Boeing – Embraer: a necessary win-win alliance.

 

MONTRÉAL – Word Count: 1736 – Reading Time: 7 minutes On Thursday, December 21, 2017, it was not without surprise that I learned from my colleague Robert Wall by his article in the American daily The Wall Street Journal that the US aerospace and defense giant Boeing of Chicago and Brazilian aircraft manufacturer Embraer from São José dos Campos had begun discussions to consider a merger.

Since the announcement last October of the takeover of Bombardier’s C Series program by the Franco-German-Spanish aircraft manufacturer Airbus, which had taken me by surprise, I wanted Boeing, world leader in aerospace and number two of defense, to seize the commercial aviation division of Embraer.

Just over two months after the announcement of the alliance between Airbus and Bombardier, Boeing and Embraer — respectively number one and three worldwide in the commercial aviation market — announced the holding of discussions for a eventual reconciliation of their activities. As the French press called it, it’s ‘the shepherd’s answer to the shepherdess.’

But according to press reports, Boeing aims to get its hands on the entirety of Embraer, because the latter company is more than the regional ERJ twinjets, the E-Jets and the E2. The E2 is a re-engined version of the E-Jet family, with Pratt & Whitney Pure Power PW1000G and equipped with a new wing, new landing gear, Honeywell Primus Epic 2 avionics suite and Moog electric controls.

Embraer also builds the Phenom, Legacy and Lineage executive jet series, in addition to which Embraer Defense & Security produces dedicated military planes like the single turboprop A-29 Super Tucano, offered in training and ground-attack versions, the KC-390 twin-jet high-wing tactical transport and specialized versions of its business jets and regional aircraft for VIP transport, electronic warfare (SIGINT), maritime patrol and surveillance (AEW & C). In addition to all this, Embraer produces communication systems, ISR, C4ISR, border control systems and simulators.

Boeing and Embraer are not strangers to each other. These two manufacturers have already worked together in the military realm on the KC-390 program and on civil projects, including runway safety and eco-fuels. In November 2016, an Embraer 170 joined the Boeing ecoDemonstrator program for a series of test flights, following others conducted with a Boeing 737-800, a 757-200, a 787-8 and soon a 777F.

Admittedly, it was to be expected that opposition from Brazil immediately materialized in the stance of Brazilian President Michel Temer and his Minister of Defense, Raul Jungmann. Brazilian national sensitivity requires retention of Embraer’s military sector. Tener would be in favor of an injection of cash, while Jungmann would be more in favor of an agreement which would preserve local control of the company and which would send a representative to Embraer’s board of directors.

This said, it is worth remembering that, in the late 1990s, Embraer opened up to foreign capital for a few years. Thus the French Dassault Aviation, Snecma, Thomson-CSF (renamed Thalès in December 2000) and Aérospatiale Matra (integrated into EADS in 2000 and becoming part of Airbus in 2014) acquired 20% of its capital.

Interest in the Brazilian aircraft manufacturer on the part of the French aerospace industry seems never to have dried up, because before becoming interested in Bombardier in 2015, Airbus was more attracted by Embraer.

As for the Embraer Executive Aircraft division, it has become more and more American over the years. Moreover, since the beginning, most of the systems of these business jets are of US origin. Today, some years after the opening of the assembly line in Melbourne, Florida, both models of Phenom are assembled there as well as an increasing number of Legacy 450 and 500.

We should recall that Embraer — Empresa Brasileira de Aeronáutica — was founded in 1969 and privatized in 1994, and that it was born from an initiative of the Brazilian government as part of a strategic project to implement an aeronautical industry in Brazil, in a context of import substitution policies.

The aerospace sector remains highly strategic for Brazil, even though Brazil is desperate for new capital to fill its coffers, all but empty after two years of recession. Employing 18,000 people and with a capitalization of US$3.7 billion, Embraer recorded sales of US$6.8 billion in 2016 (compared with $7.96 billion in 2014) and delivered 108 commercial aircraft and 117 business jets. Turnover and deliveries are down. The aircraft manufacturer in São José dos Campos has an order book of 437 commercial aircraft, estimated at 18.8 billion dollars (defense and business aviation included). Since its creation, Embraer has delivered more than 8,000 aircraft and dominates the market for commercial aircraft with less than 150 seats. Launched in the 2000s, the E-Jet range of regional jets gives Embraer the lion’s share of this market, with 1,400 aircraft delivered so far. Embraer’s re-launched E2 range has amassed 285 firm orders and 297 options.

Who would have anticipated such a shake-up in the sector of commercial aircraft construction? The last great movement goes back to 1997 with the merger of US giants Boeing of Seattle and McDonnell Douglas of St Louis.The era of two big manufacturers and two smaller ones in the commercial aircraft market is over.

A Brazilian-US alliance win-win.

Although heavily encouraged by the governments of Ottawa and Québec City, Airbus’s takeover of Bombardier’s C Series and soon, certainly, of the entire commercial aircraft division of the Québec aircraft manufacturer, was a total surprise for the industry and has completely changed the game.

