Boeing and Embraer strike preliminary deal on $4.75bn commercial jets venture

The tie-up caps years of talks between the US and Brazilian plane-makers

Boeing and Embraer expect to close the $4.75bn commercial jets venture deal before the end of next year. AFP

Boeing is forming a US$4.75 billion (Dh17.45bn) venture with long-time industrial partner Embraer, a move that will bolster its arsenal in the newest battlefront with Airbus: the market for smaller jetliners.

Under a preliminary deal, Boeing will own 80 per cent of a partnership controlling Embraer's commercial aircraft and services businesses, while the Brazilian manufacturer holds 20 per cent, the companies said in a statement on Thursday. The tie-up caps years of talks between the two, while extending the duopoly held by Boeing and Airbus as competitive threats emerge from rivals in Russia, Japan and China.

By adding Embraer’s E-Jet family to its portfolio, Boeing will expand its manufacturing base abroad while extending its reach into the market for 100-seat planes. Airbus took control of Bombardier CSeries jets on July 1, through a joint venture it forged with no out-of-pocket cost. Boeing was left without a comparable offering, while Embraer – Bombardier’s main rival – faced a tough new competitor in Airbus’s global marketing organisation.

"The agreement with Boeing will create the most important strategic partnership in the aerospace industry, strengthening both companies' leadership in the global market," Paulo Cesar de Souza e Silva, Embraer's chief executive, said in the statement.

Boeing shares were little changed at $332.90 in early trading in New York. Through the close of trading July 3, the shares had gained 13 per cent, the fourth-best performance among the 30 members of the Dow Jones Industrial Average. Embraer has surged 35 per cent this year in Brazil on anticipation of the Boeing deal.

_______________

Read more:

_______________

Embraer, a jewel of Brazilian industry, will remain a separate company that makes military and private jets while reaping a revenue stream from the new partnership. The structure, along with the company’s flagging sales and an increasingly challenging market, helped win the support of the Brazilian government.

Boeing and Embraer said they plan to form a second joint venture to develop defence products and applications that bolster the Brazilian company’s military portfolio, including its KC-390 cargo aircraft.

The commercial venture will be run by a Brazil-based chief executive and management team, while Boeing's boss, Dennis Muilenburg, will have ultimate control. The companies expect to finalise the agreement during the next several months, and close the transaction by the end of next year, after securing regulatory approval. The partnership is expected to add to Boeing's earnings beginning in 2020, and the US company's stake is valued at $3.8bn.

For years, Boeing and Airbus focused on larger, more-profitable jetliners and shifted away from the smaller planes, which have similar development costs, but sell for lower prices. Airbus’s deal with Bombardier, and Boeing’s pact with Embraer, signal that the big plane-makers intend to deny a foothold in the lucrative narrow-body market to ambitious newcomers, such as Commercial Aircraft Corporation of China.

Embraer brings engineering talent that Boeing could tap for the new mid-range jet on its drawing board, dubbed the 797 by analysts. Embraer also has lower-cost production capabilities that the Chicago-based plane-maker could use to build components such as actuators and landing gear as it brings more supplier work in-house, said Canaccord Genuity analyst Ken Herbert.

The Brazilian company has overtaken Bombardier as the largest manufacturer of regional jets, while burnishing its reputation for engineering prowess. In an industry where product delays are the norm, Embraer has introduced 10 all-new aircraft in the past 15 years, largely on-budget and on-time, Ron Epstein, an analyst at Bank of America, wrote earlier this year.
The company debuted the first of its E2 family of upgraded jets this year. The E190-E2 competes directly with Bombardier's smallest CSeries, seating as many as 114 passengers and powered by the same Pratt & Whitney geared turbofans as the Canadian jet.

Created in 1969 by the Brazilian government and privatised in 1994, Embraer has been touted as a source of national pride for the commodities-driven country and an example of efficiency and innovation, though corruption scandals in the past few years have tainted that image.