Embraer (ERJ) confirmed, at a press conference held today, during the Latin America Aero & Defense (LAAD) conference, in Rio de Janeiro, that it has been studying the possible development of a military transport aircraft. If it is actually launched, the EMBRAER C-390, as it is called, will be the heaviest airplane ever produced by the Company and will be able to transport up to 19 tons (41,888 pounds) of cargo. The new project will incorporate a number of technological solutions developed for the successful EMBRAER 190 commercial jet.As a medium-sized military transport jet, the EMBRAER C-390 will have an ample cabin, equipped with a rear ramp for transporting a wide range of types of cargo, including wheeled armored vehicles, and will have the most modern loading and unloading systems.

The military market is quite different from commercial aircraft, and Boeing (BA - Annual Report) and Airbus (EADSF.PK) are already fighting bitterly over the larger jet orders in both military and commercial segments. However, as Toyota and Daimler demonstrated, it is often easier to come in at the low end and move up than to move down from high end products into more economical lines.

We also suspect there are a large number of smaller governments who would like to place their military orders with an underdog rather than an American or European firm that might leave them with a bad taste of imperialism.

Hainan Airlines Co., China’s fourth-largest air carrier, and its parent have set up a regional airline which will buy 100 commercial jets from Brazil’s Embraer by 2012, the Xinhua news agency said on Saturday.

That wasn’t an additional order, it was the same 100 planes that inspired us to write our article. The news is more that the regional carrier is now a legal entity and the orders are thus one step closer to actually being fulfilled. It is also not an insignificant win, with China having launched its own regional jet manufacturer – a fact not lost on the Reuters writer:

Regional aviation, also known as feeder-line services, operates between small cities, with routes typically ranging from 500 to 1,000 km. The services usually use aircraft which seat less than 100 passengers, according to Xinhua.China launched production of a 90-seat passenger jet, known as ARJ21, on Friday, its first home-grown regional jet and a major step toward creating a national champion that it hopes could challenge Boeing (BA - Annual Report) and Airbus (EADSF.PK).

A unit of General Electric (GE - Annual Report) will supply engines for the ARJ21, which will compete with aircraft from Embraer and Canada’s Bombardier.

We still think regional jets have a far more important place in the future of aviation than behemoths like the Airbus A380, particularly in China. Embraer is likely to continue to be a strong competitor there, as it will take some time for China to build the capacity to cover its own demand.

Financially troubled European airplane manufacturer Airbus has stopped work on the freight version of its new A380 superjumbo so it can focus more on the troubled passenger version of the aircraft, a spokesman for its parent company said Thursday.

If that doesn’t say it all, we don’t know what does. The model that doesn’t have significant problems also doesn’t have any customers. Meanwhile, the longer the delays for the passenger version the more likely the plane never gets off the ground.

Europe’s largest aerospace manufacturer has sold it’s 2.12 percent stake in Brazilian aircraft manufacturer Embraer for $163 million.In a statement to the Financial Times, EADS said it had earmarked its investment in Embraer for sale as the group focused “its attention on core matters and projects that will provide future growth opportunities.”

The problem is, as we have noted many times, the growth opportunities are with Embraer and the regional jets. If anything, EADS should have sold its own business and bought the other 98% of Embraer.

A good example of the direction we see things going is evidenced by JetBlue’s (JBLU) current plans to offer nonstop service from Westchester County, New York.

The flights would begin in March, county officials said. Airport manager Peter Scherer said the airline is considering routines to Orlando, West Palm Beach and Chicago.

We have generally regarded this trend as positive for Brazilian regional jet manufacturer Embraer (ERJ). However, the current valuation may be a bit stretched if insiders are any indication.

Brazil’s Embraer share offering nearly doubles | Reuters.com

Brazilian aircraft maker Embraer said on Tuesday its proposed share offering will be about twice as large as planned because more of its shareholders decided to join the sale.Embraer, the world’s fourth largest commercial aircraft, said in a filing to Brazil’s securities regulator five of its shareholders will offer 72.9 million common shares. In a December filing, the company said two shareholders planned to offer 43.3 million shares.

With major shareholders all seeming to feel like this is a good time to lighten up, investors should probably be wary about buying right now.

Parcel delivery company UPS, the last remaining customer for the cargo version of Airbus A380, may cancel its order in what would be the latest defection from the long-delayed superjumbo, a French newspaper reported Friday.

UPS has denied canceling the order, and Airbus is simply in the dark. But no matter.

As we said before, the future of passenger air travel lies in smaller jets flying to smaller cities. The hub and spoke model is outmoded, and large passenger jets are really only well suited for a few major city-pairs. Meanwhile, the freight market that would have helped to defray the costs (because air freight carriers really do need bigger aircraft) seems to remain tightly locked up.

And to that point, regional jet maker Embraer (ERJ) remains on a tear.

Embraer Empresa Brasileira de Aeronautica SA, which manufactures commercial jets that seat up 110 passengers, on Tuesday raised its delivery expectations for 2007 to account for five jets that will carry over from last year.

The Brazilian company said it should deliver 165 to 170 jets this year, compared to 130 deliveries in 2006. It delivered 37 jets in the fourth quarter.

Embraer also said its fourth-quarter backlog increased 11.3 percent over the previous quarter and stood at $14.8 billion on Dec. 31.

We think Airbus should get to work on a regional jet program.

