Questions And Uncertainty Surround Embraer’s Boeing Tie-Up
In a way, Boeing’s production facility in Renton, Washington, and Embraer’s Sao Jose dos Campos site in Brazil now look very similar. A few people will be on special projects, but both locations, usually buzzing with activity, will be otherwise quiet.
As Boeing is forced to shut down final assembly of the 737 MAX while it awaits regulatory approval to return the aircraft to service, Embraer is also temporarily halting production of its commercial aircraft. Of course, the reasons are very different.
- Embraer’s Boeing deal hinges on European Commission approval
- No breakthrough for E2 Sales yet
- 737 MAX crisis adds to uncertainty about tie-up
- E175-E2 enters flight-test campaign
Embraer will send 14,000 people on forced vacations for three weeks to facilitate a very complex migration of information technology systems. During the three-week period scheduled to end on Jan. 21, the company is closing down the legacy operating systems of the existing company and implementing its so-called digital transformation plan. Essentially nothing will work during this blackout period.
In place of the old system, Embraer will restart with two new, separate systems: one for the future Brazilian defense and business aviation company, and the other for the future Boeing Brasil-Commercial joint venture. The latter will be a wholly owned but organizationally separate subsidiary of Embraer until the deal has received all the necessary regulatory approvals, a process already dragging on for much longer than the two parties had hoped.
The information technology transition is “an enormously complicated transaction,” says Embraer Commercial Aircraft President and CEO John Slattery. But it is necessary to prepare Embraer’s commercial aircraft business for what it hopes will be a more promising future than it would have had on its own. “We will be able to sell more aircraft by having access to Boeing’s customer base, which is five times bigger than Embraer’s,” Slattery says.
There has been much debate in the industry about Embraer’s view that sales of its new E2 family will benefit from the Boeing deal. Some have argued it would have been better off on its own as a specialist focused on its market. Following the leadership transition at Boeing from Dennis Muilenburg to David Calhoun, there is renewed uncertainty as to the aerospace giant’s priorities. Can Embraer be a focus, or does Boeing need its money and management attention elsewhere? Would not an independent manufacturer focused on the regional market be better off, keeping in mind how Airbus is positioning its A220, the former Bombardier C Series?
The skeptics may conclude that if there is a growth opportunity in the deal for Embraer, it will be in future programs such as the proposed new midmarket airplane (NMA) or a successor to the 737 MAX, rather than with Embraer’s own legacy portfolio. It is a view Slattery, unsurprisingly, does not share. “Our focus is building aircraft up to 150 seats,” he says. “It was never our core priority to be part of NMA.”
If that is the case, it is all the more important for the E2 to become the success Embraer hopes it will be. So far, sales have been disappointing, with 44 orders for the 190-E2, 127 for the 195-E2 and none for the 175-E2 at the end of November. Deliveries also were made at a modest pace in 2019, though they are to accelerate in 2020 in spite of the January final assembly line closure. Embraer plans to give an initial guidance on 2020 deliveries early in the year, provided the Boeing deal has not closed by then. In the now unlikely event that it has, the new company will take over communicating that.
E2 deliveries so far total 16 aircraft. Air Astana has received five 190-E2s, Wideroe has three and Helvetic Airways two. Binter has taken two 195-E2s while Azul now has four in its fleet. Azul, with 51 aircraft on firm order, is also the largest customer of the E2 family, followed by lessors AerCap (50) and Aercastle (25).
The timeline of the proposed Boeing deal is now almost entirely up to the European Commission. The EC has launched an in-depth investigation into the transaction, asserting there could be anti-competitive ramifications at the lower end of the narrowbody market if Boeing and Embraer Commercial are allowed to join forces.
That would be the case in particular, the EC asserts, as the U.S. market becomes more difficult for Airbus to access as a result of new tariffs and, as a consequence, the European market could become closed to Boeing in an extreme case as the European Union imposes countertariffs on Boeing aircraft. The EC has stopped the clock in its investigation as it awaits further documentation. It could be several more months before the joint venture becomes a reality—if it does.
