By Richard Pettibone and Ray Jaworowski, Analysts, Forecast International.
Boeing and Embraer have confirmed that the two companies are engaged in discussions regarding a potential combination, the basis of which remains under discussion. While an outright acquisition is unlikely due to Brazilian government fears of outright foreign ownership, some form of joint venture is likely.
The two companies are already working to jointly market and support Embraer’s KC-390 transport aircraft. Under the agreement, the companies will jointly pursue new business opportunities, both for the aircraft itself and for aircraft support and sustainment. Embraer will provide the aircraft, and Boeing will be responsible for in-service support. In addition, Embraer is a long-time subcontractor to Boeing. Specifically, Embraer supplies machined flap supports for both the 747 and 767 programs. In addition, Embraer received a contract to produce wingtips and dorsal fin fairings for the 777.
Driving the merger talks is Airbus’ move to take a majority stake in Bombardier’s CSeries commercial jetliner. A teaming between Boeing and Embraer will allow the two firms to better compete against the CSeries, which has been the focus of several trade disputes in both Brazil and the U.S.
Most recently, the U.S. Department of Commerce (DoC) ruled that Bombardier had received government subsidies and sold CSeries jets below cost in the U.S. This ruling will likely lead to steep tariffs on aircraft sold in the U.S. The Airbus/Bombardier tie-up is hoping that the establishment of a final assembly line at Airbus’ facility in Mobile, Alabama, might enable the CSeries to avoid a massive tariff of nearly 300 percent that was proposed by the DoC. A final decision on tariff implementation by the U.S. International Trade Commission is expected by February 2018.
Should the Boeing/Embraer talks indeed lead to something resembling a merger or combination, the civil aircraft product lines of the two companies would make a good match. There is very little competitive overlap between the two product lines, consisting only of some indirect competition between the E195-E2 and the 737 MAX 7. The combination would also provide Boeing with an immediate and extensive presence in the business jet market, an arena in which the U.S. company currently competes only at the top end with corporate-configured 737s.
A Boeing/Embraer merger would also enable a comprehensive and broad-based attack on the Bombardier/Airbus CSeries, with the E190-E2 and E195-E2 challenging the CS100 version, and the 737 MAX 7 and 737 MAX 8 battling the CS300.
The Defense & Aerospace Companies series focuses on worldwide aerospace and defense prime contractors and subcontractors. Concise reports provide data on individual corporations regarding recent mergers, restructurings, and joint ventures, along with a Strategic Outlook that examines the company’s strengths, weaknesses, and opportunities. Also included in each report are financial and industrial segment data, snapshot coverage of major aerospace and defense programs, and recent U.S. Department of Defense contract awards.