Boeing terminates agreement to establish joint venture with Embraer

In a not so surprising move Boeing announced that it has terminated Master Transaction Agreement (MTA) with Embraer. The MTA was signed in 2018 under which the two companies sought to establish a new level of strategic partnership. This involved creating a joint venture comprising Embraer’s commercial aviation business and a second joint venture to develop new markets for the C-390 Millennium medium airlift and air mobility aircraft.

Under the MTA, 24th April was the initial terminate date, subject to extension by either party. Boeing exercised its rights to terminate after Embraer did not satisfy the necessary conditions, as per Boeing. Boeing also said that it would maintain their existing Master Teaming Agreement to jointly market and support the C-390.

Embraer was quick to come out with a statement and term the termination as “wrongful” claiming that Boeing manufactured false claims as a pretext to seek to avoid its commitments to close the transaction and pay Embraer $4.2 billion purchase price. Embraer also accused Boeing for engaging in a systematic pattern of delay and repeated violations of the MTA, because of its unwillingness to complete the transaction in light of its own financial condition and the B737 MAX. Embraer intends to pursue all remedies against Boeing for the damages incurred by Embraer.

The JV had progressed to having a name in place – Boeing Brasil – Commercial. Boeing has had a turbulent last year, where it saw multiple changes at the leadership level including a change of CEO.

A tepid demand could lead to a surge in demand for smaller jets as compared to the B737 and A320s which seat between 160 – 190 passengers while the E190-E2 and E195-E2 have a capacity between 100 to 150.

Background

The two companies had signed a MoU on 5th July 2018 where in Boeing was to hold 80% of the JV for Embraer’s airliners and services business which was valued at $4.75 billion. The deal looked like a reaction to the partnership between Bombardier and Airbus for the C-Series – a clean sheet design which has been subsequently renamed as A220 and Airbus has since taken control of the program.

While the traditional rivalry between Airbus and Boeing continued, the C-series gave a boost in the segment for Airbus and it suited both Boeing and Embraer to come together. For Boeing, it was to give a foothold in the market for smaller jets and for Embraer it meant a larger sales and maintenance network and better connects to make a foray where the airlines were existing customers of Boeing.

Why?

While the official version from Boeing pins the blame on Embraer for not fulfilling its obligations, there is no denying the fact that Boeing is going through a crisis and the money committed is a lot in current times when the aircraft manufacturer is looking for a bailout from the federal government in the United States. The company has been grappling with the B737 MAX crisis, with the aircraft grounded across the world since March 2019. Airlines have been waiting for compensation and a few have exercised their right to cancel the order. Boeing has made multiple changes at senior level over the last one year as it grapples with the crisis.

I expect Embraer to go to the market with renewed focus after the setback. The smaller jet could well make a dent for Boeing as and when the market recovers – for two reasons. The first being lack of clarity from Boeing about the return of B737MAX into service. Boeing has made repeated statements since the grounding of the MAX about its return but there has hardly been any change on the ground. In fact, the aircraft manufacturer had to shut production of the MAX in January this year, completely unrelated to the COVID-19 crisis.

Boeing had reported a net loss of USD $1,010 million in Q4-2019, while Embraer had reported a net loss of USD $209.8 million for the same period.

Boeing – Embraer part 2?

Both Boeing and Embraer needed each other. The E2 family has not had sky rocketing sales and since the C-series was taken over by Airbus, sales have boomed for the A220. A wider sales network, along with the backing of Boeing would have helped push the E2 in newer markets or existing ones where the wait for B737MAX is longer and airlines were looking at stop gap as well as long term arrangements. Boeing was short on sales in the narrow body segment due to the crisis with the MAX and hence E195-E2 would have been a great aircraft to place in the market. Alas! None of this seems to be on the cards, at least immediately.

While I was thinking on what next for Boeing as well as Embraer, a thought would not get out of my mind. Like the Jet Airways – Air Sahara deal which was put-off and re-signed at a lower valuation after a period of time, will Boeing – Embraer come back again to form a joint venture? I won’t be surprised if that happens.

For now, I think it is advantage Embraer – the company will re-group and have a better shot at sales and could get support from the Brazilian government – not financially, but politically to conclude sales.

Also Read: Understanding the E2 family from Embraer; Can Boeing help with sales?

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