The Lufthansa board is planning to meet Wednesday and approve the purchase of the 20 Boeing jumbo jets, which are valued at $5 billion at list prices, say people familiar with the negotiations. It would make Lufthansa the launch customer for Boeing’s redesigned and upgraded passenger version of the 747-8, now known as the “Intercontinental.” (see BusinessWeek.com, 11/15/05, “Boeing’s Reborn 747″). Boeing officials declined to comment. Lufthansa officials couldn’t be reached.The sale would be a huge coup for Chicago-based Boeing. It would indicate to airlines that there is a credible competitor to the Airbus A380 super-jumbo, thus diluting the profits Airbus had hoped to make on its big jetliner. Since the launch of the A380, Boeing had offered many passenger variations, but no airlines were willing to buy an aircraft that was first built in 1968. Sales of the 747-400 passenger version had virtually dried up, and industry observers were writing its obituary.

“This is as good as it’s going to get,” says Teal Co. aerospace analyst Richard Aboulafia. “Boeing was able to get a European based, dedicated Airbus customer to be the first to endorse its new 747 passenger version. It’s a blow to the Airbus A380.”

We’ve made no secret of our belief that the future of passenger air travel lies in smaller jets flying to smaller cities. The hub and spoke model is outmoded, and large passenger jets are really only well suited for a few major city-pairs. Meanwhile, the freight market that would have helped to defray the costs (because air freight carriers really do need bigger aircraft) seems to remain tightly locked up:

What’s more, chances look even better for Boeing to dominate—if not monopolize—the air-freight market, since there are questions about whether Airbus will even build its freighter version of the A380. Boeing already controls about 90% of the world’s air-freight capacity. Airbus hoped to change that with its A380 freighter. But the program suffered a near-fatal blow recently when Federal Express canceled its order for 10 A380 freighters. Instead, it bought 15 Boeing 777 freighters. “It was huge for us,” said Jim Edgar, Boeing’s director of cargo marketing. “Federal Express is the largest air-cargo carrier in the world. They’re a trend setter, and everybody watches their decision.”

It is truly amazing how quickly Boeing has been able to regain the luster lost after Airbus appeared to win the jumbo jet battle.

Because of the fact that it appears to be timing-related (and of much lower magnitude than the issues at Airbus (EADS) investors appear inclined to shrug off the problems. Over the long run, we think Embraer is sitting in the sweet spot between the large planes nobody will want to fly on and the smaller turboprop planes nobody wants to fly on.

We think it is only a matter of time before some carrier decides to create an uber-Southwest (LUV) and launch non-stop regional jet service between large markets and middle tier markets that currently require a connection on the hub-and-spoke model airlines. That could really result in a new order boost.

1. The only most successful US airline, Southwest (LUV) earned its success by offering non-stop flights from smaller airports. Rejional jets could open point-to-point non-stop service to an even larger number of even smaller airports – paving the way for the next Southwest.
2. Smaller jets can be loaded and unloaded quickly, saving precious time for passengers and precious money for the operator – who can keep the jets flying (earning money) rather than sitting on the ground (costing money).
3. Smaller airports allow passengers to pass more quickly through security, further saving time. Plus, greater point-to-point service to more markets means they also save time by not having to connect through hubs.
4. Lacking the dramatic potential of larger jets, regional jets are likely to be avoided by terrorists.

Basically, for most routes passengers won’t want to wait for the other 400 passengers to get on and off before doing so themselves. Smaller jets with direct flights to smaller markets is the way things are going. Up until now, however, air freight has been another story altogether.
News 8 :: KFMB Stations, San Diego, California reports:

FedEx Corp. canceled its order for 10 Airbus A380 jets on Tuesday, the first customer to retract an order for the new jumbo double-decker plane that has been dogged by numerous delays.The world’s largest express transportation company cited Airbus’ production delays and said in a statement that its FedEx Express unit has ordered 15 Boeing Co. 777 freighters with a list price of $3.5 billion and taken options on an additional 15.

FedEx is probably the single most important customer for such a large aircraft. If they are no longer in the market for the A380, you can stick a fork in it. It’s done.

At the end of 2000, just as Airbus gave the go-ahead to the A380, the company announced it was completing the process of transforming itself into an integrated corporation.

Since its founding in 1970, Airbus had operated as a loose consortium of aerospace companies in France, Germany, Britain, and Spain. Now, the company said, these operations would be knit together into a smooth-running, pan-European business.

In fact, Airbus remained surprisingly balkanized—and the tangled mess inside the A380 is the disastrous result. “The various Airbus locations had their own legacy software, methods, procedures, and Airbus never succeeded in unifying all those efforts,” says Hans Weber, CEO of San Diego-based aviation consultant Tecop International, who has close contacts with the company’s German operations.

However, the smallest aircraft are also on their way out. As the New York Times reported, many of the routes flown by small turboprop aircraft see few passengers and require heavy federal subsidies.

From Lewistown, Mont., Jerry Moline, the airport manager, is used to driving 110 miles to shop at the Wal-Mart in Great Falls. Likewise, most of his neighbors drive 125 miles to the airport in Billings, which has jet service, rather than fly there on the subsidized 19-seaters. The Lewistown flights attracted fewer than three people a day in 2005; each passenger’s one-way ticket was subsidized with $472.78 paid by taxpayers….

Probably the biggest beneficiary in recent years has been the Raytheon Company. It manufactured the 19-seat Beech 1900 prop planes that fly most of the subsidized routes. Tighter safety rules enacted in the mid-1990’s made operating those more expensive. And the rapid spread of regional jets preferred by passengers forced Raytheon to halt production of the 1900 in 2002.

“The average untrained traveler equates jets to safety,” said David Carter, a Raytheon spokesman. “They’re not so sure about turboprops.”

Indeed. And sure enough, once again the culprit in the demise is the regional jet. And while their success has caused Embraer (ERJ) to encounter its own (more minor) delays, the trend is becoming increasingly apparent. And Embraer is sitting in the cat-bird’s seat.

Photo: Embraer 190, originally uploaded by planephotoman.