Boeing kills its $4.2 billion purchase of Embraer
April 25, 2020 at 7:30 am
By Dominic Gates
Seattle Times aerospace reporter
After more than two years of negotiations, Boeing on Friday abruptly terminated its proposed $4.2 billion deal to acquire the commercial jet business of Brazilian regional jetmaker Embraer.
Boeing let a midnight Friday deadline to extend negotiations over the closing terms of the deal, citing an inability to come to a final agreement. “Boeing exercised its rights to terminate after Embraer did not satisfy the necessary conditions,” the company said in a statement.
However, industry observers who had been expecting the decision believe the key reason for terminating the deal is the collapse in demand for airplanes due to the coronavirus pandemic and Boeing’s urgent need to conserve cash as revenue dries up.
The pandemic has so changed Boeing’s circumstances that killing the acquisition plan has looked inevitable.
Politically, going forward with a major foreign investment could have derailed Boeing’s negotiations with the U.S. government for a massive loan to survive the brutal business downturn.
The deal would have been Boeing’s largest acquisition since it bought McDonnell Douglas in 1997. While its failure seems a short-term necessity, it’s nevertheless a blow to the jetmaker’s long-term strategy and to its competitive position against European rival Airbus.
Boeing had seen Embraer as providing a new line-up of smaller jets to extend its airplane offerings. It had also hoped to gain from Embraer’s substantial engineering talent in Brazil.
Boeing had said Embraer’s facilities near São Paulo “will become one of Boeing’s centers of excellence for end-to-end design, manufacturing, and support of commercial passenger aircraft, and will be fully integrated into Boeing’s broader production and supply chain.”
That plan has now evaporated. With the commercial airplane market looking like it will shrink significantly and not recover for some years, instead of expanding to Brazil, Boeing instead faces the prospect of down-sizing.
Advantage Airbus
Embraer, headquartered outside São Paulo, is the world’s leading maker of regional jets. Its commercial jets, known as E-jets, are smaller and shorter-range airplanes than those built by Airbus and Boeing, used on many domestic flights on less dense routes.
Alaska Airlines, for example, flies the 76-seat E-175.
Embraer also makes corporate business jets and military airplanes. Boeing was proposing to buy only the E-jet business, with a separate agreement to form a joint venture that would promote Embraer’s defense products, especially its KC-390 military transport and air refueling tanker aircraft.
After years of collaborating with Embraer and considering a purchase, Boeing announced in December 2017 that it was in talks to acquire Embraer’s commercial business.
The proposed acquisition was propelled by a need for competitive balance after Airbus acquired the small C-Series jet, known now as the Airbus A220, from Embraer’s Canadian competitor Bombardier.
The A220 has already proven a sales success for Airbus. And when the pandemic recedes and the airline world resumes flying with smaller passenger loads, its small may make it even more attractive to airlines.
Now Boeing has lost its planned contending line-up in that category, leaving Airbus at a competitive advantage.
The Embraer deal was originally expected to close by this spring but was delayed pending regulatory approval by the European Union. That delay may have been fortuitous, preventing an expansion and a big outlay of cash at a moment when neither are appropriate.
According to the terms of the agreement signed by both parties in January 2019, Boeing would be required to pay Embraer a termination fee of $75 million if it pulled out with all the closing conditions met.
However, Boeing spokeswoman Allison Bone said Saturday that with the lack of final agreement on those conditions, “we don’t believe a termination fee applies in the circumstances.”
Dominic Gates: 206-464-2963 or
[email protected]; on Twitter: @dominicgates.