Boe­ing-Em­braer Tar­get­ing Air­bus-Bom­bardier

The need for a deal has re­cently be­come more press­ing since its Eu­ro­pean ri­val, Air­bus, took con­trol of Bom­bardier’s C-Series re­gional jet pro­gramme

SP's Aviation - - TABLE OF CONTENTS - By AIR MAR­SHAL SUKHCHAIN SINGH (RETD)

Boe­ing has struck a deal that will give it con­trol of Em­braer’s com­mer­cial jet busi­ness. Un­der the pro­posed deal, Em­braer’s com­mer­cial busi­ness will be placed in a new joint ven­ture, with Boe­ing hold­ing an 80 per cent stake worth $3.8 bil­lion (£2.9 bil­lion). Em­braer is a Brazil­ian in­dus­trial cham­pion and a ma­jor man­u­fac­turer of mil­i­tary sys­tems and small com­mer­cial jet air­craft. The pro­posed joint ven­ture will give the US aero­space gi­ant a sig­nif­i­cant stake in the mar­ket for smaller pas­sen­ger planes. The need for a deal has re­cently be­come more press­ing since its Eu­ro­pean ri­val, Air­bus, took con­trol of Bom­bardier’s C-Series re­gional jet pro­gramme. Air­bus deal with the Cana­dian com­pany had threatened to give Air­bus a sig­nif­i­cant ad­van­tage in the global mar­ket­place. The agree­ment, which val­ues Em­braer’s com­mer­cial air­craft op­er­a­tions at $4.75 bil­lion, will re­store par­ity be­tween Boe­ing and Air­bus. It now rep­re­sents the big­gest re­align­ment in the global aero­space mar­ket in decades, strength­en­ing es­tab­lished Western air­craft mak­ers against new­com­ers from China, Rus­sia and Ja­pan, an­a­lysts say.

Boe­ing said that the deal is ex­pected to close by the end of 2019 pend­ing the nec­es­sary ap­provals. This deal, if it goes ahead, will re­store the cosy du­op­oly be­tween Boe­ing and Air­bus. In the past, they had the mar­ket for large jets to them­selves. In the seg­ment be­low them are Em­braer and Bom­bardier, equally fierce ri­vals in the mar­ket for smaller “re­gional” jets. The seg­ment is about re­gional jets and pas­sen­ger planes with about 100 seats and ranges up to 5,000 km. Nei­ther Air­bus nor Boe-

ing make such planes – the for­mer’s A318 and the lat­ter’s 717 went out of pro­duc­tion dur­ing 2013 and 2006 re­spec­tively.

Bom­bardier has de­vel­oped the C-series, a highly ef­fi­cient air­craft fam­ily ca­pa­ble of com­pet­ing di­rectly with smaller ver­sions of the Boe­ing 737 and the Air­bus A320. Em­braer, mean­while has de­vel­oped the E195-E2, slightly smaller, but still ca­pa­ble of play­ing in the same seg­ment. Boe­ing had ac­cused Bom­bardier of us­ing Cana­dian sub­si­dies to un­fairly com­pete for a Delta Air Lines Inc. con­tract, de­spite the fact that Boe­ing wasn’t a le­git­i­mate con­tender for that deal in the first place, as il­lus­trated by its need to gain con­trol of Em­braer’s re­gional-jet line-up. It per­suaded the US Depart­ment of Com­merce to slap hefty tar­iffs on Bom­bardier. Boe­ing tried to kill off the C-series, protest­ing un­suc­cess­fully about its fund­ing at the US In­ter­na­tional Trade Com­mis­sion. The Trump ad­min­is­tra­tion tried to help out by threat­en­ing mas­sive tar­iffs against Bom­bardier, but the United States’ own In­ter­na­tional Trade Com­mis­sion turned them down. This had sim­ply pushed Bom­bardier with Air­bus, which bought a ma­jor­ity stake in the C-series pro­gramme, strength­en­ing its po­si­tion in the mar­ket. Boe­ings an­nounce­ment of its in­ten­tion to form a joint ven­ture with Em­braer, which hap­pens to be the world’s other source of re­gional jets calls for Em­braer’s com­mer­cial planes to be tossed into the JV, of which Boe­ing will own 80 per cent. A Boe­ing-Em­braer deal should re­store par­ity - with both of the big play­ers hav­ing ex­tended their reach into the mar­ket for smaller planes.

Em­braer is a gov­ern­ment-sup­ported en­tity, just the thing Boe­ing ob­jected to for Bom­bardier. That now im­plies Brazil will not let the com­pany fly away. The JV leaves Em­braer’s mil­i­tary ac­tiv­i­ties un­touched. Boe­ing’s has of­fered the deal as good for Em­braer be­cause it will give the Brazil­ian com­pany more sales and pro­duc­tion scale than it could not have achieved alone in the short-to-medium term. This should be good news for the com­pany’s Brazil­ian op­er­a­tions. That Boe­ing mus­cle will also be put be­hind the KC-390, a jet­pow­ered trans­port which Em­braer is cur­rently de­vel­op­ing. The part­ner­ship, which adds a 70- to 130seat fam­ily to Boe­ing’s line-up, is ex­pected to boost the US firm’s earn­ings per share from 2020, gen­er­at­ing an­nual pre-tax cost sav­ings of about $150 mil­lion by the third year, the com­pa­nies said. Em­braer CEO sees $1 bil­lion boost to cash po­si­tion from the Boe­ing deal. Chief Ex­ec­u­tive Paulo Ce­sar Silva told em­ploy­ees that con­sol­i­da­tion in the aero­space sup­ply chain had also forced Em­braer’s hand. “This has been hap­pen­ing with both our sup­pli­ers and our clients. They have started to or­gan­ise in big blocs, mak­ing it harder for com­pa­nies of Em­braer’s size to ne­go­ti­ate,” he said.

