Boeing Kills Its $4.2 Billion Purchase of Embraer as Coronavirus Roils the Aviation Industry

After more than two years of negotiations, Boeing on Saturday terminated its proposed $4.2 billion deal to acquire the commercial jet business of Brazilian regional jet maker Embraer.

Boeing cited an inability to agree on final terms as it let a midnight Friday deadline expire. “Boeing exercised its rights to terminate after Embraer did not satisfy the necessary conditions,” the company said in a statement.

Embraer responded with a scathing statement accusing Boeing of bad faith in the negotiations, which were conducted under rules laid out in a 2019 agreement.

“Embraer believes strongly that Boeing has wrongfully terminated the (agreement), that it has manufactured false claims as a pretext to seek to avoid its commitments to close the transaction and pay Embraer the US$4.2 billion purchase price,” the statement said.

“We believe Boeing has engaged in a systematic pattern of delay and repeated violations of the (agreement) because of its unwillingness to complete the transaction in light of its own financial condition and 737 MAX and other business and reputational problems,” Embraer added.

Industry observers had been expecting Boeing’s decision, and essentially agree with Embraer. They believe the real 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.

“Boeing can’t afford the deal any more,” said Bainbridge Island-based aviation analyst Scott Hamilton, of Leeham.net.

And 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 political and labor problems Boeing would face if it took $4 billion from the federal government and put it into Brazil would be huge,” said Hamilton.

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 jet maker’s long-term strategy and to its competitive position against European rival Airbus.

Boeing had seen Embraer as providing a new lineup of smaller jets to extend its airplane offerings.

It had also hoped to gain from Embraer’s substantial engineering talent in Brazil. Embraer’s facilities near São Paulo were slated to “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,” Boeing had said.

Hamilton believes this was Boeing’s primary motivation — “to get access to the low-cost Brazilian engineering workforce” with an eye to helping develop its next new airplane.

That plan has now evaporated, as has any prospect of Boeing launching a new jet in the next few years.

The pandemic has all but halted air travel around the world. In mid-April, 62% of the 11,000 Boeing passenger jets in airline fleets around the world were parked and in storage. Because of the huge financial losses among Boeing’s airline customers and the expected prolonged downturn in air travel, many of the older jets that are parked are unlikely to ever fly again.

The major U.S. airlines, all of which were previously profitable and well-positioned financially, have been propped up through the end of September by a $25 billion government bailout.

But there’s no likelihood of a return to normal in the fall.

New Boeing CEO Dave Calhoun this month acknowledged that a full recovery will take years and that the jet maker too must shrink.

Boeing has already announced a voluntary layoff plan. When it releases its first-quarter financial results Wednesday, it’s expected to lay out plans for steep airplane production-rate cuts, which in turn is likely to mean shedding thousand of jobs locally.

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, and are used on many domestic flights on less dense routes.

Seattle-based regional carrier Horizon Air, for example, flies the 76-seat E-175 under the Alaska Airlines brand.

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 initially propelled by a perceived 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, the small jet may be even more attractive to airlines.

Now Boeing will have no airplane smaller than the 737 MAX to offer airlines, leaving Airbus at an 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 for Boeing, 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 $100 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.”

The Brazilian jet maker indicated it will take legal action against Boeing, saying it “will pursue all remedies against Boeing for the damages incurred by Embraer as a result of Boeing’s wrongful termination.”

Boeing’s insistence that the deal fell apart only because of a failure to agree on closing terms is disingenuous, in Hamilton’s view.

“That’s just so they don’t have to pay the breakup fee,” he said.

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