Pontifications: EU appears to be holding Boeing-Embraer JV hostage

Feb. 24, 2020, © Leeham News: I bet you’d never get an official of the European Union to go on the record.

By Scott Hamilton

But there sure seems to be plenty of anecdotal evidence that the approval of the proposed Boeing-Embraer joint venture is being held hostage.

The EU is plenty vocal about being pissed at the Trump Administration’s trade war against Europe. It’s also unhappy with Trump’s tariffs on Airbus jets imported into the US.

Trump initially levied a 10% tax on the planes, last October. Next month, this goes up to 15%.

As of last week, the US collected more than $277m in tariffs related to the Airbus complaint. The Trump Administration has WTO authority to levy 100% taxes, up to $7.5bn. Industries and countries that have nothing to do with aerospace are penalized in addition to Airbus.

It’s unclear from public information how much of the money collected so far is from Airbus imports.

Who pays?

Neither Airbus nor its US-based customers has confirmed who pays. However, in November during an investor’s tour in Asia, Airbus said it probably would split the fee for aircraft already in production. But customers would be responsible for future taxes.

Now, as of last week, Boeing and the Washington State Legislature appear on a path to end the billions of dollars in tax breaks the WTO said were illegal. The EU and Airbus are waiting for the WTO to authorize tariffs. Boeing claims ending the breaks removes the need for tariffs. If the WTO agrees, the EU has no leverage to hold over Trump to drop tariffs on Airbus. Except for the JV.

Boeing-Embraer

The JV officially was announced in February 2019. Nine of 10 governmental approved the JV. This includes Japan, where Mitsubishi Heavy Industries is developing the M90 and M100 SpaceJet in competition with Embraer.

Only the EU has not granted approval. The EU asked for a couple of million pages of documents dating 20 years. It’s twice suspended progress awaiting information.

Other governments requested up to 250,000 pages of documents.

Embraer said only one manufacturer and one supplier objected to the deal before the EU. Neither was identified, but Mitsubishi is believed to be the OEM.

John Slattery, the CEO of Embraer Commercial Aviation, is now on a mission to gin up support in the industry to pressure the EU into approving the JV. Slattery is CEO-designate for the JV once it’s completed.

Sales of the E-Jet E2 have been slow while the industry waits to see if the JV goes forward, he says. People want to see Boeing’s muscle and deal-making behind the E2.

Can’t compete with Airbus

Slattery says an independent Embraer can’t compete with the heft Airbus puts behind the C Series, now called the A220. He can point to at least one deal. Bombardier and Embraer faced off at jetBlue for an order to replace the airline’s aging E190s. JetBlue was the launch operator of the airplane. With its incumbency, Embraer believed it was ahead in the competition.

But within days of Airbus taking over the C Series, it threw in a sweetener in the form of A321neos. JetBlue placed the order for the A220.

It’s unclear what other face-offs have been won by Airbus. Air France chose the A220. But KLM, the other half of the Air France-KLM Group, ordered the E2.

Breeze Airways chose the A220-300. This was another Bombardier deal in the works, wrapped up by Airbus days after its takeover. Breeze’s founder, serial entrepreneur David Neeleman, previously chose the E195-E2 for his other airline, Azul. The A220-300 has longer range and a larger, more flexible cabin than the E195-E2 and is better suited for the Breeze business model.

Mitsubishi

If Embraer can’t compete with Airbus, can an independent Mitsubishi compete with Boeing-Embraer?

Years ago, Boeing agreed to support Mitsubishi with the development, sales and service of the MRJ program. With Boeing Brasil-Commercial on the horizon, the obvious question arises: will Boeing continue support for the MRJ90, now called the M90 SpaceJet, and the future models?

Boeing’s Ihssane Mounir,  vice president of Commercial Sales & Marketing, says yes.

