WASHINGTON — Boeing’s termination of a $4.2 billion deal for a majority stake in Embraer’s commercial aviation business could have widespread implications on the Brazilian firm’s flagship military aircraft.
Boeing on Saturday announced that it would walk away from a joint venture that would give it an 80 percent stake in Embraer’s commercial business, as well as a 49 percent stake in the company’s C-390 Millennium cargo plane.
Although Boeing said that the company would maintain previous teaming agreements to support Embraer with marketing the C-390 internationally, analysts told Defense News that the vitriol between the two companies could portend a wider collapse of their collaboration in the military sphere.
“The future of the KC-390 without Boeing — or without a U.S. defense prime helping — isn’t all that great,” said Richard Aboulafia, an aerospace analyst with the Teal Group. “It just seems like cooler heads should probably prevail.”
At Dubai Air Show last November, the companies announced the formation of a new entity known as Boeing-Embraer Defense set up specifically to proactively market the C-390 around the world — a step up from previous agreements that had Boeing in more of a hands-off role. The agreement gave Boeing a new plane that could compete head-to-head against Lockheed Martin’s C-130, and gave Embraer the resources to match.
The big question now is whether Embraer seeks out partnerships elsewhere for either the KC-390 or its commercial business, said Byron Callan, an analyst with Capital Alpha Partners.
“I just wonder, is there something else or someone else that emerges in 2021 or 2022 that ties up with Embraer. Could that be Chinese? Indian? Another country, company or entity outside of the United States?” he said. “That would be a more interesting broader change for aerospace, that has military implications as well, too.”
It’s even possible that Airbus could try to usurp Boeing’s role as Embraer’s partner on the C-390, said Callan, who noted that Airbus — like Boeing — does not offer a medium cargo transport aircraft that directly competes against the C-130.
A good relationship gone bad
On Monday morning, Embraer announced that it had filed arbitration proceedings against Boeing, capping off an angry back-and-forth between both companies that spanned the weekend.
When Boeing announced it was walking away from the deal on Saturday, the company claimed it had “worked diligently over more than two years” to finalize the transaction, but that Embraer left some conditions of the master transaction agreement, or MTA, unresolved.
"It is deeply disappointing,” said Marc Allen, Boeing’s president of Embraer Partnership & Group Operations. “But we have reached a point where continued negotiation within the framework of the MTA is not going to resolve the outstanding issues."
Embraer, however, issued a scathing statement of its own, asserting that it had fulfilled all contractual obligations and blaming the failure of the deal on Boeing’s continued financial problems and the fallout from two fatal 737 MAX crashes.
“Embraer believes strongly that Boeing has wrongfully terminated the MTA, 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 company said.
“We believe Boeing has engaged in a systematic pattern of delay and repeated violations of the MTA, because of its unwillingness to complete the transaction in light of its own financial condition and 737 MAX and other business and reputational problems.”
Boeing’s decision to break its agreement with Embraer makes sense from a financial standpoint, Cai Von Rumohr, a defense analyst with Cowen, wrote in an email to investors. Because of COVID-19’s impact on the aerospace industry, $4.2 billion seems an inflated price for Boeing to pay to acquire a controlling stake in Embraer’s commercial business, and terminating the deal may help to free up cash that Boeing needs in the near-term.
But while Von Rumohr said he believes Boeing and Embraer will continue to collaborate on the C-390, it will depend on whether the relationship can be salvaged.
“This issue is, how pissed off is Embraer now, and is this something they’re likely to get over to continue with what was a teaming agreement that made a whole lot of sense for both parties?” Von Rumohr told Defense News.
Another major question is how the COVID-19 crisis effects worldwide defense spending, with implications for nations’ domestic industries as well the international defense industrial base.
Callan noted that some countries who have ordered the aircraft such as Brazil or Portugal “are probably looking at different defense budget projections.
Aboulafia added that the dissolution of the partnership increases the likelihood that Embraer will need stimulus funds from the government of the Brazil to help fortify its commercial sector during the COVID-19 pandemic.
“That money could easily come out of defense spending, which would impact Embraer defense programs, particularly Gripen or C-390,” he said.
Valerie Insinna was Defense News' air warfare reporter. Beforehand, she worked the Navy and congressional beats for Defense Daily, which followed almost three years as a staff writer for National Defense Magazine. Prior to that, she worked as an editorial assistant for the Tokyo Shimbun’s Washington bureau.