A number of pundits have commented that stopping the current Boeing-Embraer deal will be a death knell for Embraer and provide Airbus a competitive market advantage over Boeing are premature in their conclusions.
There are almost always legal challenges and regulatory approvals required for any multinational deal these days, yet the somehow the deals get done – albeit with added administrative costs and legal fees. Nonetheless, one court ruling in Brazil doesn’t mean the world has come crashing down around Embraer, or that a deal may not materialize. Should changes be necessary to make the deal work, then changes will be made. This deal is important to both sides, and should ultimately be completed.
Interestingly, this deal came about because Bombardier was unable to deliver the CSeries on-time and on-budget, and needed a rescue from Airbus, who may have obtained the bargain of the century in a very favorable deal. Airbus has gained a strong performer in the 100-150 seat range that has proven very effective in service, beating promised performance levels. With Airbus gaining a foothold in the 100-150 seat market, Boeing felt it needed to match.
Boeing’s 737 MAX7, with only 70 orders, was upgraded and increased in size to improve its seat-mile economics but is still failing to gain traction in the market. As a result, with Airbus having the popular CSeries, Boeing needs the Embraer E190-E2 and E195-E2 to effectively compete across the board for airlines and lessors.
But Embraer represents much more than the two aircraft. In their due diligence process of Embraer, two things stood out – Embraer’s ability to deliver 14 new airplanes in the last 15 years, on-time and on-budget, and tremendous engineering capabilities from a young and capable workforce, particularly in information technology and systems integration. With high costs and an aging engineering workforce in Seattle, Boeing decided that the partnership with Embraer could bring additional benefits, including the use of Embraer’s engineering talent on new Boeing programs such as the NMA/797.
Embraer, which now has to compete with Airbus in sales campaigns, faces a much more sophisticated and formidable competitor, with much deeper pockets and more resources than Bombardier. The now A220 is gaining traction and will be a market success. The E190-E2 and E195-E2 have been selling more slowly, with some sales deferred because of the uncertainty of the Boeing transaction.
Nonetheless, the E2 series is a very good airplane but faces a market in which it cannot yet replace existing EJets, which remain a very young fleet not ready to retire. With only a growth or competitive conquest, rather than a replacement market, Embraer is faced with a more difficult marketing challenge than its competition. Nonetheless, replacement of older Avro RJ and Fokker 100 fleets are overdue for some carriers, and Embraer offers a very compelling replacement aircraft. As we have seen at Wideroe and Helvetic.
The regional side of the market, under 100 seats, is an area in which Airbus does not compete, and an Embraer deal would expand Boeing’s product line to smaller aircraft. The E175-E2 is currently restricted by scope clauses in the US market, which will likely extend to 2024. While there is an international market for this aircraft, more than half of the regional jet market is centered on the United States. Embraer will likely build and launch the E175-E2 in international markets, as carriers like Widerøe, the launch customer for the E190-E2, need the E175-E2 for smaller markets.
The E175-E2 will need to wait for scope clauses to catch-up in the US, but Embraer will continue to sell the existing E175 in the US market, using its hybrid assembly line in Saõ Jose dos Campos. With competition in the scope compliant RJ space in the US limited to the CRJ, the E175 has already proven effective in landing a majority of recent orders and should continue to be successful.
The Bottom Line
In the worst case, if the equity transaction were to be rescinded, there are no restrictions on keeping the spirit of the agreement through marketing partnerships and outsourced engineering contracts. There is more than one way to accomplish a goal, and you don’t have to own the ballpark to play in the ball game.
