Embraer calls for industry limits on aircraft development funding

By Brad Haynes

SAO PAULO (Reuters) - Brazilian planemaker Embraer SA (EMBR3.SA) called on Tuesday for the aviation industry to set limits on state funding of aircraft development, a day after Brazil said it would challenge Canada over government support for rival Bombardier Inc (BBDb.TO).

Embraer Chief Executive Paulo Cesar Silva said the aviation industry's standards for export financing by state banks had worked well to promote fair competition between Embraer, Bombardier and larger peers Boeing (BA.N) and Airbus (AIR.PA).

"If the industry can establish a framework for aircraft development financing similar to what we have for export financing, then we'll have a level playing field," Silva told journalists.

The timing may be tough for an industry accord, however, after Brazil said on Monday it would dispute investments made by the province of Quebec in Bombardier's CSeries, which helped to develop a direct competitor for Embraer's E-195.

Silva said the capital injection had helped Bombardier sell the CSeries at cut-rate prices to Delta Air Lines Inc (DAL.N) in April and there were signs of similarly aggressive pricing in other ongoing U.S. sales campaigns.

Bombardier did not immediately respond to a request for comment.

The latest standoff at the World Trade Organization (WTO) recalls nearly a decade of sparring between Brazil and Canada over state financing for Embraer and Bombardier's exports. Silva's comments on the rules that settled those disputes shows the Brazilians may be looking ahead to industry-wide talks.

Silva said it is especially important to set limits as new entrants from Russia, Japan and China are challenging Embraer's and Bombardier's duopoly in the regional jet market, in some cases with generous government backing.

"This is a market that can barely fit two players. Five is impossible," Silva said.

Making matters worse, Silva said demand in the aviation industry is passing through a softer cycle, making 2017 a challenging year.

Structural changes to the executive aviation market, with the rise of fractional ownership companies such as NetJets in the United States, have also given buyers more leverage in an already weak market for new private jets, Silva said.

Embraer shares fell 2 percent on Silva's downbeat outlook to their lowest in two months.

One bright spot for Embraer is the defence division, which is expected to start delivering the new KC-390 military cargo jet to the Brazilian Air Force in 2018. Jackson Schneider, head of Embraer's defence division, told journalists he expected to book another order for the KC-390 in 2017.

(Reporting by Brad Haynes; Editing by Chizu Nomiyama)