production. And in part because they were delayed
a couple of years by the abortive merger with Boeing with their commercial unit. And that was an
enormous distraction of production, product development and managerial resources in general.
They're recovering from that. They're recovering from COVID. Now people are like, well,
that and your big investments in the last decade, we'd like some returns now please.
Can you talk through that failed merger? What was the origin story in terms of the desire
for that to happen and then what fell through? It spends which story you believe, but the idea was
they would take their commercial unit and merge it in with Boeing. And Boeing, Brazil,
would actually maybe even help develop a new Boeing jet using the engineering talent. And maybe
there'd be cross-decking where Embraer jets were given commonality with existing Boeing jets.
There were all sorts of interesting possibilities and this would also help Embraer deal with
its number one disadvantage in the world, which is lack of supply chain muscle in ability to get
its cost-based down in line with their bus and Boeing. So for them, it represented a really strong
solution to their problems. Now, of course, there was also the issue of what would happen with
the rest of the company. The general feeling was that business aviation would be spun off,
maybe sold to Gulfstream or somebody. There'd be a fit with one or two of the other busjet
primes. And that the military would revert to what it started at in 1969, effectively a national
defense champion. Romainco would be Embraer defense, the arsenal system for Brazil. It's a fast
knitting set of counterfactuals, but the two sides walked away, more pointedly Boeing walked away.
There's still a bit of a legal aftermath. I don't know how that's going, but it obviously caused a
great deal of confusion, distraction, and whatever else. Now, they're still composing themselves for
a very different future, a very different reality. It begs the question, obviously, there's a bad taste
in each company's mouth. I would imagine. But if you're talking about acquiring a good management,
that could maybe reinvigorate your corporate culture in the right direction, it certainly seems
like there might be alignment there. Is this ever something that you could see come back into the
possibilities? That's a really interesting question. I think there are some who really see some of the
advantages you just mentioned. You can't rule it out, but it seems like there's a lot of bad blood
under the bridge to mix metaphors. Some of that bad blood no longer at Boeing, but point certainly
taken, and I don't think it's ever wise to bet on any type of M&A. There's way too many people
and challenges to getting these things done. That's right. Interesting to think about them.
It's certainly interesting to think about. You've mentioned a few times, Bumbardi A,
Canadian business that is operating in a very similar way to Embraer. When you think about what
they're doing, and as they either pose a potential risk or whether it's a comfortable,
duopoly similar to how Airbus and Boeing seem to operate, how would you categorize them relative
to Embraer? Yeah, former Nemesis and Arch Enemy and now barely any overlap, really. Bumbardi A
did bet the company on what was the scene series, and they stumbled very badly. I like to joke
back in the last decade that Embraer was an amazingly managed company in an extremely poorly
managed country. Bumbardi A was an incredibly poorly managed company in an extremely well-managed
country. It was very strange to juxtaposition. But yes, in this earlier, Bumbardi A had no choice,
but to sell off its entire regional aircraft division. It's now in the hands of Mitsubishi,
which decided to do nothing with it, and it's sitting there. Bumbardi A is the world's first,
as of a couple years ago, pure play business aviation prime, publicly traded business aviation prime.
They're doing pretty darn well with it, but it's mostly stuff at the top end. You look at the
bottom end of their range, Challenger's 3500. There is some competition there with the Pre-Tourist
series. But other than that, you had two people who used to be locked in a cage match.
And they're now, oh yeah, hey, how's it going over there? Not bad, you?
Yeah, I wonder if they long for those days of arrival, right? Sometimes you miss it after the fact.
I'll bet there's some nostalgia for that. Yeah, absolutely. Just in the bidjet market,
from a size perspective, how big is it, laryllative to the regional market, or even the defense
market? Is it a large-tam market? Well, it depends where you are in time in terms of cycles.
What's smaller? But they're not too different. You look at the business of jetliners,
it's peak where we're fast heading back to again. It's a $120 billion a year enterprise.
Businesses, regionals are about $5 billion a year. And Bizav is around $22, but there are so many
more players. There are basically six, five plus a couple of extras. Bizav is a bigger addressable
market. But I remember years ago, I asked the then head of their business jet unit in Embray,
is like, have you thought about moving upward, went to the rarefied air of the larger jets?
And he said, it's like a horn. It's nest up there. It's hard to avoid that conclusion. I'm afraid.
Makes sense. When you think about Embray, I think we've referenced some of the risks that could be
associated with the business here, particularly if you take on a bet the company moment and trying
to make that push into new territory. But are there any other things that we haven't mentioned
that would stand out as risks for Embray? Well, there's political risk, of course. We saw that
with the election. Lula's classic, non-aligned, but ultimately well-meaning politician. He's got
his limits, obviously. And then there was Bolsonaro. That was another cup of tea. That was
absolute wild card geopolitically. And it could have been much worse. They had their January 6th.
So that domestic political instability coupled with a very different political direction for
the country that represents risk. I think one big area of concern is anything that leads Airbus
to really double down on A220 competitiveness. So they've been working to drive down costs.
But if they say, okay, this is no longer our adopted Canadian jet, we mean it. And we're going to
get cost down and even take a loss just to beat up the 190-195. That represents risk. And then
finally, you can't rule out the possibility of someone saying, hey, regional aircraft are neglected
in the world. We'd like to go after that segment. And I don't see it, but you can't rule it out.
You added all up. It's not a lot. And frankly, now there are a lot more opportunities. The biggest
being that for the first time in 30 years, global defense spending is skyrocketing upwards. And
everyone is looking for industrial capacity. And well, Embrayr products aren't exactly
right for us to end off with China or Russia. They're in the right place at the right time.
So I think they can expect to see a healthier increase in defense exports.
Yeah. That picks in shovels business, which is interesting when you have all this turmoil.
This has been a fascinating, wide-ranging, interesting conversation on one of the other players
in this space. We've talked about Boeing before and aviation more broadly. When you just think about
the lessons that you can pull away from this company that you think you could apply elsewhere,
I already have a list in my head. But what stands out to you is the lesson from Embrayr.
Well, first and foremost, again, that juxtaposition with Boeing and everything that's gone on,
culminating in this week's events, aircraft people should run aircraft companies.
It's absolutely essential. And Embrayr has been super about that. Absolutely terrific.
And other lesson, of course, is just be really good at your core competence. Don't try to do
everything. Vertical integration is not a good idea. Recognize what your niche is.
Another that I think they've been gradually learning is the importance of partnerships.
And when you're a small company, you don't have to be arrogant or humoristic about partners.
And it's just really good to work with other companies across borders. Most of France, amazing,
amazing collection of skills and experience and products in France. They are God-awful at
partnering because it's France. They do it well. They do it best. If you like a joint venture,
yes, it's a Franco-French joint venture partnership between France and France. I guess you can
say Brazil is the opposite. I like that. That's a wine-raging list of lessons as well. And I think
it was good that we started out the episode with a lesson to not take away. It's that don't try
this at home with this outlier story, but finish with some very applicable ones. So thank you,
Richard. Appreciate you joining us and sharing the knowledge here. It's really my pleasure, Matt.
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