Boeing and Embraer to Establish Strategic Aerospace Partnership to Accelerate Global Aerospace Growth
(Source: joint Boeing-Embraer statement; issued July 5, 2018)
The non-binding agreement (Emphasis added—Ed.) proposes the formation of a joint venture comprising the commercial aircraft and services business of Embraer that would strategically align with Boeing’s commercial development, production, marketing and lifecycle services operations. Under the terms of the agreement, Boeing will hold an 80 percent ownership stake in the joint venture and Embraer will own the remaining 20 percent stake.
“By forging this strategic partnership, we will be ideally positioned to generate significant value for both companies’ customers, employees and shareholders – and for Brazil and the United States,” said Dennis Muilenburg, Boeing’s Chairman, President and Chief Executive Officer. “This important partnership clearly aligns with Boeing’s long-term strategy of investing in organic growth and returning value to shareholders, complemented by strategic arrangements that enhance and accelerate our growth plans,” Muilenburg said.
“The agreement with Boeing will create the most important strategic partnership in the aerospace industry, strengthening both companies’ leadership in the global market,” said Paulo Cesar de Souza e Silva, Embraer Chief Executive Officer and President. “The business combination with Boeing is expected to create a virtuous cycle for the Brazilian aerospace industry, increasing its sales potential, production, creating jobs and income, investments and exports, and in doing so, adding more value to customers, shareholders and employees.”
The transaction values 100 percent of Embraer’s commercial aircraft operations at $4.75 billion, and contemplates a value of $3.8 billion for Boeing’s 80 percent ownership stake in the joint venture. The proposed partnership is expected to be accretive to Boeing’s earnings per share beginning in 2020 and to generate estimated annual pre-tax cost synergies of approximately $150 million by year three.
The strategic partnership will bring together more than 150 years of combined leadership in aerospace and leverage the two companies’ highly complementary commercial product lines. The partnership is a natural evolution of a long-standing history of collaboration between Boeing and Embraer over more than 20 years.
On finalization, the commercial aviation joint venture will be led by Brazil-based management, including a President and Chief Executive Officer. Boeing will have operational and management control of the new company, which will report directly to Muilenburg.
The joint venture will 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 and the joint venture would be positioned to offer a comprehensive, highly complementary commercial airplane portfolio that ranges from 70 seats to more than 450 seats and freighters, offering best-in-class products and services to better serve the global customer base.
In addition, both companies will create another joint venture to promote and develop new markets and applications for defense products and services, especially the KC-390 multi-mission aircraft, based on jointly-identified opportunities. (Emphasis added—Ed.)
"Joint investments in the global marketing of the KC-390, as well as a series of specific agreements in the fields of engineering, research and development and the supply chain, will enhance mutual benefits and further enhance the competitiveness of Boeing and Embraer," said Nelson Salgado, Embraer's Executive Vice President, Financial and Investor Relations.
Finalization of the financial and operational details of the strategic partnership and negotiation of definitive transaction agreements are expected to continue in the coming months. Upon execution of these agreements, the transaction would then be subject to shareholder and regulatory approvals, including approval from the Government of Brazil, as well as other customary closing conditions. Assuming the approvals are received in a timely manner, the transaction is expected to close by the end of 2019, 12-18 months after execution of the definitive agreements.
“This strategic partnership is a natural evolution of the long-standing history of collaboration between Boeing and Embraer on a range of aerospace initiatives over almost three decades,” said Greg Smith, Boeing Chief Financial Officer and Executive Vice President of Enterprise Strategy & Performance. “It is aligned with Boeing’s enterprise strategy of pursuing strategic investment opportunities where they demonstrate real value and accelerate our organic growth plans. This partnership will strengthen the vertical capabilities of Boeing and enhance value for our customers through the full lifecycle of industry-leading products and services.”
Boeing and Embraer will benefit from a broader scale, resources and footprint, including global supply chain, sales and marketing, and services network, which will enable them to capture benefits from best-in-class efficiencies across the organizations. Additionally, the strategic partnership will provide opportunities to share best practices in manufacturing and across development programs.
