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Leeham News and Analysis
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Analysis: The collapse of the Boeing-Embraer joint venture
By the Leeham News Team
Analysis
April 25, 2020, © Leeham News: The Boeing-Embraer joint venture is off.
Boeing called off the JV, saying Embraer didn’t satisfy all the conditions required.
The Boeing-Embraer joint venture is dead.
The impact to Embraer is more profound than to Boeing.
When the JV was announced in 2019, the advantages for Boeing were:
- Access to EMB engineers at a time when Boeing’s are aging and ready to retire.
- Access to much lower cost base in Brazil.
- KC-390 program.
- Revenue from EMB Commercial services.
- E2 program, though this is tangential.
The advantages for Embraer were:
- Access to Boeing’s vast customer base, marketing power, balance sheet (again, pre-virus) and capital markets.
- Access to work on new airplane programs: NMA (at the time), Future Small Airplanes (single aisle, either to compete with A220 or larger).
- Work for its engineers.
- A future beyond the struggling E2 and beyond the fanciful turboprop concept.
- A future for Embraer Commercial Airplanes, which in LNA’s view was increasingly risky.
No future at Boeing—for now
Boeing’s NMA, “NMA Lite” and FSA are dead for now. The future is with the 787 and the MAX. Photo: (c) 2020 Leeham News.
The coronavirus crisis changes everything.
Boeing’s balance sheet is in tatters and its cash flow, already under strain, now rests with its Defense unit and a shrinking stream from the 787, 767 and 777 programs. Cash flow from Boeing Global Services is tanking along with the airline industry.
New product development was put on the back burner with the firing of CEO Dennis Muilenburg and replacement by David Calhoun.
Boeing 777-9 demand was shrinking before the COVID-19 crisis. It’s worse now. Photo by Leeham News.
LNA understands from several sources, in and out of Boeing, that product development now has ground to a halt. There are no New Market Airplane, no “NMA Lite,” no Future Small Airplane in the foreseeable future. There are no customers. It will take years to recover from the virus crisis.
This means Boeing’s future for this decade, for better or worse, relies on getting the MAX recertified and deliveries restarted.
The need for access to Embraer engineers and Brazil’s lower cost base, for a new airplane, is over—for now.
Paying around $5bn for a company that has a market value closer to $1bn is problematic. Assuming Boeing takes federal money, however the deal may be structured, would present huge political problems if Boeing sends $5bn to Brazil.
Boeing’s near-term priority is saving itself and rebuilding its balance sheet. It’s hard to see how Embraer fits into this.
The 2020 decade is going to be Boeing’s lost decade.
Crushing blow to Embraer
Boeing’s exit from the JV is a crushing blow to Embraer, especially now.
Divide this into two parts: pre-virus and post-virus crisis.
Pre-virus, Embraer’s engineering force was well down the downslope of the bell curve on the E2 program. The E190/195-E2 are in service. The E175-E2 is in flight testing. Engineers were faced with little substantive work in the coming years. The JV afforded them the opportunity to participate in development of Boeing’s NMA (or whatever aircraft was launched). They also had the prospect of creating an airplane to compete against the A220, given’s Boeing’s balance sheet and strength to do so against Airbus.
Embraer considered launching a new turboprop program. While it is true the dominant turboprops in the market today, the ATR series and the De Havilland Canada Dash-8-400, are aged designs that have been updated, market demand is small. The 20-year forecasts, including Embraer’s, generally land in the 2,000-2,500 range. This is a small market to split three ways, not including the home-grown China and Russian products.
The most often stated reason for the program was to keep Embraer’s engineering talent. This certainly is a consideration, even for a program cost estimate of some $2bn. But LNA was not convinced this was the best use of Embraer’s resources.
Without Boeing, LNA was told Embraer doesn’t have the financial resources to pursue even this amount of money.
Sales of the E2 have been disappointing. There are no E175-E2 orders, despite assurances several times non-US deals would be forthcoming. US deals are moot because the airplane is too heavy to be economically viable under pilot labor Scope Clause contracts. E190-E2 sales stood at just 27 at Dec. 31. E195-E2 sales stood at just 171.
Post-crisis
Eighty-six percent of Embraer’s deliveries from March through December are concentrated in Brazil and the US. Of these, 58% are E175-E1s destined for US airlines. It’s unlikely many of these will be delivered. Brazil’s Azul Airlines is scheduled to receive 25 E195-E2s in the nine months this year, the 28%.
Going Forward
Boeing is likely to accept a US federal loan in the billions of dollars.
