FRANKFURT/LONDON–Embraer and Boeing are entering into a bitter public fight over who is responsible for the end of the proposed commercial aircraft joint venture, Boeing Brasil Commercial.

Embraer said April 25 it “believes strongly that Boeing has wrongfully terminated the Master Transaction Agreement (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.” In a statement the company added that “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 earlier the same day said it is terminating plans for the tie-up with Embraer stating that the Brazilian manufacturer did not satisfy the necessary conditions.

"Boeing has worked diligently over more than two years to finalize its transaction with Embraer. Over the past several months, we had productive but ultimately unsuccessful negotiations about unsatisfied MTA conditions. We all aimed to resolve those by the initial termination date, but it didn't happen," Marc Allen, president of Embraer Partnership & Group Operations said. "It is deeply disappointing. But we have reached a point where continued negotiation within the framework of the MTA is not going to resolve the outstanding issues."

The disputes include the question whether Boeing has to pay a $100 million termination fee. A Boeing spokesperson told the Seattle Times that “we don’t believe a termination fee applies in the circumstances.” Embraer believes it is entitled to receive the money.

The collapse is a huge strategic blow for Boeing that may have long term, far-reaching consequences for its ability to compete against Airbus and become re-established as an equal competitive force in the narrowbody and mid-sized aircraft market. It also means a U-turn for Embraer which will now have to compete as an independent manufacturer against industry behemoths Boeing and Embraer, putting it in an economically much weaker position. Airbus is emerging as the big winner from the fight.

While the MTA included a long list of conditions and some of them, including important regulatory approval from the European Commission, may not or may not yet have been met, industry observers believe the real reason behind Boeing’s decision is that the current financial pressures caused by the grounding of the 737 MAX and the novel coronavirus crisis are so enormous that it simply didn’t believe it could afford the transaction. Also, it would have been extremely difficult politically to ask for financial assistance from the U.S. government, cut thousands of jobs and at the same time spend more than $4 billion for an acquisition abroad, as strategically important as it may be.

Embraer’s value for Boeing was in two ways: After Airbus acquired the C Series program from Bombardier and made it into the A220, Boeing felt pressed to react at the bottom end of the narrowbody market where it cannot offer an aircraft offering the same economics as the A220. Also, Boeing was keen to get Embraer’s engineering capabilities that are regarded highly in the industry. Those capabilities would have been welcome in new aircraft programs such as the new mid-market airplane (NMA), which was undergoing a major reset even before the COVID-19 outbreak hit the industry with full force. 

The lack of a viable product at the bottom-end of the narrowbody market that can compete at least to part of the A220 spectrum is now raising even more questions about the timing and design of Boeing’s next new aircraft. The manufacturer not only faces the task of designing an aircraft that eclipses Airbus’s highly successful A321neo/LR/XLR at the top end of the narrowbody market, but now also faces a gap at the bottom.

Designing a family of aircraft that can cover both segment is likely impossible.

The sale of a majority stake in its commercial aircraft division to Boeing has been a contentious, divisive decision inside Embraer, with management and the board split over its merits for a very long time. At the end, Embraer Commercial Aircraft President and CEO John Slattery managed to convince his team that it is in the company’s best interest to seek a strong partner rather than trying to compete independently.

In fact, one main reason why Embraer designed the E2 family the way it did was to avoid direct competition with Boeing and Airbus (which at the time did not own the A220).

Now, Embraer is on its own for now and needs to decide whether it will look for another strong partner, which would likely have to be outside of aerospace, or continuing as the broad, but small aerospace firm. It also has to decide whether to re-integrate Yabora Industria Aeronautica, the carved-out former commercial aircraft unit, into the group or run it as a separate entity for now.

The failed Boeing deal also puts an end to development programs for likely a long time. Slattery had said publicly for months that the company would not be able to afford the launch of its proposed new turboprop on its own, hoping to finally gain anti-trust approval by the European Commission by offering it the prospect of increased future competition in the regional aircraft market.

Boeing would have taken an 80% stake in a new company spun out of Embraer, the latter owning the balance. Another joint venture for the C-390 would be 51% owned by Embraer with the remainder owned by Boeing. The agreement allowed for either side to terminate the transaction had it not been completed by April 24. An extension was possible but only if certain conditions had been met, Boeing concluded that Embraer had not met them.

The tie-up had secured approvals from regulatory authorities apart from the European Commission, which had restarted its anti-trust probe into the joint venture earlier in April. It had been on pause since February and was due to conclude in August.

The two will however maintain their existing Master Teaming Agreement, originally signed in 2012 and expanded in 2016, to jointly market and support the C-390.