After the September 11 terrorist attacks, the aviation industry witnessed a severe decline in air travel, which translated into cancelled contracts for airplanes and sharp reductions in purchases planned for the future. Aircraft producers like Embraer had already committed significant resources to building planes – aircraft that they could no longer sell. Between August 31st and December 31st, 2001, Embraer’s inventories grew from $600 million to $1.1 billion, absorbing $500 million in cash in four months.
CEO Mauricio Botelho later remarked: “If we did not have cash at hand and weren’t flexible, we would probably be dead right now”. But by building a cash cushion during the relative lull in the airline industry in the late 1990s, Embraer was able to survive 9/11. Embraer also shifted production to military aircraft to capitalize on rising demand from the defense sector after the terrorist attacks. Embraer’s operational improvements also conferred the flexibility to respond to the September 11 slowdown. Botelho described the situation:
We were increasing our production from 14 to 20 aircraft per month from January to December 2001. On August of that year, we had delivered 18 aircraft. Then, September 11th came and we immediately, by the end of September, announced our actions to face the new scenario. We visited all our customers, studied the impact on their operations, and then studied the impact on us. And we reacted very promptly, adjusting our man power, our course and everything to a new delivery scheme of 10 aircraft per month. We adjusted from 18 to 10 aircraft per month overnight. Flexibility is mandatory, and the downturn forced us to lay off 1,800 employees (14% of total) and reschedule our production line.
One might be tempted to attribute Embraer’s resilience to luck. After all, Embraer was at the right place to capitalize on the boom in demand for regional jets. However, a comparison with competitor Fairchild Dornier