Its product strategy is in tatters and on hold indefinitely. Airbus has the advantage, especially with the A220, which can be expanded to a third, larger family member if it chooses.
The 777X, a product about which LNA has been skeptical for the last year, is even more at risk for the lack of demand.
Embraer almost certainly will need a bailout from the Brazilian government. But will the money be available? Given the government’s Golden Share and Embraer’s position as Brazil’s No. 1 exporter, probably so.
But this doesn’t solve Embraer’s own product strategy challenges.
This is just said for Embraer. The E2 is a superb aircraft….
When the JV was announced in 2019, the advantages for Boeing were:
Access to EMB engineers at a time when Boeing’s are aging and ready to retire.
The advantages for Embraer were:
Work for its engineers.
OK, come on now, this is silly, and it’s missing the most important part.
A benefit of the JV was that Boeing got access to Embraer’s CHEAPER engineering force.
It’s disingenuous to talk about Boeing’s engineering force being “aging and ready to retire,” as if there was no ability to hire new engineers. There has always been plenty of engineering talent out there. Just not at the price Boeing is willing to pay.
@Jim: Are you blind? Look at the second bullet point:
“Access to much lower cost base in Brazil.”
It is questionable at best to assume the cost base in brazil is lower than in the us or Europa. I was SVP for a company that had manufacturing in Everett, Netherlands and Sao Paulo, amongst other places. There was no big cost difference between all 3. BRAZIL has the most inflexible Labour regulations that i know, even worse than France. Probably a mootpoint now but something to remember in this discussion.
I’d question your metrics to determine value for money from some workforce. ( in the end it is not money per hour but money per _successful_ design objective.
The US “hire and fire while hating your workforce all along the way” as a method may be cheaper per hour but the output is sub par.
Behavioral tactics to keep your job are regularly not conducive to good work done overall.
Being respected, having workplace protection, job security, secure health insurance and pensions is complemented with good work done.
Many companies do well with employees, they have a ‘trading values’ view of life.
I suggest Hutchinson Technologies (at least prior to Japanese ownership), Analog Devices, and Branch Bank and Trust.
They quietly go about producing and making money.
Leadership as key, I point to:
– The Essence of Leadership, by Edwin A. Locke et al
– Sony said its US plants were its most productive with best quality
– another large Japanese company said likewise
The rest want bailouts.
Have to agree with Jim. The cost of engineering is not that significant a factor in aircraft production. Quality of engineering is still dominant in the long run, regardless of source. This may have been a perk but not a significant driver for the deal, and Boeing still has plenty of options for both domestic and offshore engineering talent.
It used to be that Engineering talent from around the world moved to Boeing, not that work packages were sent far away with limited control and communication with those building the parts and aircraft sections. It might work well in Japan where design and build are integrated with huge amounts of goverment money added but the risks for misunderstandings and a “design by commitee” aircraft becomes the final product (747-8I?).
I don’t see the experience and resources of Embraer being allowed to wither. So my money is strongly on an opportunist tie up from a wannabe global player, be it China, India, Russia, Indonesia, a petro state with resilient finances. Really any country (or countries) that can find the money down the back of the sofa.
I realise Boeing’s decision may be enforced (the bailout fund tight restrictions) and so maybe they had no choice. But it feels like a “win the battle right now, lose the war 10 years down the line to the new entrant you’ve just accelerated enormously” catastrophic error of judgement.
Saudi Arabia had a JV with Antonov on the new an-132. Would blend nicely with their aim to move away from oil revenues
An opportunity for Mitsubish?
Japanese are no strangers to Brazil.
Would be a mush of companies with products to sort out, by would give Mitsubishi sales and support (I forget if they made a deal with Bombardier who flopped around and ended up staying in the business jet business, perhaps Mitsubishi purchased the business of airliner derivatives of the Challenger business jet).
Only if Boeing hadn’t gone after Bombardier. Talk about consequences.
It is not beyond imagining that, had Boeing not gotten Wilbur Ross to so frontally attack Bombardier, Boeing could have scooped up a top notch, North-American produced airliner for a song by waiting a year +/-. Bombardiers finances were that shaky, Canadian interventions notwithstanding, and even after Delta ordered a bunch of planes (at uneconomic prices for BBD, one presumes), the path to manageable liquidity for BBD wasn’t clear.
Now our preeminent airframer will stagger along with the MAX, . I hope recent speculation about Delta considering a 717/MAX swap is just rumor. But it does suggest that the A220 is suitably impressing the Atlantans (who have not parked a single copy of that plane amidst an otherwise huge draw-down) that they may find the 717 completely superfluous.
