Boeing, Embraer reach $4.75B pact
$4.75B joint venture ‘direct response’ to Bombardier-Airbus partnership
TORONTO Boeing Co. and Embraer SA have joined forces to form a joint venture, a move that is being viewed as a direct response to the CSeries partnership between Bombardier Inc. and Airbus SAS.
Analysts also believe the partnership comes at a slight disadvantage for Bombardier, as its main competitor Embraer will now have the strength of Boeing behind it.
The proposed deal, which is not expected to be finalized until the end of 2019, will see Chicago-based Boeing take an 80-per-cent ownership stake while Brazil’s Embraer holds on to the remaining 20 per cent. Valued at US$4.75 billion, the joint venture will merge Embraer’s commercial aircraft and service business with Boeing ’s commercial development, production, marketing and lifecycle services, a statement from the two companies said.
The tie-up was “a direct response to the competitive threat that emerged against the two companies as a result of the CSeries JV between Airbus and Bombardier,” RBC Capital Markets analyst Walter Spracklin said in a note on Thursday.
“Ultimately, we view the product portfolio as being enhanced under both deals, as each JV will be able to offer a more fulsome suite of aircraft types,” Spracklin wrote, adding that Bombardier’s regional jets, such as the CRJ, that compete with Embraer’s are not part of the Airbus partnership.
“As a result, we could see somewhat of a disadvantage (for Bombardier) as the company will now be selling against a competitor with significantly more sales and marketing clout,” Spracklin wrote in a note to clients.
Boeing and Embraer first confirmed that they were discussing a potential partnership in December, just two months after it was announced that Airbus — Boeing ’s chief rival — would be acquiring a majority stake in Bombardier’s CSeries program. Embraer produces jets that compete directly with the CSeries and fills a void for Boeing at the low-end of its product lineup.
Embraer now stands to be more competitive under Boeing ’s control, said Desjardins analyst Benoit Poirier in a note to clients, and well-capitalized to support future investments and growth opportunities.
At the same time, both joint ventures solidify the duopoly between Airbus and Boeing in the commercial aircraft space, which Moody’s vice-president Jonathan Root says is well balanced.
“The expectation is that if an airline was looking for an aircraft at above 150-seats and below, Airbus would have the advantage versus Boeing because it would offer the CSeries in the same conversation,” Root said.
“It seems with a Boeing-Embraer tie-up, the Boeing sales team will be in the same position now ... it just levels and maintains the status quo.”
Richard Aboulafia, an aviation analyst and vice-president with the Teal Group, said it was clear that both Bombardier and Embraer faced similar questions on how to grow their commercial aircraft divisions — and reached the same conclusion.
“Do you want to maintain control of something that is being marginalized, or grow the business by partnering with a bigger company, but potentially lose that control?” Aboulafia said.
“Both of their businesses will likely grow significantly because they can bring their costs in line with the big guys, but of course, it means the jets are no longer Bombardier and Embraer products.”
The CSeries was the subject of a surprise ruling by the U.S. International Trade Commission in January that eliminated massive duties against Bombardier that were imposed after Boeing submitted a complaint and prompted a Commerce Department investigation.
Analysts at the time had speculated that Boeing’s surprise loss to Bombardier at the ITC made a partnership with Embraer more likely.
Do you want to maintain control of something that is being marginalized, or grow the business by partnering with a bigger company, but potentially lose that control?