Employees remove cockpit window covers from an Embraer SA E195-E2 aircraft during the 52nd ... [+]
Boeing
Embraer said Boeing was making false claims to back out of the transaction and that it would “pursue all remedies.”
The deal was born out of the weakening prospects for smaller plane makers amid the increasing dominance of Boeing and Airbus and the U.S. plane maker’s desire to widen its lineup and add engineering resources. Its rationale was undercut by the sudden collapse of the aerospace industry amid the coronavirus pandemic. Boeing is under pressure to raise cash and slash production, with demand for new planes disappearing, and the agreed-upon price of $4.2 billion was looking increasingly rich with Embraer’s market value tumbling roughly 75% to $1.1 billion.
“$4 billion means much more to Boeing than it did back then,” said Richard Aboulafia, an aerospace analyst with Teal Group.
Boeing will need at least $30 billion in external funding in 2020, according to Moody’s, double the ratings agency’s pre-coronavirus expectations. Boeing already funded about half of that need with a $13.8 billion term-loan draw in February and is weighing whether to apply for aid from the federal government.
Boeing had envisioned putting Embraer engineers to work on its long-planned new middle-market airplane, but new CEO David Calhoun put the project on the back burner after taking over in January with the company in crisis over the prolonged grounding of its bestselling plane, the 737 MAX, following two deadly crashes.
Under the terms of the deal, either party could back out after midnight Friday if it wasn’t closed by then. Boeing does not believe it’s required to pay a $75 million termination fee in the agreement, or a $100 million fee for failure to win antitrust approval.
Boeing and Embraer were also looking to establish a separate joint venture involving Embraer’s C-390 military transport. While Boeing is backing out of an agreement to take a 49% stake in that program, the U.S. company said it would continue to cooperate with Embraer to market the C-390 internationally under a deal struck in 2012.
The two companies announced the tie-up in July 2018 after Embraer’s rival in the regional jet business, Bombardier, gave Airbus a 50.01% stake in the Canadian company’s C Series program after coming close to bankruptcy due to cost overruns and delays in developing the plane.
Amid a boom in jetliner sales over the past 15 years, the regional jet segment has been stagnant, held back in their largest market, the U.S., by “scope clause” provisions in pilots’ union contracts that limit the number and size of regional jets that can be flown by major airlines’ regional partners. Embraer’s newest airliner, the E175-E2, is heavier than scope clauses allow.
Bombardier is exiting the regional jet business, striking a $550 million deal to sell its CRJ line to Mitsubishi Heavy Industries, which only wants the associated service network for its long-delayed new regional jets and will shut down production.
Amid a near-halt in air travel amid the coronavirus pandemic, airlines worldwide are projected to lose $314 billion in sales this year, and many analysts don’t expect travel to rebound fully for three to five years. With airlines cancelling and deferring orders for new planes, Airbus said earlier this month it would reduce production by 30%. Boeing is expected to announce large output cuts and layoffs when it reports earnings April 29.
It’s possible that Boeing and Embraer could revive the deal once markets calm down, says Aboulafia. Embraer faces a rough road ahead on its own.
“On its own, Embraer is going to have a tough time competing with Airbus at the higher end, since the European company has a lot more power over its supply chain, and therefore lower pricing,” says Aboulafia. “At the lower end of the market, Mitsubishi now has a better chance, if they can complete their acquisition of Bombardier’s jet support unit.”
Embraer said that Boeing had engaged in “a systematic pattern of delay” and was unwilling to complete the transaction due to its stressed financial condition.
