Don Sull's blog

The late 1980s and early 1990s were as difficult for Embraer as the preceding years had been good. The fall of the Berlin wall in 1989 resulted in steep reductions in military spending around the world. A global recession depressed demand for air travel, leading airlines to delay or cancel their orders for new planes. Even as demand contracted, supply grew because European countries supported their local champions’ entry into the regional jet market, spawning new rivals including Aerospatiale (France), Saab (Sweden), Daimler Aerospace (Germany), Fokker (Holland), and Casa (Spain).

Embraer initially responded to these altered environmental conditions by doing more of what had worked in the past. Historically, executives had seen Embraer as an “engineering company” and believed that superior engineering would sustain the company’s success. These strategic frames led Embraer managers to focus on refining and extending their existing turboprop planes, investing more than $280 million on a state-of- the-art turboprop, known as the CBA 123, even as momentum was building for short-range jets instead.

The CBA 123 was to become the most advanced turboprop ever built. But it had two problems. The advanced technology boosted the CBA 123’s final price to $6 million per plane, while comparable turboprops sold for $3.5 to 4.5 million, and offered 45% lower operating costs. Second, the market began to demand jets over turboprops. Jets were less noisy, could fly faster, higher (above bad weather), and were considered safer. According to one of Embraer’s engineers:

Looking back, it would have made more sense to invest on developing a jet version of the larger Brasilia, but we just kept doing more of what worked in the past.

With sales plunging and debt soaring, Embraer faced the worst crisis in its 21-year history. In 1991, Ozires Silva returned to lead Embraer five years after retiring as CEO. Silva quickly decided that the company should be privatized, and took a number of steps to increase its viability as a private company. Silva reduced headcount from 9,000 in 1991 to 6,100 in 1994. He put an end to the CBA 123 program (although he salvaged some of the technology for a new jet version of the Brasilia).

Silva also negotiated for the government to assume $700 million of debt and inject an additional $350 million of cash prior to the privatization in 1994. Silva might have implemented these cuts more rapidly than he did, but the government placed restrictions on his actions to preserve jobs. For instance, the Brazilian Congress, under pressure from the unions, demanded a moratorium on layoffs for six months after the privatization.Six months and a day after the deal closed, Embraer fired an additional 1,800 workers representing 30% of the total staff.

Silva’s actions positioned Embraer to survive and wait for new opportunities to arise. His successor, Mauricio Botelho, built on Silva’s firm foundation and seize Embraer’s golden opportunity.