After months of negotiations, Boeing and Brazilian jetmaker Embraer today announced a tentative agreement to form a $4.75 billion joint venture that would bring Embraer’s small-size commercial aircraft operations firmly into Boeing’s fold.
The arrangement is a strategic parry to last year’s move by Boeing’s European archrival, Airbus, to partner with Canada’s Bombardier on small-size jets.
Embraer’s engineering expertise could also come into play as Boeing gears up to design and produce a new breed of midsize jet variously known as the New Mid-Market Airplane, NMA or 797.
“This important partnership clearly aligns with Boeing’s long-term strategy of investing in organic growth and returning value to shareholders, complemented by strategic arrangements that enhance and accelerate our growth plans,” Dennis Muilenburg, Boeing’s chairman, president and CEO, said today in a news release.
Embraer’s CEO and president, Paulo Cesar de Souza e Silva, echoed Muilenburg’s bullish view.
“The agreement with Boeing will create the most important strategic partnership in the aerospace industry, strengthening both companies’ leadership in the global market,” he said. “The business combination with Boeing is expected to create a virtuous cycle for the Brazilian aerospace industry, increasing its sales potential, production, creating jobs and income, investments and exports, and in doing so, adding more value to customers, shareholders and employees.”
Boeing and Embraer also said they’d eventually reate a separate joint venture to develop new markets and applications for defense products and services, especially Embraer’s KC-390 military transport jet.
The two companies have a history of cooperation, but the latest round of negotiations had to tread a fine line between Boeing’s desire to beef up its competitive position in the small-size jet market and the Brazilian government’s desire to preserve one of the country’s most strategically valuable companies.
In December, for instance, Brazilian President Michel Termer vowed that “Embraer will never be sold.” The government effectively holds veto power over any Boeing-Embraer deal, but the tentative terms announced today appear to satisfy Termer’s concerns.
The joint venture would take charge of Embraer’s commercial aircraft and services business, with Boeing owning an 80 percent share and Embraer holding the other 20 percent. The deal sets a value of $4.75 billion on the operation, which means Boeing’s share would be worth $3.8 billion.
Boeing said it’ll take months more to finalize the deal, and then the deal will have to gain approvals from shareholders and regulators, including the Brazilian government’s OK. The transaction is expected to close by the end of 2019.
Once the deal is finalized, the commercial joint venture would be led by a management team based in Brazil, including a president and CEO. But Boeing would have operational and management control of the new company, which would report directly to Muilenburg.
“The proposed partnership is expected to be accretive to Boeing’s earnings per share beginning in 2020 and to generate estimated annual pre-tax cost synergies of approximately $150 million by year three,” the two companies said in today’s news release.
The deal opens a new chapter in an epic competition that now pits Boeing and Embraer on one side against Airbus and Bombardier on the other.
Last year marked a significant escalation in the rivalry, when the Commerce Department sought to levy a nearly 300 percent punitive tariff on Bombardier’s C Series jets because of what it said were illegal Canadian subsidies. The U.S. International Trade Commission struck down the tariff proposal, but the dispute sparked the Airbus-Bombardier partnership.
That partnership calls for Airbus to own 50.01 percent of a joint venture that would produce the C Series jets, which can carry 108 to 160 passengers. Airbus said it would build the jets at its factory in Alabama.
Embraer’s E-Jet planes have a similar capacity, with 66 to 124 passenger seats. In today’s statement, Boeing said Embraer’s offerings were “highly complementary” to its own, which range downward to the 737 MAX 7 with 138 seats.
Richard Aboulafia, an aerospace industry analyst for the Teal Group consulting firm, noted that Airbus basically “got a jet for free,” thanks to the terms of its C Series deal with Bombardier. The Embraer deal isn’t quite as beneficial to Boeing, he said.
“It isn’t exactly equal now, but it sure helps a great deal,” Aboulafia told GeekWire.
The promise of a future joint venture for military jet production is also a plus. “There’s a lot of potential on the military front,” Aboulafia said. “I don’t think they want to get ahead of that because of political considerations.”
But Aboulafia was less certain about how much Embraer could contribute to Boeing’s expected development effort for the midsize 797 jet. “I’m not seeing it,” he said. “They’ve already got the expertise.”