For Embraer, the question is how the Brazilian aircraft manufacturer could face Bombardier alone, supported by Airbus and its effect of range, its state funding, its political and commercial pressures.

Obviously, Embraer needs Boeing to face a Bombardier now carried, to say the least, by the behemoth Airbus which intends to use its commercial firepower and marketing to revive the anemic sales of the C Series, competitor to the largest of the Embraer E2 jets. The E-190 E2 is scheduled to enter service in April 2018, followed by the E-195 E2 in the second half of 2019 and the E-175 E2 in 2021.

In addition, integration of Embraer Defense & Security with Boeing Defense, Space & Security would open new horizons for Embraer by means of the commercial support of the US giant.

For Boeing, an agreement with Embraer would be an opportunity to finally achieve what it tried to accomplish in 1986 by acquiring Toronto-based de Havilland Canada from the Canadian federal government — i.e., to offer a full range of commercial aircraft. In 1986 this  included everything from the DHC-8-200 with 40 seats to the 747-400 with 416 seats. Today the range would stretch from the Embraer E-175 E2 with 80 seats to the 747-8i with 410 seats or 777-9 with 414 seats.

By incorporating Embraer’s E2-Jets range, which includes the 80- to 90-passenger Embraer E175-E2, the E190-E2 (97–114 passengers) and the E195-E2 (126–146 passengers), Boeing would extend its single-aisle offerings below the 737MAX7, and have a competitor to both versions of the C Series, the CS100 and CS300. But also, a rapprochement with the Brazilian aircraft manufacturer would enable Boeing to firm up its desire to enter the market of 12 to 50-seat regional airplanes. In April 2017, the US aircraft manufacturer announced its intentions to develop a hybrid electric airplane demonstrator by investing in Zunum Aero, a start-up company in Kirkland, Washington, that plans to fly, by 2019 or 2020, a prototype 19-seat hybrid electric regional transport aircraft with a range of 700 nm (1300km). The union of Boeing and Embraer would give birth to a behemoth whose annual sales would exceed US$100 billion, versus US$79 billion for Airbus.

Such a merger would bring together under one roof the 737, 747, 787, 777 airliners, F-15 and F-18 combat aircraft, Boeing’s UAVs, satellites and space launchers and the E2-Jets, the Phenom, Legacy and Lineage business jets and the dedicated A-29 Super Tucano and KC-390 military aircraft, as well as all the specialized Embraer commercial and business aircraft designs for the armed forces. These alliances, mergers or takeovers only actually follow the trend.The 1990s saw particularly strong military connections: Northrop bought Grumman in April 1994, Boeing bought North American Rockwell, the builder of the B-1B Lancer strategic bomber, in August 1996 and then merged with McDonnell Douglas in December 1996 mainly to its military and space activities, Lockheed acquired the General Dynamics military aircraft division that builds the F-16s, located in Fort Worth, Texas, in March 1993 and then merged with Marietta in March 1995. In July 1998, however, Lockheed Martin abandoned its attempt to buy Northrop Grumman following opposition from the US government.

The current decade is also seeing big groupings. In July 2012, United Technologies (UTC) bought the Goodrich equipment supplier for US$18 billion. In February 2015, Orbital ATK took over Alliant Techsystems and then in May, Harris gobbled up Excelis and, in November, UTC sold , helicopter giant Sikorsky to the world’s leading defense company, Lockheed Martin, for US$9 billion. In January 2016, Bershire Hathaway was getting its hands on US Precision Castparts for some $37 billion.

The year 2017 will be marked by the resumption of B/E Aerospace by Rockwell Collins in April and that of Orbital ATK by Northrop Grumman as well as that of Rockwell Collins by UTC for US$30 billion in September and finally that of the French Zodiac Aerospace by its fellow Safran in December, not to mention the takeover of the C Series program by Airbus in September. Like all other industries, particularly the automotive industry, consolidation in the aerospace industry has taken a long time to get under way, but the movement is inexorable. In the 1960s and 1970s, US Boeing (707, 720, 727, 737, 747), Convair (880, 990 Coronado), Douglas (DC-8, DC-9) and Lockheed (L-1011 TriStar), the French Dassault (Mercure) and Sud Aviation / Aerospace (Caravelle, Concorde), the UK’s British Aircraft Corporation (BAC 1-11, Concorde), Hawker Siddeley (Trident) and Vickers-Armstrong (Viscount, Vanguard, VC-10) and the Dutch Fokker (F27 Friendship, F28 Fellowship) built commercial aircraft. At the end of the 1990s, only Boeing remained with Airbus with the entry into service in 1974 of the A300, Embraer in 1973 with that of the EMB-110 Bandeirente and Bombardier in 1992 with that of the CRJ100.

The combination of Boeing and Embraer is the logical response to takeover of Bombardier’s C Series and Chinese and Russian ambitions in the commercial aircraft market.

 

 

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