The Boeing Company (BA): Is Embraer SA (ADR)(ERJ) Finally in the Clear?

Lastly, United’s recently completed pilot agreement allows it to increase its fleet of large regional jets to 255 in the next few years, up from just 153 today. The near-term opportunity at United is thus approximately 100 planes. United will presumably use its new scope flexibility to replace some of its more than 350 regional jets with 50 or fewer seats. Moreover, United’s pilot contract allows it to increase the use of 76 seat regional jets even further if it also adds small narrowbodies to its mainline fleet. Embraer’s E-190 and E-195 aircraft are two of the three prime candidates to do this mainline flying.

As a result, Embraer could see a significant additional opportunity at United within a three- to five-year time horizon — perhaps 150 units, taking the current Delta “re-fleeting” initiative as a baseline. Of course, there is no guarantee that United will add small narrowbodies to its fleet, and it could also opt for competitor Bombardier‘s CSeries jets. However, with Delta reducing its 50-seat regional jet fleet to 125 by 2015, United will feel competitive pressure to reduce its small regional jet fleet to that ballpark as well. The economics (and lack of comfort) of 50-seat regional jets will make it problematic for United to be more reliant on them than competitors. Thus, while Embraer will still have to beat out Bombardier (and possibly new entrant Mitsubishi) for the contract, there will probably be significant demand for aircraft in the 70- to 110-seat range at United.

Conclusion

As I mentioned, growth in Embraer’s private jet and military businesses is helping to diversify Embraer’s revenue. Defense gains have been particularly strong recently, and Embraer recently won a key contract from the U.S. Department of Defense for supplying light aircraft. Nevertheless, the commercial-jet segment still represents 52% of revenue, and so its health is critical for Embraer’s overall financial success. Fortunately, there will be strong demand in the next few years from U.S. carriers for large regional jets. As long as Embraer can win its fair share of those contracts, the company will be just fine.

The article Is Embraer Finally in the Clear? originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg owns shares of Delta Air Lines and is short March $14 calls on Delta Air Lines. He’s also short shares of United Continental Holdings (NYSE:UAL). The Motley Fool recommends Embraer.

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