Yes, that’s right. The right move for Boeing was to buy the C-Series program itself, rather than bury it. Failure to do so was a blindingly stupid thing to do (another thing for which Calhoun, as a board member, has culpability) but kinda fades into the woodwork when considered alongside all the other idiotic moves its made in the past decade or two.
No big surprise, but what a difference a year makes. It’s too bad the past CEOs of Boeing aren’t around to suffer the consequences of their hubris and golden parachute motivated decision making. Mostly aerospace jobs will be stressed and also the workers in supporting industries. Granted, Covid was a Force Majeure, but for instance, the CSeries for a small sum of money would look pretty darn fresh in the Boeing line-up. Delta is flying a third of their planes, but all of their CSeries (220s.)
Not surprising. Every transcontinental route is now a thin route. Be interesting to know what load factors they are getting on them.
I have never understood the decision to make the E2-175 too heavy for the scope clauses. That has to go down as one of the most misguided gambles in the history of aviation product strategy.
I could see Mitsubishi making the error, they had no real relationships with US industry, but really Embraer should have know just how risky that move would be.
Brazil’s government will find the money.
The argument around the engineering workforce (cheap or not) always confounded me. At this level, it is not easy to make work, even treated at a supplier, arms length level. Deep integration can but rarely works at that geographical scale. See AB’s tribulations.
Am sure we are going to hear from our usual pundits that it’s a great opportunity for our commie friends (russia/china). Brazil won’t allow that. EB would be dead immediately, and for the long term, in the US: EB’s only real long term market. China would steal and copy at home, leaving a corpse. Russia can’t manage anything…let alone EB in Brazil.
Tough slog ahead for EB. BBD had it easy in 20/20 hindsight, given the chinese flu event that unfolded.
They’ll find something to work on. KC follow on, turbo prop (bad idea), electric hybrid (nah), cutting weight on the E2, real competitor to the A220? (need real money for that and AB will crush them on the market).
If we can dare saying so given the mayhem, AB has things pretty well lined up though it will hurt hard. Some BA execs should be tried from ‘economic sabotage’ — LOL. Just for the show so we can get all exposed to the deep thinking so everyone learns and we can debunk the usual Fox manipulations (don’t jail them, and i mean that, just expose the rationals for where the money is spent). Here we privatize profits and nationalize losses at larger scale than the rest of the world.
While at the same time, we send (ok, now, it’s print) money to the chinese because we can’t tell our people to work more/smarter, get educated, stop getting fat (exercise & learn about what you buy/eat), and invest for the future (& yes also for the environment). oh sorry, now we have also privatized education for profits so we can bankrupt our kids early. Sigh.
The chinese flu is truly indeed a blessing for the chinese brand of predatory dictatorship. No wonder they made sure not to share relevant data with the rest of the world. In one fell swoop, everyone else gets weakened. What an opportunity.
And with the wrong type of leader (“science is a hoax”) at the helm on our other side…trying do disinfect everyone by “Reiningung” (disinfectant) injection (you had to love that one !)… it’s truly great to be a predatory dictatorship in the years to come….”let us help you…!”.
Poor EB. Me always rooting for the underdog(s).
“The chinese flu ..”
You are aware that the “Spanish Flue” was a “Kansas flu”
And nobody uses “Mexican Pig Flue” though its global spread seems to have started in Mexico.
It really helps if one states facts in a nonpolarized fashion.
( Look for Sapir Whorf hypothesis.)
Use Covid19 or whatever.
The Spanish flu’s genetics have been traced to China/Vietnam area from DNA analysis from preserved samples and bodies and comparison with other strains. The fist outbreak seems to have been the Shanxi Province in China in 1917. It may have entered Europe via Indochinese dock workers working in France in WW1. Yes, it did break out in a US Army Kansas camp in 1918 and may have been transported to Europe by that route concurrently. It was originally blamed on the Germans, like so many of these things are. I think a lot of people really hope it evolved in the USA for ideological reasons and certain media seem to promote the Kansas farmer theory. I’s a possibility like all these things.
The original CCP claim is that it originated in wet market. I’ve been to a wet market in China. Customers and Vendors alike pinch and handle the meat with bare hands to see if it is firm and fresh. They pick up the meat and count money, lick their fingers to count out change. They don’t have a place to wash their hands. If you are lucky enough to find a toilet you need to bring your own toilet paper. Older people don’t known that virus wont wash of without soap. Its entirely possible it originated in one of these places. There is a mentality that phlegm must be gotten rid of and you’ll see this delivered to the footpath in front of you quite often. There is also the issue of mixed farming of animals were pigs, ducks, fish and other animals share the same space and waste.
