Why Was Embraer Privatized In 1994?

Embraer kicked off the 1990s by sending the CBA 123 Vector to the skies for the very first time. This turboprop, which was being designed to carry up to 19 people on regional services, first flew on July 18th, 1990. However, despite the strong start to the decade, it would be this plane that would catalyze Embraer into financial difficulty, which in turn helped lead to its privatization.

Embraer CBA-123
Embraer had high ambitions ahead of privatization, but there were challenges when it came to finances. Photo: Pedro Aragão via Wikimedia Commons

Company struggles

The CBA 123 Vector program was launched in partnership with FAMA (Fábrica Argentina de Material Aeroespacial). The price of the modern technology needed to maintain such an aircraft was too considerable at the time, with each finished plane costing $5 million ($10m today). This figure was too much for the market.

Additionally, Brazilian president Collor de Mello was going through an impeachment process. So, investments from the state were on the back burner. As a result of the tough conditions, the $300 million project was canceled.

There were some silver linings with this failure. Embraer had the chance to experiment with new cutting-edge systems. These technologies were used in the development of the ERJ 145 family, which would become a resounding success.

“In 1994, after investing in the CBA 123 project, Embraer suffered financial difficulties. Extensive changes were necessary. Ozires Silva returned to the company to lead it through privatization, which was concluded at the end of that year. In the midst of this troubled situation, Embraer engineers worked on a new aircraft,” Embraer shares.

“They studied the regional aviation market thoroughly and knew this new model was capable of meeting market needs. The ERJ 145 was a twin-engine, narrow-body jet for 37-50 passengers. Aligned with market demands, the aircraft was so successful, it gave rise to a complete family of Embraer Regional Jets – ERJ 135, ERJ 140, ERJ 145 and ERJ 145XR.

Embraer CBA-123 Aircraft
Altogether, only two CBA 123 Vector prototypes were produced. Photo: Marcio Sette via Wikimedia Commons

National policies

Along with the closure of the program, the new Brazilian president, Itamar Franco, and his PRN party were fans of economic liberalization. So, privatization was now high on the agenda for the government. Bankruptcy was looming for Embraer following the high investments on the canceled project, and with the government naturally keen on freeing up enterprise, a private entity was the concluding solution.

Despite the massive change, Embraer brought back a familiar face to help with the transition. Founder Ozires Silva returned to the company in the early 1990s after leaving in 1986. He helped the firm prepare for the shift until 1994 when the process was complete.

The New York Times highlights that a “golden share” clause would allow the government to hold onto 20% of the manufacturer’s stock. Moreover, foreign bodies would not be allowed to purchase over 40%.

Additional conditions included the commitment of the new owners to keep using the name of Embraer and its branding. Investors would also have to carry on the production of the business’ military builds. Overall, the successful auctioneers were be expected to fork over at least $295m ($527m today) while inheriting $215m ($384m today) in debt.

Envoy Air American Airlines Embraer ERJ-145
Embraer went on to produce several jets that are still highly-praised today. Photo: Getty Images

A new start

Thus, on December 7th, 1994, privatization was complete. An experienced businessman and engineer, Maurício Botelho became the president of the revamped company. Three Brazilian investment outfits now held 20% of the voting capital. Six Sizzling Markets, a book by Pran Tiku, shares that groups were the Previ, Sistel, and Bozano Group.

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A European consortium also got in on the action before the end of the century, acquiring 20% of the shares. The Brazilian government retained 1% while the rest of the stock was publicly traded. Notably, before 1994, the state held 51% of Embraer.

So, following the privatization process, Embraer still largely remained a Brazilian operation. This factor could have significantly changed in recent years amid the proposed joint venture with Boeing, which would have seen the US manufacturer own 80% of Embraer’s commercial aviation branch. Nonetheless, Embraer managed to overcome the struggles of the early 1990s and serve as the third-largest producer of civil aircraft in the world.

What are your thoughts about Embraer’s privatization? Would you have liked it to remain as a state-run company? Let us know what you think in the comment section.