Flying High.

Now that its reorganization is complete and sales are soaring, will Embraer be able to fly solo?

IN THE MIDST OF THE BRAZILIAN RECESsion, Embraer is flying high.

The only sizable airplane manufacturer in the region was moribund just a few years ago. But it has since grabbed market share in the United States and Europe, becoming the fourth-largest manufacturer in the world after Boeing of the United States, Airbus of France and Bombardier of Canada. The company registered its first profit last year--US$110 million--after seven years in the red, and sales, which increased 90% last year, are due to reach $2 billion this year.

"Embraer has come a long way since privatization," says Daniel Henner, the head of French defense, telecommunications and electronics firm Thomson CSF in Rio de Janeiro. "It is a great success story. The credit must go to its first-class management team."

For the first time since its creation in 1969, Embraer escaped the command of the military in December 1994, when a consortium led by Rio de Janeiro-based investment bank Bozano Simonsen and two pension funds acquired 94% of the company for $181.5 million. A tough restructuring exercise has been commanded by Mauricio Botelho, a short but sharp mechanical engineer whose financial engineering has worked wonders. Initially, thousands of jobs were cut as the company was turned upside down. But thanks to the recent expansion, Embraer has been recruiting again and has more than doubled the number of employees to 6,700 from three years ago.

Meanwhile, productivity has increased dramatically. It now takes less than six months to make a plane, instead of fourteen, and income per employee has risen from $40,000 in 1994 to $227,000 last year.

Embraer's recovery is largely due to its line of "regional jets," small planes designed to carry between 30 and 70 passengers. "Regional jets have a special role to play," says Botelho, who tested the airlines' demand before developing this new product.

Embraer planes were tailor made for the growing market for airline flights between cities that are less than 500 miles apart. AMR's American Eagle and Continental Airlines' Continental Express in the United States are among Embraer's main customers. But big orders have been recently placed by several European airlines, including Brymon Airways, the regional carrier for British Airways, Crossair of Switzerland and Skyways of Sweden. The company is also developing a family of 70- and 90-seat regional jets with General Electric and Honeywell. In total, Embraer has been commissioned to build as much as $6.2 billion worth of planes.

Suppliers are jubilant. "When Embraer starts a new project, everybody wants to be on board," says Alan Sinclair, a regional executive for Rolls-Royce, which is scheduled to deliver some 300 engines per year to the Brazilian plane maker.

Embraer has also staged a comeback in the military market for the first time in five years. Two new planes were unveiled in May that will take part in surveillance missions over the Amazon River Basin to combat deforestation and drug smuggling.

While Botelho still presents his company as "the technological and industrial arm of the Brazilian Armed Forces," the Greek army is also acquiring such planes, which are equipped with Israeli and Swedish technology "We are going to be the top Brazilian exporter this year," boasts Gilberto Galan, Embraer's director of corporate affairs, who expects foreign sales to reach $1.8 billion this year. Last year, Embraer came in second behind iron-ore giant Companhia Vale de Rio Doce (CVRD) and ranked 14th among Latin America's largest exporters.

The company's export policy, however, has become controversial. Its main competitor, Canada's Bombardier, has accused Embraer of benefiting from export subsidies from the Brazilian government, which still has a 6% stake in the airline and voting control through its "golden share."

This is an issue that ruins Botelho's generally good humor "It is not true that Embraer owes its success to these subsidies," he says, arguing that credit facilities offered by the Brazilian development bank Banco Nacional de Desenvolvimento Economico e Social' (BNDES) only help level the playing field in terms of interest rates. "The Brazilian government tries to partially compensate the handicap of being in an emergiuig market," Botelho says. Adds Elcio Alvares, the Brazilian Defense Minister: "The financial program is essential to the company's growth"

Nevertheless, the state hand has always been benevolent to Embraer, even since privatization. "If BNDES had not acted swiftly to release credit lines for the sale of airplanes, Embraer would certainly not have survived," says Roberto Bemardes, a senior analyst at Sao Paulo state-funded research institute Seade Foundation who wrote his doctoral thesis on Embraer.

For the time being, the company seems anxious to secure its future. Embraer has been in search of a strategic partner for several months to access new technologies. "They won't be able to survive on their own for very long," says Damian Kepp, a Latin America analyst at Jane's Defence Weekly, a publication published by the London-based Defence Institute. "They are good at what they are doing, but their capacities are limited."

Embraer has made several contacts with industry players Saab and Marcel Dassault, but nothing has evolved yet. "The moment is one of rationalization in the industry," says Gordon Wright, executive vice president of British Aerospace in Brasilia.

Company officials are adamant that the company is not for sale. And the Brazilian government could block any takeover attempt thanks to its "golden" share. But Embraer's chairman, Carlos Leoni Siqueira, a Bozano Simonsen executive, confirms that the company is contemplating issuing shares on Wall Street and is merely waiting for "the right moment." With such a strong turnaround story going for it, the right moment may be now.