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Jilted Embraer embittered by Boeing Brazilian airframer launches arbitration process as commercial aviation merger collapse leaves it in weakened position
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Absence of orders aside, the E175-E2’s planned service-entry date of 2021 reflects another key reason for Embraer’s interest in the Boeing tie-up. While the manufacturer has been exploring a complementary turboprop development, it was looking to Boeing to provide potential post-E2 openings for its engineering personnel. When the tie-up was initially disclosed, Boeing had just started delivering the 737 Max to customers and – with the Max the probable final iteration of the 737 – the airframer had been wrestling with options for a successor, as well as a proposed New Midmarket Airplane to bridge between its single- and twin-aisle lines. Embraer would have been able to offer technical specialists with a lower Brazilian cost base.
SECOND SETBACK But Boeing’s aircraft development ambitions, already set back by the 13-month-and-counting grounding of the 737 Max, have been overturned by the impact of the coronavirus crisis, which has demolished the forecasts and assumptions behind the BoeingEmbraer proposal. Embraer’s share price has halved since the outbreak and its market capitalisation of around $1.1 billion is barely a quarter of the $4.2 billion that Boeing had been set to pay just for its 80% of the commercial aircraft venture. Embraer had just completed, in January, its carve-out preparations to separate the commercial aviation division ahead of the Boeing acquisition. The company disclosed in March that the separation costs relating to this carveout, some $120 million, had wiped out its full-year earnings before interest and taxes. Even as it negotiated with Embraer, Boeing had been under financial pressure itself – not only from the 737 Max situation but also the broader fall in longhaul jet demand.
E2 was set to give US manufacturer a presence in regional market
David Branco Filho/Embraer
mbraer’s fierce reaction to prospective suitor Boeing’s decision to bail from their intended commercial partnership is hardly surprising, given that the Brazilian airframer stands to lose heavily from the split. While the tie-up proposal, unveiled in late 2017, might have given the impression of a hastilyshoehorned response to Airbus’s audacious swoop for the Bombardier CSeries programme, Boeing and Embraer already had collaborative interests, and a merger had genuine merits. Boeing stated that the decision would “strategically align” with its commercial development, production and lifecycle services operations. A new joint venture, 80%-owned by Boeing and named Boeing Brasil – Commercial, would have handed the US airframer its own “highly complementary” presence in the regional aircraft sector with the re-engined E2 version of the Embraer E-Jet family, along with income from Embraer’s services and support arm. Both Boeing and Embraer had separately put pressure on the CSeries, through trade and subsidy disputes. But the intervention of Airbus – and Boeing losing a high-profile trade case against Bombardier shortly afterwards – simply gave the CSeries, rebranded the Airbus A220, additional momentum and the backing of a powerful partner. Embraer’s E2 stood to gain a similar advantage under Boeing, capitalising on the US firm’s global marketing network and heavyweight presence in procurement and cost negotiation. While the A220 has flourished under Airbus, the E2 has lost traction – total orders for the family have actually declined since 2017, even discounting the specific US scope-clause peculiarities that led to the removal of 100 E175E2s – the entire backlog for the variant – from Embraer’s books.
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Coronavirus has since exacerbated the situation, cutting into the crucial single-aisle market while inflicting further damage to the weakened long-haul sector. Under these conditions Boeing’s decision to revisit the strategic rationale for pursuing an expensive Embraer deal is hardly a shock, especially following the change in the US manufacturer’s leadership in mid-January and its requests for US government aid. But the decision has – equally unsurprisingly – left Embraer frustrated, furious and bitter, its future direction now another uncertainty among the myriad uncertainties caused by the most extraordinary of circumstances. In the days following the merger’s collapse, Embraer announced it had formally commenced arbitration proceedings. But the Brazilian airframer has provided little insight into its response to the failure, and the extent to which it had prepared for such an eventuality. Chief executive Francisco Gomes Neto, speaking during a 27 April briefing, said he was “surprised and disappointed” by Boeing’s decision, reiterating the belief that the US firm had wrongly ended the agreement and disputing its claim of a failure by Embraer to meet conditions. He says Embraer has worked “nonstop, day and night” to conclude the deal, which has in-
volved a “long, costly and complex process”. Gomes Neto would not be drawn on the overall cost to Embraer of the separation and preparatory work for the merger, beyond saying that it was “substantial” – nor would he elaborate on the remedies sought from Boeing, or even the conditions Boeing believes Embraer to have breached. Merger documents filed to the US Securities and Exchange Commission refer to two termination fees, one amounting to $75 million and the other, designated an “anti-trust termination fee”, of $100 million.
STRATEGY REVIEW Gomes Neto also remained vague on alternative plans that Embraer might pursue in the aftermath of Boeing’s withdrawal, stating only that the company would “review” its commercial aviation structure and strategy. Embraer would remain open to possible partnerships, he says, but adds: “We want to do our homework first.” “I think the situation is more acute for Embraer,” says Michel Merluzeau of aerospace consultancy AIR. “Embraer needs a partner really, really quick.” But there are few options in the market for Embraer, with China seen as the most plausible. ■ See Defence P13 5-11 May 2020 | Flight International | 7
