Boeing’s Other Headache Is Its Joint Venture With Embraer

(Bloomberg Businessweek) -- Is it time for Boeing Co. to worry about its proposed joint venture with Embraer SA? As the crisis of its grounded 737 Max jet drags on, Boeing's planned partnership with the regional-aircraft maker hasn't gotten much attention, but more than a year and a half after it was announced, the deal still hasn't closed.

Boeing and Embraer outlined a preliminary agreement for a joint venture to sell regional aircraft—typically planes with 150 or fewer seats—in July 2018. It took five more months to hammer out the details, with Boeing ultimately agreeing to pay $4.2 billion for an 80% stake in the business, later dubbed Boeing Brasil–Commercial. Embraer and Boeing repeatedly projected confidence the deal could be wrapped up by the end of 2019. It wasn't to be.

While the transaction was expected to be a political hot potato in Brazil—where Embraer is a national champion—and in China—which was fighting a trade war with the U.S. when the venture took shape—the biggest roadblock turned out to be the European Union. In October the EU warned that a Boeing-Embraer deal could damp competition in commercial aircraft and opened an in-depth investigation. It's since stopped the clock on its review twice in the quest of more information from the two plane makers, with the latest halt pushing the deadline for a decision to June 23.

The venture was widely seen as a defensive response to rival Airbus SE's move in late 2017 to take control of Bombardier Inc.'s CSeries program, now called the A220. That deal, in turn, was precipitated by Boeing's campaign to get tariffs slapped on Bombardier jets, which it said competed unfairly with the smallest of its Max jets. The U.S. International Trade Commission eventually ruled against that claim in January 2018. But the uncertainty created by Boeing's protests depressed sales of the CSeries, leading Bombardier to turn to Airbus for financial help.

As it happens, Embraer's largest model, the E195-E2, also competes with the smallest Max in certain configurations. This time it's in Boeing's interest to downplay the overlap.

Ultimately, the Boeing-Embraer venture is likely to get EU approval, because the Max crisis makes it difficult for regulators to argue the product mashup gives Boeing leverage to raise prices, Bloomberg Intelligence analyst Aitor Ortiz wrote in a Feb. 24 note. Boeing, which didn't sell a single commercial jet in January, is likely to offer steep discounts to entice buyers for the damaged Max brand.

Also, European regulators didn't object to the Airbus-Bombardier tieup. The Wall Street Journal reports that's in part because Boeing's trade complaints kept such a tight lid on CSeries orders that the purchase didn't meet the revenue threshold that triggers a review. Having not stepped in to block a similar deal may make it difficult for the EU to take a hard stance on this one.
 
Sutherland is a columnist for Bloomberg Opinion.

To contact the editor responsible for this story: Eric Gelman at egelman3@bloomberg.net

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