U.S. deal has Brazil's Embraer flying high in defense

(Reuters) - With its first-ever U.S. military contract in hand, the defense unit of Brazilian planemaker Embraer SA (ERJ.N) has finally hit the big time, establishing itself as a global player while the rest of the industry struggles with shrinking budgets.

The light attack plane that Embraer will supply for the United States in Afghanistan handily illustrates how the company, which is best known for the regional jets it supplies to airlines such as JetBlue Airways Corp (JBLU.O), is climbing the ranks of the world's top 100 arms dealers.

A rugged design and low cost make Embraer's Super Tucano popular in counterinsurgency missions from Africa to South Asia, where resource wealth has spurred new defense spending amid austerity in Europe and the United States.

[size=14px]The focus on frontier markets and expanding ambitions for Brazil's armed forces have made Embraer one of the few planemakers outside of [color=rgb(0, 110, 151)]China[/color]that are growing, thanks to the outperformance of its defense operations.[/size][/size][size=14px]"Is there anyone else this bullish on defense? Certainly nothing that a U.S. investor can bet on. Nothing in this hemisphere," Deutsche Bank defense analyst Myles Walton said in an interview. "Embraer is the foundation of the military industrial complex in Latin America, through a combination of execution, luck and being the right company at the right time."[/size][/size][size=14px]Embraer shares in Sao Paulo ([color=rgb(0, 110, 151)]EMBR3.SA[/color]) touched a five-year high on Thursday after the Pentagon awarded the contract late on Wednesday. The stock later retreated slightly as analysts said impending cuts to the U.S. defense budget would make the Air Force less likely to exercise options for more planes.[/size][size=medium]

[size=14px]Embraer's defense division expects to increase revenue by as much as one-third this year, compensating for slipping deliveries to commercial airlines and a string of canceled private jet orders.[/size][/size][size=14px]The Brazilian defense boom is also luring powerful partners for Embraer, from the helicopter unit of Italy's Finmeccanica SpA ([color=rgb(0, 110, 151)]SIFI.MI[/color]) and Israeli drone maker Elbit Systems Ltd ([color=rgb(0, 110, 151)]ESLT.TA[/color]) to Boeing Co. ([color=rgb(0, 110, 151)]BA.N[/color]), which has stepped up work with Embraer noticeably over the past year.[/size][/size][size=14px]BOEING BUOYED[/size][/size][size=14px]In fact, Boeing may have been the biggest winner from Wednesday's decision in sheer dollar terms.[/size][/size][size=14px]The goodwill between Washington and Brasilia will help its shot at a multibillion-dollar Brazilian fighter jets deal, a senior Brazilian official told Reuters, calling the Embraer deal a "very good development" for Boeing.[/size][size=medium]

[size=14px]Last year, President Dilma Rousseff iced the tender process for at least 36 fighter jets after the United States revoked an earlier deal with Embraer due to legal challenges from Kansas-based rival Beechcraft.[/size][/size][size=14px]Brazilian officials made clear to their U.S. counterparts earlier this year that an Embraer loss on the rebid would be awful for Boeing's chances at the Brazilian jets contract, according to a source with knowledge of the discussion.[/size][/size][size=14px]France's Dassault Aviation SA ([color=rgb(0, 110, 151)]AVMD.PA[/color]) and Sweden's Saab AB ([color=rgb(0, 110, 151)]SAABb.ST[/color]) are also in the running for the deal worth at least $4 billion.[/size][/size][size=14px]Reinforcing the diplomatic stakes of the Afghanistan deal, U.S. Deputy Defense Secretary Ashton Carter called within minutes of the Pentagon announcement to congratulate Brazilian Defense Minister Celso Amorim on the result.[/size][/size][size=14px]A Boeing spokeswoman said the collaboration with Embraer was a "natural partnership," but it considers the bidding in the two countries to be entirely separate procurement processes.[/size][size=medium]