I find the following flabbergasting. According to Professor Luc Montagnier, winner of the Nobel Prize for Medicine in 2008 for “discovering” HIV as the cause of the AIDS epidemic together with Françoise Barré-Sinoussi, the SARS-CoV-2 is a virus that was manipulated and accidentally released from a laboratory in Wuhan, China, in the last quarter of 2019. He says sequences of Malaria and HIV virus are present in the SARS-CoV-2 virus and these could not occur in naturally. Check it out yourself.
In an attempt to keep this relevant a simulation of the pandemic spread in the UK has concluded that had the reaction to the pandemic occurred in a timely manner,,ie had CCP authorities been transparent, that the virus would have been arrested at 10% of its current growth.
As late as January 15th Chinese Government representatives on the WHO COVID-19 committee were arguing that the virus wasn’t spread person to person but only animal to person. This despite Wuhan being in lockdown and Taiwan authorities informing WHO that the virus was spreading person to person. (Wuhan Doctors were getting sick from their patients).
I really don’t know what was going in with these CCP officials but compared to what happened at Boeing over the MAX people should be 10 x angrier.
This is an aviation discussion and not one about the politics of Covid-19.
this veers off topic, @William
Question to anyone in the know. Boeing’s official communiqué takes a swipe at the EU (what else is new…) by stating it was the only one opposing the JV. My read was that they were slow, but would have eventually cleared it. Is the claim standard PR posturing? No flames please, just asking.
See this article from Reuters: https://www.reuters.com/article/us-embraer-m-a-boeing-idUSKCN2270KN?taid=5ea48e8de1ba1400012805ab&utm_campaign=trueAnthem%3A+Trending+Content&utm_medium=trueAnthem&utm_source=twitter
“The deal had already faced antitrust hiccups but sources close to the talks said these did not ultimately wreck the deal. “
The EU hadnt come out and said NO. They wanted more information and CV-19 delayed their final decision as well to late Aug
The reality for the EU competition rules was the Number 1 Airframer was going to control the Number 3 which ipso facto was a ‘reduction in competition’.
My take was a possible deal to get around the lack of competition problem, was to see the 95 + seater market as an Airbus-Boeing limited competition already and keep Boeing out of the below 95 seater market as DHC , ATR and Space jet are minnows, by cancelling the E175-2 model.
This is a common EU method to deal with the large mergers which reduce competition and at a stroke removes Boeing from the under 95 seaters where it currently doesnt operate. The E175-2 could be an easy give up
Looking back you’ll notice that causalities offered by Boeing when presenting decision PR it to never mention the real “pressure path” .
787 not ready in house? : “delayed by engine hickup during RR readying ops.”
Lost sales due to BBD price dumping : only fully uncompetitive products in the B portfolio.
Applied over 2..3 decades this is now deep self hypnosis.
I didn’t see the fit between Embraer and Boeing, especially not for 4.3bn.
Actually, the EU saved Boeing.
If they would have bought and paid in Q1 2020 or earlier, they would now have 4bn less cash,
a struggling E2 family which is basically just the E2 195 and does face 2 serious competitors – A220-100 and A220-300.
Together with its already troublesome KC 46 program, it’s disaster B737 Max, it’s production quality troubled and deferred cost loaded B787 and the low demand B777x – it could be too much to handle even for a company the size of Boeing.
Embraer mains advantage is, they can develop and produce planes at ultra low cost, many airlines also profit from currency effects. The last decade, Embraer had the newest product superior to the CRJ,
but regional jets are a difficult market.
E2 is somewhat a hybrid, as it tries to move where A319 / B737-700 was, but it’s doubtful if you really can fit those 125-146 pax and how much range you get. Also, that 2+2 seating, realistic is around 120 seats.
Not sure if that sees great demand.
The engineers are an asset but to make use of them you need a new program.
I don’t see Boeing going for a new program at all, especially if they would have bought Embraer.
Their only cash cow is the B787 now, but I wonder how much cash it really makes.
Boeing needs to fix it’s Max, it’s cash, it’s B777x, it’s quality issues.
Then it needs to rebuild the ability to develop great airplanes, not ones that start burning midair and get grounded, or have avionics software to nose dive into the ground and get grounded. Or ones that hull break during tests and face low demand.
I guess then Boeing can go for a FSA or NMA.
Didn’t Boeing up front expect to buy up a cohesive compact engineering force able to produce the design for a marketable product in reasonable time and at good quality avoiding the
Boeing apparently ingrained problems caused by accessorizing on existing designs instead of starting from new with _abstracted out knowledge_ gained from previous work?
i.e. the model they test rode for the trainer competition?