“If you look at last year, we had disclosed a couple of off-platform services deals where we won the right to manage components on Airbus products with a couple of airlines,” he said at the Singapore Air Show. “They’ve given us component management of their Airbus fleet. We do the same thing on training. Our facilities have both Boeing and Airbus simulators. I’ll let you answer the question of how Mitsubishi would feel about that. There is a level of professionalism that the industry adheres, and this will be no different.”

However, after-sales support is much different than the deals offered during a sales campaign. Boeing packages services with sales offers in campaigns. One has to believe the Boeing E2 will get preferential package pricing vs an independent SpaceJet.

This begs the question whether Mitsubishi, with its decades-long relationship with Boeing, should turn to Airbus for support.

 

37 Comments on “Pontifications: EU appears to be holding Boeing-Embraer JV hostage

  1. The EU has different rules to US about mergers. The reality is competition is being reduced by the Boeing Embraer deal. They can’t complain about the Cseries as for a $1 deal it was a rescue mission.
    At $4.5 bill for 80% of Embraer Boeing is buyinto a successful business not a struggling one.

    • That pretty well is a self fulfilling way to putting it.

      If you can’t argue the merits just change the terms and its fine.

      While I have no issue with the EU messing with the administration let alone Boeing, the logic of a rescue?

      Correct me if I am wrong but did not Mitsubishi buy the CRJ line?

      So you have the Big M, Embaer could have bought it (not a direct competitor) or the Chinese would have been happy to get a real airplane.

      So really? Seriously? Your kidding right? This is so like the crowd on the mall during the last inauguration.

    • Considering the Mitsubishi sh could care less about losses and airplanes are just something they are plaining with (pun intended) ?

      Or the fact they have the CRJ network and the BBD people?

      They need Airbus for what?

  2. Given that neither the USA or EU ever appear minded to stick to narrow specifics and at the moment are philosophically/politically sparring I think the EU has broader leverage available than just this JV go/no go. Just as the USA would in return.

    As to the documentation required, without knowing the differing capacities/capabilities of the 10 jurisdictions referred to I don’t see how any objective critique of the volumes required is possible. My hunch though is that the EU is alone in this in having the resources necessary for a thorough assessment and also the (narrowly specific aerospace manufacturing) motive for wanting one.

    Doesn’t mean the EU isn’t playing imperial political games (I’d be surprised if they are not. After all, both the EU and USA do all the time), but I don’t see the justification for calling the JV delay as an Airbus/Boeing leverage play without seeing an analysis of the jurisdictional capability and motive first. Or before any detail regarding the claim that Boeing/Embraer have been foot dragging on providing the requested documentation. Boeing obviously has current form on foot dragging, just as the EU has long term form on being disingenuous over what it has or has not received.

  3. Boeing assistance in the early days of the program appears now to be somehow of a certain ambiguity. I’d love to understand how the Japanese are now (re) viewing their cooperation position towards Boeing. I can’t see how A Mitsubishi can survive – whatever how good the product will be and the CRJ service network might be – yet alone against a mighty Boeing/Embraer JV as direct competitor for the lower pax range of RJs. More consolidation ahead, with Airbus looking at the lower end of commercial jets, improving his footprint with Japan, and narrowing a portfolio gap from ATR to A220?

    • Subservience to the WWII victor is wearing thin over time.
      And the US hasn’t really done anything to transform that into friendly and respectful relations.
      ( some one remember the US trade representative demanding access to the allegedly “closed shop” Japanese automobile market. .. with zero RHD, local market suitable products in the portfolio. With Holden closing in AUS we see the same lack of being willing to produce “suitable stuff” for a market that deviates from the US)

        • It’s a myth that no American cars are sold in Japan. I’ve seen several, and indeed family members in Japan have a Ford.

          But it’s certainly true that the maximum practicable car size for Japan looks incredibly tiny against the norms of a typical US spec car. People in Japan simply don’t have the parking space for anything bigger (oh and the roads can be narrow).

          It’s not even that Americans can’t design cars for the Japanese market. The Mazda MX5 / Miata is designed in the US, by Americans. Ok they’re guided by the design brief of replicating the quintessence of a small English roadster, but it’s done in the US.