By contrast, Slattery hopes Brazilian competition watchdog CADE will approve the transaction “with no conditions” in January, as “there is no overlap with Boeing.” Assuming CADE does clear the deal, Embraer and Boeing will have nine of the 10 antitrust approvals it needs, none of which have come with any limitations.
Embraer’s future joint-venture partner is still struggling to first end the MAX grounding and then recover from its consequences, short- and long-term. Many believe the MAX problems will have a lasting impact on Boeing’s future product strategy, as the manufacturer may have to develop a MAX replacement sooner, possibly in place of the current NMA proposal. In spite of Slattery’s official claim that Embraer is not betting on NMA work, that program is providing a massive growth opportunity, and the Brazilian company’s stellar track record in engineering and design has been a major attraction for Boeing, more than the E2, a program marginal in size for the aerospace giant.
In the short term, joint MAX/E2 sales were seen as a chance for Embraer to escape having to compete with the Airbus A220 on its own. The delayed return of the MAX “has no effect on E2 sales because we are not competing,” says Slattery, nonetheless pointing at campaigns where customers are looking for a choice between the MAX and a competing aircraft such as the Airbus A320neo. However, the grounding and the wait for the EC’s joint-venture approval are holding back sales campaigns in which the MAX and the E2 could be offered together against the A320neo family and the A220.
The takeover of the former C Series from Bombardier ultimately triggered the Boeing/Embraer deal when it was announced in July 2018. More than a year later, the picture has changed substantially, seemingly supporting those who believe Embraer could have continued on its own, only partially competing with the A220. As it turns out, the A220 is moving more upmarket and therefore away from Embraer’s scope.
At the end of November, Airbus had 431 firm orders for the A220-300, which is not only larger and heavier than the Embraer 195-E2 but also much more range-capable. The smaller A220-100, which more directly competes with the 190-E2 and the 195-E2, has garnered only 99 sales. As airlines such as Air France press Airbus to develop an even larger variant dubbed the A220-500, the family is moving much more into MAX and legacy A320 and A319neo territory and away from the E2 market.
In terms of sales to operators seeking regional and shorter-range mainline missions, the A220 development (which now also includes true long-haul versions) is good news for Embraer. But does it also indicate management hastily pushed for a takeover that was ultimately unnecessary? “Boeing should abandon the Embraer acquisition,” says one senior industry source. “It always seemed like a knee-jerk reaction to Airbus.”
Before it surrenders control of its commercial aircraft business to Boeing, Embraer orchestrated a special moment on Dec. 12. Management decided that it would attempt to roll out and fly the 175-E2 for the first time on the same day, an unusual exercise. Embraer did that once before, almost exactly 50 years ago, when the first prototype of the Bandeirante took off the same day it was first publicly presented. Slattery says the plan enabled “employees to own that moment” and find “an elegant bookend for the story of [Embraer] commercial aviation.”
The aircraft took off at 11:07 a.m. for a flight lasting 2 hr. 18 min. in the airspace around Sao Jose dos Campos. In the second quarter of 2020, two more prototypes will join the flight-test campaign, an exercise that is to last up to 24 months. While Slattery points out that the aircraft is substantially different from the other two models of the E2 family, with its dedicated wings and landing gear, thus requiring an extended flight-test program, two years is an unusually long period even for a completely new aircraft; 1,200 flight test hours are to be accommodated.
The reality is that Embraer cannot be in a rush to bring the aircraft to market. The 175-E2 so far has no orders, and there are more than a few industry skeptics who expect the smallest version of the E2 family will be the first to be killed by Boeing once Chicago is in charge.
Sales of the type have been hampered because it is not compliant with scope clauses in pilot deals at United Airlines, American Airlines and Delta Air Lines, effectively closing off the biggest market for regional jets for now. Slattery does not expect scope restrictions to be lifted at the three carriers soon, “so the focus of my sales team is outside of the U.S.,” he says In the meantime, the 175-E1 has been selling exceptionally well over the past few years as North American regional airlines have been renewing and upgauging their fleets.
For the 175-E2 there is “meaningful interest from flag carriers,” Slattery says, and therefore he would be “disappointed” if Embraer had not secured at least one firm order at the end of the first quarter.