FAB announces order cut for Embraer military freighters – 05/27/2021 – Market

In the first major effect of the budget constraint on a strategic military program under the Jair Bolsonaro government, the FAB (Brazilian Air Force) announced that it will reduce the order for its new military freighter, the KC-390 Millennium, manufactured by Embraer.

In a contract signed in 2014 for R $ 7.2 billion (R $ 10.44 billion today, in amounts adjusted for inflation), Força was committed to buy 28 planes. Now, he wants to reduce that to perhaps less than 20 units.

Alleging fiscal restrictions due to the economic crisis resulting from the pandemic, the FAB said in a note that “the resources destined to the defense sector have been suffering restrictions that cause direct limitations in the strategic projects of the Armed Forces”.

“The expected number of 28 aircraft under the current contract, which, at the moment, has proved to be superior to the budgetary reality of the Force, both for acquisition and for logistical support over time,” stated the Force, praising the performance in the sequence of the 4 planes delivered since 2019.

The FAB proposes a renegotiation so that two planes are delivered per year. If this becomes effective this year and the initial deadline for order completion in 2027 is maintained, the fleet could drop to 16 aircraft.

This is not yet certain, and will be the subject of negotiations. “Embraer informs that it has all its contractual obligations up to date, as well as reiterating its capacity to fulfill future obligations,” said the manufacturer in a note.

The news is very bad for Embraer, which has a robust initial contract in Brazil to leverage the promising sales of the KC-390 and its version without aerial refueling capacity, the C-390, in the international market.

The plane has already been adopted by two NATO countries, the military alliance led by the United States, with 5 units sold to Portugal and 2 to Hungary.

In addition, although there is no official data released, the FAB note suggests that the aircraft’s operating costs are higher than initially estimated, which should be explored by Embraer’s main rival, the American Lockheed Martin.

The American company has been manufacturing the C-130 Hércules since the 1950s, a four-engine turboprop freighter that carries up to 19 tons. The KC-390 is much more advanced, a twin-engine jet capable of carrying up to 26 tons.

Its greatest efficiency has always been one of Embraer’s main selling points. The aircraft is considered the most promising Brazilian military product since the successful Super Tucano training and attack turboprop.

It is not the first time that the KC-390 has suffered from the inconstancy of Brazilian military spending. With the 2015-16 recession, the program suffered delays – the first aircraft was delivered in 2019, when the original plan already foresaw five planes with the FAB.

“It is noteworthy that in times past budget constraints imposed by the Union on the development and production contracts for the KC-390 Millennium, Embraer has always sought to adjust its resources with a view to the continuation of this project of great national and international relevance, valuing the partnership with FAB and for the development of the national industry “, said the company from São Paulo.

As is usual in the military market worldwide, the initial government order is vital for any new product.

Since 2008, the FAB has placed around R $ 5 billion (uncorrected amount over the years) in the development of the KC-390, which will be reimbursed for payment of 3.2% of royalties on exports.

Like leaf showed at the beginning of the month, the Ministry of Defense returned to its usual spending pattern, anchored in personnel expenditure above 80% of its budget in 2020.

In the first year of Bolsonaro’s administration, fiscal maneuvers allowed an increase in the level of investment to 14.5% of total spending, which fell to 7.4% last year. The Ministry of Defense tried, unsuccessfully, to increase the military budget from 1.5% of the Gross Domestic Product to 2%.

So far, programs like the KC-390 have been preserved: with R $ 720 million paid in 2020, the freighter was the second largest recipient of defense resources in the year.

With the blocking of R $ 1.4 billion in total military spending this year, still being assessed by program, the situation has become complex.

In its note, released on Wednesday night (26), the Force emphasizes that it will keep Embraer as its priority partner, including in new programs, such as that of an unmanned aircraft.

The São Paulo manufacturer is also a partner in the manufacture of the new Brazilian fighter, the Swedish Saab Gripen, which will have part of its 36 planes ordered made at the Embraer unit in Gavião Peixoto.

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