The A330 was an an accessorized design of an earlier model , so was the 737 NG.
The first A350 was just another version of the A330/A300 but the customers wanted them to start from scratch with XWB.
Its nothing wrong with that, oftenwhen its what the airlines want…. their business is to carry passengers not ‘indulge plane geeks’
Your disjunctive reply with “alternate facts” doesn’t bring anything to the discussion, does it?
The question is now who will buy or “Joint Venture” with Embraer now to throw it a life line. There is going to be no money in the US or Western world after the debts from the COVID-19 response are added to existing debts. I would reckon an acquisition by Chinese maker COMAC is possible given that the Chinese actually have money. Much of the world don’t care about EASA and FAA certification but it gives COMAC a base to expand from.
Saying that the 2020s will be a lost decade for Boeing is undeniable, but you can equally make that about the 2010s. This company is unbelievably good at shooting itself in the feet, by now it can’t have any toes left.
Boeing should’ve called off the attempted joint venture with Embraer immediately after the MAX program was grounded. Instead, they continued on, their lust for greed out of control. I’m glad to see it didn’t go through. Embraer will be better off for it. Boeing on the other hand will continue to stumble due to it’s inept corporate management. It has a severe negative caustic culture within the company. Almost every one of its programs has been late to launch, over budget and wrought with problems. All caused by poor leadership, poor engineering and just bad decisions.
Boeing is no longer the golden child of aviation that it once was. The two previous CEO’s and current CEO are all to blame. And let’s not forget the merger with McDonnell Douglas that started this downward spiral. The added problems of hiring former GE executives to the corporate management just made things worse.
Quality assurance and control continues to be one of the top issues within the company.
Boeing is ripe for a takeover from another company, it might be the only way to save it, but only if the current corporate management department is completely replaced.
Calling off mergers while they are under way , can cost large break fees and if its called off outside the contract terms can result in huge penalties , up to the $4.5 bill or so that Boeing had committed to pay.
Boeing is doing this in a professional and legal way.
1. Boeing will lose any civil case claiming it failed to meet its obligations under the Master Transaction Agreement with EMBRAER. Why? Because Boeing failed to meet its obligations under the agreement, despite stating EMBRAER failed to meet conditions
2. EMBRAER has capital options other than strategic investment from state-owned enterprises located in totalitarian nations with absurd industrial ‘ambitions’ and voracious corporate stripping appetites
Point #2 implies private investors assess risk and commercial opportunity to price the cost of capital. That is the basis of any CAPITALIST society, which both Brazil and U.S. embody. There are vast private pools of corporate risk capital available for EMBRAER to receive investment from. Pension funds, insurance companies, mutual funds, alternative investment funds, and public equity portfolio investors would all consider investing in EMBRAER.
The Brazilians do NOT need to sell capital in EMBRAER for absurd political reasons, there are private sources available, even in the midst of a global pandemic obliterating the tactical business cases for commercial aviation.
EMBRAER has an amazing track record developing and launching innovative and successful products in new markets like general aviation jets and military transport tanker projects. The E2 190 and 195 will soon see enormous interest from carriers seeking small, efficient, and proven aircraft as commercial aviation activity begins to recover at the end of the year and next.
Everyone needs to take a deep breath and allow EMBRAER to develop and execute its future strategic direction.
I don’t think this discussion has taken into account how badly the entire aviation industry is going to be damaged by Covid-19. Until a reliable vaccine is approved, manufactured and widely distributed – which will take at least 18 months – international passenger numbers are going to be tiny. Economic recovery will take even longer. Domestic passenger numbers are going to be greatly reduced also due to high unemployment, economic downturn and reduced numbers connecting to international flights. Lots of airlines will go bankrupt. The amount of surplus capacity in the industry will be huge. The demand for new planes will be zero. International passenger routes are going to be thin and competition fierce. Even with low fuel prices only the most fuel efficient planes will be flying. International freight will be less affected and capacity reduced along with the fewer passenger flights, so fuel efficient freighters will be at an advantage. Airbus is bleeding cash and has no good freighters, while the market for the A220 and A320 families will shrink to a fraction of ABs capacity- so it has huge problems. At least Boeing has the efficient 787 family and a couple of good freighters in its stable. The last thing it needs right now is a JV for a plane it can’t sell. Thanks to brutal US labour laws BA can downsize far more effectively than AB. It should be using the next 5 years to develop a clean sheet 737 replacement, as that is where it is weakest. We live in interesting times.