          The main reason why US owned car companies don’t / wouldn’t do well in Japan is “quality”. Japanese cars are all masterpieces of system engineering, specification (especially Kei cars), design, manufacturing and after sales services and servicing. It’s widely known across the Systems Engineering world that US car companies just aren’t very good at the systems engineering bit. And the certainty is that if you’re not truly red hot in systems engineering, you’re never going to be making products that the Japanese consumer will want to buy.

          It’s not even the case that Americans don’t get Systems Engineering. Plenty do, NASA being a pioneering light in the field. Even the Japanese approach to Systems Engineering has some of its origins in an American’s ideas, which post WW2 they incorporated into their primary school curriculum. The guy took his ideas to Japan after being rebuffed by Ford, GM, and Boeing too I think.

          • Yes there is a difference. You could collect all German car ceo’s for a full day discussion on door handle design and half of them would like to stay another day.

  4. I am not sure if the Boeing-Embraer deal can be approved under EU competition rules at this moment.

    EU law basically looks at how the situation will be post-merger. They prefer 3 players minimum. This is the problem and at the same time the decisive difference from the moment when Airbus got a controlling majority of the C-series.

    So post merger you have only Boeing and Airbus at this moment: COMAC cannot deliver the C919 jet and the ARJ 21 does not play a big role. Neither do SSJ, CRJ. MC 21 and Mitsubishi are not available neither. So you are left with Airbus and Boeing.

    At the time of the C-series take over, Bombardier and Embraer were still respective, independent players and SSJ on the rise.

  5. EU let Airbus swallow Bomberdier but will prevent Boeing from buying Embraer. You can say all you want about EU law if it is not fair the other side will retaliate.

    • “.. if it is not fair the other side will retaliate.”

      Could this be the reason the EU is dragging their feet?

      Boeing wants to aquire the major part of Embraer.

      Airbus acquired exactly _one_ project from Bombardier.
      Not even the complete aerospace division.

      On another note the EU opposed the fusion of Siemens and Alstom railway divisions.
      Judgement on the Alstom ingesting Bombardier ( again rail only ) deal is afaik still out.

    • @Daveo: The Airbus-C Series is different than Boeing-Embraer.

      Airbus acquired only the C Series program (at the time, 50.01%), not all of BBD. BBD was a failing company as well.

      Boeing is acquiring 80% of Embraer Commercial Aviation, which is not a failing company; and 49% of the KC-390 program.

      So there are significant differences.

      • The only aspect that counts is the competition area.

        In this case its aviation no rail systems etc

        Arguably C Series loss to Airbus does reduce competition as its sucked up into Airbus giving them more monopoly.

        It could have been sold to Boeing or the Chinese. We don’t know. We just know it went into one of the duopoly without a qualm.

        Embraer in fact is not competitive there, they are regional not a true Trans Con+ single aisle like the C Series was (and more capable all the time)

        C series is non scope and the E Series is scope (or out of it with the E2 which cna’t compete heads up with the C / now A.).

        Boeing does not make a transporter so I don’t see where the KC-390 has any relevance in this.

        Nope, its a political play, maybe a way to put a thumb in someones eye?

  6. The phrase that I like to describe the situation:

    “United States of Boeing vs the Economic Union of Airbus”

  7. We are in a world of civil airframe maker duopoly. There is only Boeing and Airbus. One of the two companies capable of some kind of alternative, Bombardier, was brutally crushed by the Boeing gorilla and it’s Board Level political connections and has folded in to Airbus in lieu of Bankruptcy. This was good for Boeing. Duopoly is good for Boeing. Embraer merging into Boeing makes sense for Embraer aircraft types in that Embraer can, supposedly, take advantage of Boeing’s service support network and its the support network that is more a limit to sales than actual aircraft performance.

    Nevertheless it eliminates competition. Only Mitsubishi and the Russians remain though COMAC will be a player eventually.

