Yesterday it was announced that a new Brazilian airline company called Azul (”Blue” in Portuguese), which was recently formed by the North American entrepreneur David Neelman, founder of Jet Blue (JBLU), will invest US$800 million, most of this amount will be to acquire new Embraer Air’s (ERJ) jets, most  of them the Embraer 195 model.

The amount represents around 1.7% of the total backlog of Embraer, which is around US$46.2 billion, including firm orders (US$20.9 billion) and options (US$25.3 billion).

That’s for sure good news for Embraer. The company has benefited from the recent weakness of the Brazilian real, which increases the competitiveness of the company in the international markets.

Embraer has also been expanding its geographical reach, selling more airplanes in Europe and Asia, so that it can reduce the exposure to the North American market. However, only the U.S. represents now over 20% of the company’s backlog, and the business environment for the airline industry is not much better in Europe. U.S. and Europe together now represents over 50% of the company’s backlog.

The current economic crisis remains a real threat to the world’s short-term economic growth and for the airline industry in particular. Especially the U.S. and Europe are facing difficult economic situations. On one hand, the economic crisis was positive to reduce oil prices, but on the other hand the crisis is negative as it reduces overall demand.

Even though the company will experience higher operating margins in the very short-term due to the devaluation of the Brazilian currency, we are concerned over the international economic environment, and we foresee the possibility of some cancelations of options in the near future.

It seems that Embraer’s management is also worried, as it announced yesterday that it will fire 4,200 employees or 20% of its total workforce. We prefer to keep our Hold recommendation on until the company post 4th quarter numbers, so that we will be able to have a more clear view on how the crisis has affected its business.

Read the full analyst report on ERJ

“ERJ” Free Stock Analysis: Buy? Sell? Hold?
“JBLU” Free Stock Analysis: Buy? Sell? Hold?
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