Once a happy couple fully in love, looking to a bright future together. Now a couple at war after the groom walked away, leaving an angry bride contemplating an uncertain future. That’s how the relationship with Boeing and Embraer has developed between July 2018 and April 2020 when on the 25th Boeing unilaterally has withdrawn from the planned commercial aircraft joint-venture which was to be called Boeing Brasil.

As we analyzed earlier this week, there were a number of factors that made a go-ahead of the JV beyond the initial stage most uncertain: the lack of approval from the European Union for the deal (although not ruled out), the value of the deal ($4.2 billion compared to Embraer’s current value of some $1.3 billion), Boeing’s focus on its own dire financial situation, and a return to service of the MAX, and – as a result – changing priorities.

Boeing: conditions not met
After ongoing negotiations ended without a conclusive agreement after the April 24-deadline lapsed, Boeing exercised its right to unilaterally terminate the Master Transaction Agreement (MTA). In a press statement, the US company clearly puts the blame with the Brazilians as it says Embraer didn’t satisfy the necessary conditions.

As Marc Allen, president of Embraer Partnership & Group Operations, says: “Over the past several months, we had productive but ultimately unsuccessful negotiations about unsatisfied MTA conditions. We all aimed to resolve those by the initial termination date, but it didn’t happen. It is deeply disappointing. But we have reached a point where continued negotiation within the framework of the MTA is not going to resolve the outstanding issues.” Allen didn’t specify what is meant by ‘outstanding issues’ or ‘conditions’.

Embraer: false claims
Unsurprisingly, the response from Sao Jose dos Campos was quick and with an aggressive tone. In a statement, Embraer said: “Embraer believes strongly that Boeing has wrongfully terminated the MTA, that it has manufactured false claims as a pretext to seek to avoid its commitments to close the transaction and pay Embraer the $4.2 billion purchase price. We believe Boeing has engaged in a systematic pattern of delay and repeated violations of the MTA, because of its unwillingness to complete the transaction in light of its own financial condition and 737 MAX and other business and reputational problems.”
And it doesn’t stop here: “Embraer will pursue all remedies against Boeing for the damages incurred by Embraer as a result of Boeing’s wrongful termination and violation of the MTA.”

We have to wait and see what Embraer means by this and if it actually decides to fight the case in court. If that’s the scenario, it means more bad blood between the two and a rift that is unlikely ever to be healed in the future. It could even result in the ending of the MTA for the C-390 Millennium transporter, which Boeing said is still covered by a separate agreement.
So far, it has been quiet on Twitter, although Donald Trump and Jair Bolsonaro never shy away from strong wording and accusations that could make a US-Brazil case out of this.

Boeing and Embraer announce their MoU at Farnborough 2018. (Richard Schuurman)

Joint-venture the way forward
The 80/20-percent joint-venture was hailed by both companies as the way forward for Boeing and Embraer, both companies said on July 5, 2018, in a press conference at the Farnborough Airshow when they announced the non-binding MoU. “By forging this strategic partnership, we will be ideally positioned to generate significant value for both companies’ customers, employees, and shareholders – and for Brazil and the United States”, Boeing President and CEO Dennis Muilenburg said.
“The agreement with Boeing will create the most important strategic partnership in the aerospace industry, strengthening both companies leadership in the global market”, Embraer CEO and President Paulo Cesar de Souza e Silva added.

Embraer’s E2-series would seamlessly align with Boeing’s MAX-family, without much interference except for the E195-E2 and MAX 7. But even here overlap would be minimal, Commercial Aircraft CEO John Slattery said. “We don’t compete with the 138-seat MAX 7: our largest product is the 132-seat E195-E2. Customers are increasingly embracing the concept of right-sizing, matching the passenger per-day each way versus the size of the jet they are using, therefore enabling them to keep trip costs down”, he said in July 2018.

Embraer has most to lose
It remains to be seen how this divorce will end and who will lose the most from it. Boeing could have opted for a pause and restart negotiations at a later and more convenient date, but has gone for a full termination. This indicates its priorities have shifted indeed and a tie-up with Embraer is no longer worth spending precious dollars on.
For Embraer, the consequences could be much bigger. It spent $120.8 million on separation costs last year, but more importantly, it has lost an opportunity to form a powerhouse with Boeing to counter Airbus, especially the former Bombardier C Series-program that was integrated within Airbus in 2018. It leaves Embraer the weaker player on the commercial aircraft market, which as a result of Covid-19 is about to enter a prolonged weaker market. Even in the glory-days not long past Embraer has failed to really capture the market, its biggest recent successes dating back to the same 2018 Farnborough Airshow.

“Our history of over 50 years is lined with many victories but also some difficult moments”, Embraer’s statement concludes. “All of them were overcome. And that’s exactly what we are going to do again. Overcome these challenges with strength and determination.”

Investor’s call leaves many questions open
In a special investor’s call on April 27 on the topic, CEO Francisco Gomes Neto actually said very little extra. He confirmed Embraer will seek arbitration as it thinks it has the right to do so after Boeing and Embraer signed a contract on January 24, 2019, that has been approved by shareholders, governments, and all regulators except the European Union. Gomes Neto left open if Embraer will run the case in a Brazilian or international court. He was also unwilling to elaborate on the conditions Boeing claims Embraer has failed to meet, only saying: “We were fully compliant.” Also left unanswered was the question about the extent of the separation costs except saying these are ‘substantial.’

While the Boeing-statement of April 25 said that the agreement on the C-390 is still valid, Gomes Neto made it clear that any collaboration is off as far as Embraer is concerned. In a virtual shareholders meeting a couple of hours later, Boeing CEO David Calhoun said the termination of the MTA covers both commercial and military partnerships.

Gomes Neto stressed that Embraer is the number one regional jet-maker in the world with a strong market. If it can continue to go it alone now or will seek a new partner is something that needs to be decided. The same applies to the question about whether or not the Commercial Aviation division will be integrated again within the company or run as a stand-alone unit. “We don’t comment on any speculation on potential partners. For a decision on separation or integration it is too soon, we must analyze the situation.”

One billion is cost reductions identified
Chief Financial Officer Antonio Garcia announced that Embraer has applied strict cash preservation and cost control measures that include looking at staff numbers, furloughs, salary cuts, incoming and outgoing cash, liquidity, and suppliers. The company has identified $1 billion in cash savings for this year and reduced its working capital while focussing on maximum cash inflow and maintaining deliveries. Embraer secured $600 million in liquidity in March but is in discussion with the Brazilian government and banks about additional credits worth $1 billion. “There is no liquidity issue for this year.”
Embraer has suspended its FY20-guidance, with Garcia only saying: “2020 will be tough and 2021 will be worse than expected before.”

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