The transaction will have no impact on Boeing and Embraer financial guidance for 2018 or Boeing’s cash deployment strategy and commitment to returning approximately 100 percent of free cash flow to shareholders.
(EDITOR’S NOTE: While it is probably intended to protect Boeing from any bad surprises it might find during due diligence – which is not even mentioned in the above statement -- announcing that such a strategic agreement is not binding introduces an element of doubt that detracts from the significance of the arrangement.
While the teaming between the two companies was generally considered inevitable after Airbus’ takeover of Bombardier’s CSeries family, the way it is envisaged, through at least two separate joint venture companies, is probably not the most effective.
Furthermore, the joint venture that will take over Embraer’s military product line is barely mentioned in passing which, given the significance of the programs involved – the KC-390 tanker/transport, the Super Tucano family of turboprop trainers and light attack aircraft, the Embraer’s share of the Saab Gripen NG program – only reinforces the impression that the above statement was released prematurely, primarily to satisfy stock exchange regulations, rather than because it has sufficiently matured.
And obviously all of this is conditional on the outcome of the mandatory due diligence process.)
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Boeing and Embraer Solidify Commercial Aircraft Tie-Up
(Source: Forecast International; issued July 6, 2018)
by Richard Pettibone
As the process moves ahead, the two firms recently signed a Memorandum of Understanding to establish the partnership. This MoU lays the foundation for the formation of a new commercial aircraft entity, majority owned by Boeing, with the military aircraft programs, and possibly the Executive Aviation segment, remaining under Embraer. Under the terms of the agreement, Boeing will hold an 80 percent ownership stake in the joint venture and Embraer will own the remaining 20 percent stake. The transaction values 100 percent of Embraer’s commercial aircraft operations at $4.75 billion, and contemplates a value of $3.8 billion for Boeing’s 80 percent ownership stake in the joint venture. The deal is expected to close by the end of 2019 pending the necessary approvals.
A new Boeing/Embraer venture would make a solid match, as it would round out Boeing’s aircraft offerings. There is very little competitive overlap between the two product lines, consisting only of some indirect competition between the E195-E2 and the 737 MAX 7. The combination would also provide Boeing with an immediate and extensive presence in the business jet market, an arena in which the U.S. company currently competes only at the top end with corporate-configured 737s. More importantly, the tie-up would also enable a comprehensive and broad-based attack on the Bombardier/Airbus CSeries, with the E190-E2 and E195-E2 challenging the CS100 version, and the 737 MAX 7 and 737 MAX 8 battling the CS300.
While sales did bounce back in 2016, Embraer continues to face some headwinds. Low aircraft prices in the pre-owned market along with cheap oil could pose difficulties in the company’s efforts to increase sales.
After stalling in 2015, the business jet market shifted into reverse in 2016 and 2017. Reduced oil revenues and serious economic slowdowns in emerging markets in Asia, Latin America, and Russia have adversely affected demand for such aircraft. Now, due to continuing improvement in global economic conditions, moderately increasing oil prices, and a return in force of U.S. buyers to this portion of the market, demand is expected to rise beginning in 2018.
Thanks to earlier development efforts, Embraer is well diversified in this market, holding a presence in seven of the eight business jet market segments as defined by Forecast International. The company’s business jet line now covers each market segment – from the very light jet (VLJ) class through the large-cabin category, and includes a product in the corporate-configured airliner class. This positioning is helpful in the current business climate, as a strong showing in one sector can help offset lower results in another.
In the regional aircraft segment, the market is stabilizing following several years of erratic swings in yearly production. While the market has been flat of late, the long-term outlook is more bullish as new models enter production and service. Key to this drive was the 2012 liberalization of scope clauses in pilot contracts with U.S. mainline carriers. The newly liberalized scope clauses allowed regional airline partners of the major carriers to operate greater numbers of 76-seat regional jets.
