Embraer: An Ugly Duckling Finds Its Wings

A half-dozen freshly painted jets fill a mammoth hangar. One, emblazoned with the JetBlue (JBLU ) logo, is being fitted with 100 leather seats and individual TV screens as well as 28 miles of electrical wiring. Lined up along the catwalk are planes for Delta Connection, Panama's Copa Airlines, United Express (UAL ), and Republic Airways. This looks like a Boeing (BA ) or Airbus assembly plant. But it's actually São José dos Campos, Brazil, home of Embraer, the world's third-largest aircraft maker.
Since 1969, Embraer has been the only company -- and Brazil the only country -- to make a successful entry into the commercial jet market. More than 1,000 of its planes are flying around the world, including a new generation of 118-seaters that are nibbling at the market served by Boeing Co.'s (BA ) and Airbus' larger planes. Embraer delivered $446 million in profits on $3.83 billion in revenues last year, and 93% of those sales were outside Brazil.
How did Brazil succeed in such a capital-intensive, high-tech business? Surprisingly, wages, less than one-third of those at Boeing, are not the key factor. First, Embraer tapped into a long tradition of engineering spearheaded by the Brazilian air force's aerospace program created after World War II. For the past six years, Embraer has plowed 6% of revenues into research and development. It trains its newly hired engineers not only in aeronautics but also in market research and finance. Customers call the company's planes well designed, reliable, and cheaper to operate than rival aircraft.
Second, Brazilians who land jobs at Embraer know they're among the lucky few in a country with a limited number of high-tech positions. Customers sense the pride, says Dave Barger, JetBlue Airways Corp.'s chief operating officer. "If you work at Embraer in Brazil, you're something," he says. "It's a very cool culture. It plugs in nicely to JetBlue." Each time JetBlue takes delivery of a new Embraer aircraft, the airline donates $10,000 to an Embraer program that sends talented, poor students to college. JetBlue has ordered 101 planes, worth $3 billion.
Finally, Embraer has staying power. It has grown steadily since the former state-run company was privatized in 1994. Its high-performing, 50-seat regional jets put Embraer on the map, with more than 850 of them still flying. And its current wave of success stems from a decision in the late 1990s to invest $1 billion to design a new, larger plane that seats from 70 to 118 passengers for rapidly growing low-cost airlines.
Embraer engineers came up with a new fuselage design it called "double bubble" that allows plenty of head space, legroom, and luggage space, and eliminates the middle seat. More than 40 airlines provided input. That innovation has pushed Embraer ahead of archrival Bombardier of Canada and set the stage for an ambitious move into executive jets. "Years ago our competitors said: 'How dare those ugly ducklings from South America try to sell a jet in the Northern Hemisphere,"' says Satoshi Yokota, Embraer's executive vice-president for engineering and development. "Fortunately, they underestimated us."