By the Leeham News Staff
Updated with details of Air France – KLM order
Dec. 16, 2021, © Leeham News: When Boeing decided to drop its joint venture plan with Embraer, there were good business reasons to do so.
The grounding of the 737 MAX was dragging on much longer than anyone ever expected, and there was no end in sight. The coronavirus infections exploded into a global pandemic the month before. Air transportation plunged as much as 95%. Airlines were grounding fleets and some, at that point, looked certain to go bankrupt or go out of business. Boeing was bleeding cash and debt exploded by more than $20bn. The company was in survival mode.
Embraer faced the same industrial and customer challenges Boeing did. And while none of its airplanes were grounded, the E175-E2 turned out to be an airplane with no customers because the US market for which it was designed disappeared. Restrictions in pilot contracts limiting the weight of airlines in regional operations killed the airplane.
Finally, Embraer’s market value at the time the joint venture was agreed was set at $4.5bn. By April 2020, it had fallen to $1.25bn. Given the business environment and the drop in value, why pay the higher price?
With Qantas Airways abandoning Boeing, we now know why going through with the deal may have been smart.
Airbus’ product line is stronger than Boeing’s, in part because it acquired the Bombardier C Series in 2017. (This was the result of Boeing filing a trade complaint with the US Commerce Department that drove Bombardier to seek a deal with Airbus. The complaint was a gamble Boeing lost but strategically, it turned out to be a bad, bad idea.)
The C Series, renamed the A220, gave Airbus a modern, clean-sheet airplane to effectively replace its poor-selling A319neo and compete against the equally poor-selling 737-7 MAX. The A220-300 has better economics than either of the re-engined airplanes, each based on old designs going back decades.
Airbus saw the immediate benefit and Embraer was immediately hurt. As soon as the C Series deal was closed, Airbus announced an order from JetBlue for the A220-300. Bombardier competed against Embraer for the deal. Embraer offered the E195-E2, its own re-engined airplane based on the 2004 E190. Embraer was the incumbent at JetBlue, a launch customer for the E190. EMB was thought to be winning the campaign as a result.
Airbus was the incumbent at JetBlue for mainline aircraft. Now, with the Airbus power behind the former C Series, JetBlue swapped some A320neo orders for the larger A321neo and selected the A220 over the E195-E2. Embraer officials bemoaned its inability to compete alone against Airbus.
While Boeing and Bombardier were still duking it out over the former’s trade complaint, Boeing and Embraer announced they agreed to create a joint venture. They claimed the E2, slotting in below the 737-7, filled a gap in Boeing’s product line. It did, but the E2 product line wasn’t a perfect match against the A220-100 and the A220-300. Boeing’s product line would be better but still weaker than the Airbus-C Series lineup. But the No. 1 reason for the JV was access to Embraer’s young engineer workforce. Boeing’s engineering group was aging, with some 5,000 due for retirement in the coming years. Embraer’s Brazilian workgroup also was cheaper. Embraer would contribute significantly to developing Boeing’s New Midmarket Airplane (NMA), at the time somewhat of a foregone conclusion. The JV called for the new Boeing Brasil-Commercial to be responsible for developing a brand new airplane in the 100-150 seat sector.
When Boeing walked from the JV, charging Embraer failed to live up to the terms of the agreement (which Embraer denied), all this went away. Boeing’s weak 737-7 MAX remained the smallest airplane in its product line. The gap in the 100-140 seat sector remained unfilled.
Observers saw it was only a matter of time before dropping the JV would come back to bite Boeing. The Qantas agreement to abandon the 737 with an order for the A321XLR and A220-300 is the most visible sign.
As for struggling Embraer, it competed at Qantas for an order for the E195-E2. It was the incumbent there. There’s little it can do about competing against the A220 when Airbus can offer the A320 family as a package. Losing the JV came back to not only bite Boeing. It also took a big bite out of Embraer.
Air France – KLM announced a firm order for 100 A320neo family aircraft, with purchase rights for an additional 60. Those aircraft will replace from 2023 the Boeing 737 NGs operated at subsidiaries KLM, Transavia, and Transavia France. The loss is probably more significant for Boeing since it had an incumbent advantage and Air France – KLM had not ordered A320neo family aircraft so far.
The group also signed a letter of intent for four A350F freighters for Air France. The A350Fs would replace the pair of 777Fs and grow the carrier’s cargo business. The A350F order does not bode well for Boeing’s chances to win a 777X order to replace Air France’s fleet of 43 777-300ERs.
You can read all about Boeing’s trade complaint against the Bombardier C Series in Scott Hamilton’s new book, Air Wars, The Global Combat Between Airbus and Boeing. The book details why Boeing filed the trade complaint after passing on Bombardier’s approach to sell the C Series program to Boeing. It details how Airbus, which also once rejected Bombardier, agreed this time to buy into the C Series. And Air Wars details the creation of the joint venture and Boeing’s decision to ashcan the deal.