    The EU commission is right. In bombardiers case the company was going to die otherwise.

    • If BBD C was crushed it was crushed by Airbus with the NEO.

      Boeing could not crush an aluminum can.

      • Well, BBD obviously had execution issues with the CS project.
        Airbus had to fear the CSeries ( analyst voices )
        Boeing had the superior product. no fear.

        Next thing Boeing gets out the dumping hammer and beats up on BBD who by B assay are no danger to B.
        Result:
        BBD has no (longer) staying power and thus lacks a perspective to continue on their own.
        Project is offered a second time to Airbus at “improved” conditions.
        Counter to expectations in the US reflecting MoO of Boeing Airbus did not trample the product to nix competition for the NEO ( and thus Boeing products as fall out ) but boyed the CSeries as the new stepchild A220.
        With a proper product to complete against the A321 Boeing is quite a bit more pressured by the A220 than Airbus A19/A320.

        TransWorld you should not stop with bringing up Pravda. Go for the truth!

  8. The way Trump has shamelessly used “national security” for several tariffs means the EU will shamelessly use whatever pretext it wants in this trade war. The 737 Max cert will will also get a rough ride. The US may be a larger aircraft market then EU but EU and Asia combined are HUGE and China is also looking for ways to hit back

    • Without Britain the EU is much weaker. Really the EU elite is so detached and so destructive the whole union may pull apart. Airbus was one of its most magnificent accomplishments but the lunacy of the EU elite looks like destroying itself.

  9. The c series was the only part of Bombardier’s that was worth anything. A narrow body program that has over 600 orders is a viable entity in civil aviation. EU policy’s is part socialism, communism and a little bit capitalist. They have no problem in government control of industries.

    • Boeing refused to take over the c-series – their mistake. Why should the EU help Boeing recover by letting them take over Embraer, if that reduces competition?

      Embraer received substantial state aid and Canada won a WTO case against them. Will Boeing repay that state aid, if this take-over goes through? Or can Canada enforce the tariffs, won in that case, against Boeing?

    • “They have no problem in government control of industries.”

      Your prefer corporatist control of government?
      In context of the US “Democracy” is a hollowed out shell!

  10. The EU is helping Boeing. Boeing didn’t even have the cash to pay the dividend. How can they pay Embraer.

    Slattery said that the E2 is much cheaper to produce than A220. Embraer needs to lower their prices more same as they did against the CRJ and they will sell more.

    It’s much better to have an independent Embraer than Boeing politics running them down too. If Boeing has a combined aircraft sale of E2 and 787, they could sell the E2 at a loss and earn on the 787. Embraer could earn nothing.

    Boeing could have re-engined the 717 and stretch it but they were only interested to sell low quality 737.

    • Valid point that all Boeing will do is wreck Embraer the way its done itself.

      Day 99, Embraer held hostage, will it never end?

    • Leon:

      The 717 is as dated as the 737. It simply was not viable vs a modernized 737 o an A320 series let alone a C/A series.

      Ford retied the Model T a long time ago for good reason.

  11. Mitsubishi teaming up with Airbus? Quite possibly. Various Japanese airlines seem to be slowly looking at moving to Airbus products, and I can imagine that being eased considerably if there were a strategic relationship with a large Japanese manufacturer. So it may be Airbus would be motivated too…

  12. Maybe it seems to be a hostage but 1st of all job has to be done well, without shortcuts and rubber stamping, because “everybody else approved”. Volume of documents is just a volume necessary, they didn’t asked unnecessary documents, I assume. I don’t understand all whimping about stopping process by EU if requested documents haven’t been submitted.

  13. I think the far reaching cooperation of Boeing and their biggest customer, taxation agent, R&D supporter, financer, rulemaker, certification body is a reality and a topic of investigation at this stage. As are import tarrifs. It seems politics play a bigger role than at Airbus.

    • A “Japan First” strategy. Jobs, knowledge, make sure it ends up in your borders, not somewhere else.

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