Dec. 26, 2017, © Leeham Co.: Potential synergies exist between Boeing and Embraer which may be important to development of the next new, clean-sheet airplane for both companies.
Last week, both firms acknowledged a Wall Street Journal report that talks have been held about a combination of some kind. No details were reported about what this would look like. The Brazilian president was quick to say the government, which holds veto power over any merger or acquisition of Embraer, won’t approve any deal that means EMB ceases to be a Brazilian company.
Joint ventures or minority ownership structure appears possible.
What are the potential benefits for Boeing and Embraer?
As Boeing continues its work to decide whether to launch the New Midmarket Aircraft (the NMA or, unofficially, the 797), obtaining risk-sharing partners has been challenging, aerospace analysts previously told LNC. A partnership with Embraer just might be the business relationship needed.
It’s been widely reported that Boeing is considering a two-member NMA family, 220- and 260-seats, with a range of 4,500nm to 5,000nm.
Bernstein Research, which has been skeptical of the market demand for such an airplane, recently floated the possibility Boeing might redefine the mission to top out at 4,000nm.
LNC is skeptical of this hypothesis. At the time of the Bernstein note, checks in the market with the supply chain and customers indicated no change in what Boeing was telling them.
If Boeing is interested in a 4,000nm airplane, a smaller wing might make sense. Boeing originally planned a multi-wing approach for the 787. The 787-8 and -9 shared a wing. The 787-3, intended to be a domestic version, had a different wing. The -3 was later dropped as delays, production, designs and costs soared. The 787-10 originally was conceived with a different wing, but in the end no change was made from the 787-8/9.
Embraer chose to have a wing specific to each of its three EJet-E2 family. One can easily envision Embraer, with its lower-cost wages, taking a major engineering role—something that might be crucial at a time when a very large number of Boeing’s engineers are reaching retirement age. Boeing may find itself with a critical engineering shortage at just the wrong time if the NMA program proceeds.
Embraer and Boeing have had business relationships for years. A joint venture now, however it’s structured, can do nothing but benefit the Brazilian company with new business, new opportunities and new expertise.
A major role on the NMA would be a huge shot in the arm for Embraer.
While the E2 is going to be a very good airplane, sales have lagged during an extended period of low fuel prices. The skyline quality is poor. One major customer ceased operations and lessors are having difficulty finding lessees willing to pay a premium for a fuel efficient aircraft that isn’t needed in today’s operating environment.
The sole E175-E2 order, for 100 airplanes, depends on a relaxation of US Scope Clauses—something that remains doubtful.
Officials have long talked about the need for a second airplane family. In recent times, the discussion centered around a turbo-prop. This would, in some respects, be a step backward, returning to its roots as a turbo-prop provider. More to the point, the 20-year forecast is 2,500 airplanes or less—hardly a compelling business case in a market currently dominated by ATR.
Embraer’s second family opportunity rests with going up, not down. But going up against Airbus and Boeing is something EMB has no interest in.
But in partnership with Boeing, the dynamic changes.
With Boeing appearing to be heading for an NMA program, launching a replacement for the 737 on a more-or-less concurrency basis is something the shareholder-value-driven Boeing executives and Board of Directors are not likely to be keen to do.
On the other hand, if principal responsibility is assigned to Embraer resources (i.e., engineering, production and contribution to funding), with its lower cost structure, might the 737 replacement be the new partnership’s responsibility?
With Boeing focused on the 220-260 seat NMA, and an aging 737 line for which the MAX is the last iteration, there will be a need for a new, clean-sheet design from 135 to 220 seats.
The E195-E2 seats 120 passengers in two-class configuration. Its range is marginally US-transcontinental, considering winds and reserves. (The smaller E190-E2 has a range of 2,850nm, comfortably transcon.)
Boeing’s smallest 737, the 7 MAX, at 138 seats is a sales dud (for reasons having nothing to do with C Series). The 737-9 and -10 are greatly outsold by the Airbus A321neo. Except for the 737-8, Boeing needs a complete makeover for its single-aisle product line.
A Boeing-Embraer design, which LNC will dub the BE808, could be the answer. The combined partnership would then have coverage from 75 to 220 seats with two family members.
The Bombardier trade case
Revelations of the talks between Boeing and Embraer, first reported by The Wall Street Journal, immediately raised questions in some quarters if Boeing filed the trade complaint is more about the potential Embraer combination than it is about protecting the 737-700 and 7 MAX.
As LNC noted last week, history undermines Boeing’s claims the C Series is killing the 737-700 and the 7 MAX. Sales were poor before the C Series was certified and during lagging C Series sales before the United and Delta airlines transactions.
Boeing’s relationship with Embraer long-predates the C Series.
The Wall Street Journal last week wrote that the trade complaint may be about protecting Embraer. LNC long suspected Boeing might be fronting for Embraer.
“LNC was told as far back as June, only a few months after the complaint was filed with the ITC, that Boeing felt if it could block the CSeries in the US, which Bombardier views as the largest market for the airplane, that the business model for the program will collapse—and Bombardier will have to terminate the program,” we wrote.
Last week, The WSJ wrote, “The tariff allegations criticism may have been meant to protect Embraer, said [Richard] Aboulafia at the Teal Group. ‘It’s about the only thing that would make the trade case against Canada look sensible,’” he said.