In response, regional aircraft have grown larger. Embraer’s E-Jets series – which includes the large-passenger-capacity 190 and 195 – continues to be popular. In an effort to capitalize on the need for fuel efficiency, Embraer has launched the E2 series, a family of comprehensively upgraded versions of its E-Jets regional jets. The E2 aircraft feature new engines (the Pratt & Whitney PW1000G) and landing gear, and possibly a new wing. Such a move follows the very successful trend set by Airbus and Boeing when they introduced new fuel-efficient, re-engined designs in their respective A320neo and 737 MAX models.
One area that Embraer is looking to expand is its maintenance, repair and overhaul sector. The company organized a new services division in 2017 that consolidates the service capabilities that had been spread throughout its different business units. The new Global Services and Support sector is now the focus of all commercial, executive, and defense-related MRO offerings. With aftermarket support being a key revenue generator, the new operation should be able to grow thanks to an expanded portfolio and reduced operational redundancies. With 2,000 Embraer aircraft in service around the world, the company is aiming to capture a larger share of the services aftermarket than it has in the past.
In its third market, defense and security, Embraer is facing some challenges due to economic issues in Brazil. The company’s new KC-390 military tanker/transport has been impacted by a governmental fiscal crisis in Brazil that stemmed from the country’s deep economic recession. The company postponed certification of its new transport aircraft until the second half of 2017, and service entry was delayed until the first half of 2018. The aircraft’s entry into service had previously been targeted for late 2016.
Despite the delay, Embraer has secured letters of intent for 32 KC-390s from its five partner nations. The company has begun the process of converting these commitments into firm orders. At least initially, Embraer intends to build about 10 KC-390s per year.
In 2015, Saab and Embraer signed an agreement that established a partnership for joint management of the F‑X2 project for the Brazilian Air Force. The agreement concluded more than a year of negotiations since Brazil selected the Gripen NG fighter for the contract in December 2013. Under the manufacturing plan for the Gripen NG – named the F-39 in Brazil – Embraer will receive a significant technology transfer package from Saab. The company will also be actively involved in finalizing the single-seat F-39 aircraft’s design and will develop with Saab the two-seat F-39 variant in Brazil.
A production line is currently being set up at Embraer’s Gavião Peixoto industrial facility. Deliveries of the 36 Brazilian Air Force Gripen NGs are scheduled to begin in 2019 and to be completed in 2024. Approximately 10-15 of the aircraft are to be assembled in Brazil by Embraer. Looking ahead, Argentina has expressed interest in possibly buying Embraer-built versions of the aircraft.
Finally, Embraer has been actively expanding its global footprint with facilities in key countries around the world. Currently, its global footprint includes its home in Brazil as well as operations in the U.S., Mexico, and Portugal. These facilities include not only pilot training and service centers but also business jet manufacturing operations. For example, in the U.S. (Melbourne, Florida), the company assembles Phenom 100 and 300 aircraft (and recently added the Legacy 450 and 500), while in Portugal, the Évora facility manufactures wings.
Such geographic dispersion helps protect the company from single-currency fluctuations. Perhaps more importantly, this diversity changes the mindset that Embraer is simply “a Brazilian company,” and reinforces its position as an international aerospace firm.
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Boeing Takes Over Embraer's Commercial Business
(Source: Deutsche Welle German Radio; issued July 05, 2018)
The announcement Thursday followed months of talks to allay concerns of the Brazilian government, which had veto power over the transaction and initially resisted ceding control to the US company.
Under the terms of the deal, Boeing will hold an 80-percent stake in the commercial part of Embraer, with the transaction valued at $4.75 billion (€4 billion).
The deal will allow Boeing to offer planes with a capacity of up to 150 seats, a market it does not currently compete in.
Late to the game?
The agreement follows a similar strategic partnership between European arch-rival Airbus and Canada's Bombardier last October.
"By forging this partnership, we will be ideally positioned to generate significant value for both companies' customers, employees and shareholders," Boeing CEO Dennis Muilenberg said in a statement.
The two companies are creating another joint venture to promote their defense products and services, especially Embraer's KC 390, a military transport aircraft.
News of the initial talks on the transaction was first reported in December. Since then, shares of Embraer have risen more than 60 percent, although the price dropped after the partnership was announced Thursday, with many investors cashing in on the previous jump.
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