Air­lines around the world prob­a­bly won’t like this deal, as it will mean less com­pe­ti­tion and higher air­craft prices. But trav­ellers may not mind, as re­gional jets let air­lines fly routes that can’t be flown prof­itably with larger air­craft. With both big plane-mak­ers push­ing re­gional jets, new routes will be­come a pos­si­bil­ity, as does jet-pow­ered re­place­ments for routes cur­rently served by tur­bo­props. “The Boe­ing-Em­braer an­nounce­ment con­firms the strong mar­ket po­ten­tial in the 100- to 150 seat cat­e­gory,” Air­bus said through a spokesman. “Boe­ing and Em­braer are fol­low­ing Air­bus and Bom­bardier.”

Em­braer will hold the 20 per cent of the Boe­ing joint ven­ture and keep con­trol of its de­fence and busi­ness jet op­er­a­tions. Con­cern over US in­flu­ence in mil­i­tary pro­grams had raised flags in the Brazil­ian gov­ern­ment, which holds a strate­gic veto at Em­braer dat­ing back to its pri­vati­sa­tion. The Brazil­ian gov­ern­ment is un­likely to sup­port a for­eign en­tity con­trol­ling the de­fence por­tion of Em­braer’s busi­ness. How­ever, re­cent sig­nals from Brazil’s Pres­i­dent Michel Te­mer and mil­i­tary of­fi­cials sug­gest the gov­ern­ment is sat­is­fied with the new struc­ture of the tie-up, as long as Brazil­ian jobs are main­tained and Em­braer con­tin­ues to de­velop new tech­nol­ogy. In ad­di­tion to the pas­sen­ger jet deal, Boe­ing and Em­braer will deepen a sales and ser­vices part­ner­ship on the new KC-390 mil­i­tary cargo jet through a sep­a­rate de­fence ven­ture that is likely to even­tu­ally re­ceive a joint in­vest­ment.

The Em­braer trans­ac­tion doesn’t do that much for Boe­ing’s goal of build­ing a $50 bil­lion busi­ness fo­cused on higher-mar­gin sales of parts and af­ter-mar­ket ser­vices. Per­haps the big­gest ben­e­fit on this front is Em­braer’s lower-cost man­u­fac­tur­ing ca­pa­bil­i­ties, which Boe­ing could take ad­van­tage of as it brings more parts work in-house. That’s an in­ter­est­ing value propo­si­tion for a com­pany that earned a “God Bless Boe­ing” ac­claim from Pres­i­dent Don­ald Trump about a year ago for its Amer­i­can man­u­fac­tur­ing and hir­ing ef­forts. Boe­ing Co.’s plans to form a de­fence-fo­cused joint ven­ture with Em­braer SA will test whether the two aero­space com­pa­nies can over­come the Brazil­ian scep­ti­cism to­ward the US aero­space gi­ant. Boe­ing was stunned five years ago when Brazil se­lected Swe­den’s Saab AB in a $4.5 bil­lion deal for 36 Gripen fighter jets over its own F/A-18 Su­per Hor­nets. Em­braer is help­ing Saab AB to build the Gripens in Brazil. Boe­ing is also now com­pet­ing with ri­val Lock­heed Martin by strik­ing a sep­a­rate JV to mar­ket Em­braer’s KC-390, which could ad­versely af­fect sales from Lock­heed’s C-130 Her­cules.

One key at­trac­tion for Boe­ing is Em­braer’s strength in af­ter­mar­ket ser­vices, an area where Boe­ing aims to ex­pand its an­nual rev­enue al­most three­fold to $50 bil­lion. About 60% of Em­braer’s E jet cus­tomers are signed to main­te­nance pro­grams, and Em­braer is aim­ing for 80 per cent pen­e­tra­tion with the E2. Po­ten­tial losers from the Em­braer-Boe­ing deal in­clude United Tech­nolo­gies, which is mak­ing the en­gines, aux­il­iary power unit and other elec­tri­cal sys­tems for the E2, as well as wheels and brakes, and avion­ics sup­plier Honey­well.

For sup­pli­ers, Bom­bardier and Em­braer’s tie-ups with the big two in the air­craft in­dus­try promises to fur­ther erode mar­gins at a time when both the heavy­weights have been squeez­ing them for cost sav­ings, and Boe­ing has ramped up in-house parts pro­duc­tion. Re­gional jets only ac­count for about 5 per cent of the OEM air­craft mar­ket, but the re­gional jet mak­ers have taken more of a part­ner­ship approach with sup­pli­ers, who they’ve de­pended on to fund more of the devel­op­ment cost on their air­craft.

Re­gional jets have long been the small end of the air­liner mar­ket. Now the sec­tor is get­ting taken over by the heav­ies. Will Air­bus and Boe­ing’s lever­age make re­gional jets a bet­ter busi­ness? His­tor­i­cally 100 to 120 seat jets have been a back­wa­ter, largely due to their rel­a­tive higher costs. “We’re about to test the the­sis that they would be more com­pet­i­tive to pro­duce with more ag­gres­sive sup­ply chain man­age­ment.”

One key at­trac­tion for Boe­ing is Em­braer’s strength in af­ter­mar­ket ser­vices, an area where Boe­ing aims to ex­pand its an­nual rev­enue al­most three­fold to $50 bil­lion

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