By Rosalba O'Brien and Felipe Iturrieta

SANTIAGO, March 29 (Reuters) - The development of a key military cargo plane by Brazilian planemaker Embraer is progressing on schedule, a company executive said, although he suggested that a delay last year had upset some potential customers.

The large KC-390 cargo aircraft has been developed by Embraer as a direct challenge to Lockheed Martin Corp's Hercules airlifter, promising a jet that flies higher, fuller and faster, at a lower price.

But last year, amidst a slumping economy, government spending cuts forced Embraer into delaying development of the plane, and it said it would deliver its first order to the Brazilian military in 2018 rather than 2016.

"There is no talk of another delay today," the CEO of Embraer's defense arm, Jackson Schneider, told Reuters at the FIDAE airshow in Chilean capital Santiago on Tuesday.

"We have done more than 150 hours of flight, the second prototype should fly in two or three weeks," he said, adding that certification should take place "towards the end of 2017".

Embraer has 28 contracts to deliver the KC-390 to Brazil, and 32 'letters of intention' with other countries, including Chile, Portugal and Argentina. The company is also in advanced talks with some other countries that have not yet announced an intention to buy, said Schneider, declining to name them.

Schneider said that Embraer retained a positive image abroad despite Brazil's current economic and political turmoil, but hinted that the KC-390 delay had affected potential customers.

"Of course when there's a year's delay, some things will be quarreled over, but it's not a plane made for one year but for many," he said.

"Maybe one specific opportunity that would have needed a product delivery in 2017, that's gone, but we're looking at the long term." (Reporting by Rosalba O'Brien and Felipe Iturrieta)