Last week, Supply Chain Matters featured a commercial aerospace industry supply chain advisory reflecting on Boeing’s ongoing attempts toward phased return of aircraft production and in an announced senior leadership restructuring. Over the weekend, another developed has occurred, namely an announcement that the company has reportedly walked away from plans to takeover majority control of Brazil based Embraer SA.
Aerospace industry and business media are both reporting that the deal is off, but the announcement is likely to result in a bitter public fight as to which party terminated the Master Transaction Agreement for cause. Boeing announced its intention to acquire an 80 percent stake in the Brazil based manufacturer of regional single aisle aircraft in 2018 for a reported $4.2 billion in cash. The deal came after rival Airbus took control of Bombardier’s C-Series aircraft program which is now named the Airbus A220 model
According to reporting by The Wall Street Journal, Embraer’s stock value has fallen two-thirds since the start of the year, as well as severe airline industry impacts brought about by the COVID-19 global pandemic. Embraer indicated in a statement to news outlets: “We believe Boeing has engaged in a systemic pattern of delay and repeated violations of the agreement, because of its unwillingness to complete the transaction in light of its own financial condition and the 737 MAX and other business and reputational problems.”
Boeing is arguing that the deal is off because of unsatisfactory conditions imposed in the final negotiations.
A published report from Aviation Week cites industry observers as indicating that the reason Boeing walked was likely the ongoing financial pressures being felt and that the company feeling it could not afford the transaction, especially in the light of seeking financial assistance from the U.S. Government stimulus, along with the risk of having to cut thousands of jobs and at the same time expend $4 billion to complete the acquisition.
As noted in our prior industry specific commentary, Boeing is facing intense financial challenges in its ability to both secure global clearance for the 737 MAX and financially maintain its network of key suppliers with sharply reduced cash revenues and order intake.
While a legal battle is likely forthcoming, the move likely de-facto cedes the low-end single aisle aircraft market to Airbus and its A220 series since Boeing is not likely to be able to financially afford new development of both a 737 MAX replacement and a regional jet market replacement.
From our Supply Chain Matters lens, the market potential for a post COVID-19 more fuel-efficient aircraft like the A220 may be attractive to global airlines having to maintain services to point-to-point destinations with less passenger loads. There could likely be future swaps of existing Airbus A320/A321 orders relative to this condition.
Pending any resolution of the Boeing and Embraer dispute, the former’s supply network can take some solace in the possibility that $4 billion can be applied to nearer-term tactical needs.
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