by Richard Pettibone, Aerospace & Defense Companies Analyst, Forecast International.
The times they are a-changin’.
In a move that has altered the commercial aircraft OEM landscape, Airbus has announced a tie-up with Bombardier. As a counter, Boeing is moving to join with Embraer. A teaming between Boeing and Embraer will allow the two firms to better compete against the CSeries, which has been the focus of several trade disputes in both Brazil and the U.S.
As the process moves ahead, the two firms recently signed a non-binding Memorandum of Understanding to establish the partnership. This MoU lays the foundation for the formation of a new commercial aircraft entity, majority owned by Boeing, with the military aircraft programs, and possibly the Executive Aviation segment, remaining under Embraer. Under the terms of the agreement, Boeing will hold an 80 percent ownership stake in the joint venture and Embraer will own the remaining 20 percent stake. The transaction values 100 percent of Embraer’s commercial aircraft operations at $4.75 billion, and contemplates a value of $3.8 billion for Boeing’s 80 percent ownership stake in the joint venture. The deal is expected to close by the end of 2019 pending Boeing’s due diligence and the necessary approvals.
In addition, both companies plan to create another joint venture later on to promote and develop new markets and applications for defense products and services, especially the KC-390 multi-mission aircraft, based on jointly-identified opportunities.
A new Boeing/Embraer venture would make a solid match, as it would round out Boeing’s aircraft offerings. There is very little competitive overlap between the two product lines, consisting only of some indirect competition between the E195-E2 and the 737 MAX 7. The combination would also provide Boeing with an immediate and extensive presence in the business jet market, an arena in which the U.S. company currently competes only at the top end with corporate-configured 737s. More importantly, the tie-up would also enable a comprehensive and broad-based attack on the Bombardier/Airbus CSeries, with the E190-E2 and E195-E2 challenging the CS100 version, and the 737 MAX 7 and 737 MAX 8 battling the CS300.
While sales did bounce back in 2016, Embraer continues to face some headwinds. Low aircraft prices in the pre-owned market along with cheap oil could pose difficulties in the company’s efforts to increase sales.
After stalling in 2015, the business jet market shifted into reverse in 2016 and 2017. Reduced oil revenues and serious economic slowdowns in emerging markets in Asia, Latin America, and Russia have adversely affected demand for such aircraft. Now, due to continuing improvement in global economic conditions, moderately increasing oil prices, and a return in force of U.S. buyers to this portion of the market, demand is expected to rise beginning in 2018.
Thanks to earlier development efforts, Embraer is well diversified in this market, holding a presence in seven of the eight business jet market segments as defined by Forecast International. The company’s business jet line now covers each market segment – from the very light jet (VLJ) class through the large-cabin category, and includes a product in the corporate-configured airliner class. This positioning is helpful in the current business climate, as a strong showing in one sector can help offset lower results in another.
In the regional aircraft segment, the market is stabilizing following several years of erratic swings in yearly production. While the market has been flat of late, the long-term outlook is more bullish as new models enter production and service. Key to this drive was the 2012 liberalization of scope clauses in pilot contracts with U.S. mainline carriers. The newly liberalized scope clauses allowed regional airline partners of the major carriers to operate greater numbers of 76-seat regional jets.
In response, regional aircraft have grown larger. Embraer’s E-Jets series – which includes the large-passenger-capacity 190 and 195 – continues to be popular. In an effort to capitalize on the need for fuel efficiency, Embraer has launched the E2 series, a family of comprehensively upgraded versions of its E-Jets regional jets. The E2 aircraft feature new engines (the Pratt & Whitney PW1000G) and landing gear, and possibly a new wing. Such a move follows the very successful trend set by Airbus and Boeing when they introduced new fuel-efficient, re-engined designs in their respective A320neo and 737 MAX models.
One area that Embraer is looking to expand is its maintenance, repair and overhaul sector. The company organized a new services division in 2017 that consolidates the service capabilities that had been spread throughout its different business units. The new Global Services and Support sector is now the focus of all commercial, executive, and defense-related MRO offerings. With aftermarket support being a key revenue generator, the new operation should be able to grow thanks to an expanded portfolio and reduced operational redundancies. With 2,000 Embraer aircraft in service around the world, the company is aiming to capture a larger share of the services aftermarket than it has in the past.
In its third market, defense and security, Embraer is facing some challenges due to economic issues in Brazil. The company’s new KC-390 military tanker/transport has been impacted by a governmental fiscal crisis in Brazil that stemmed from the country’s deep economic recession. The company postponed certification of its new transport aircraft until the second half of 2017, and service entry was delayed until the first half of 2018. The aircraft’s entry into service had previously been targeted for late 2016.
Despite the delay, Embraer has secured letters of intent for 32 KC-390s from its five partner nations. The company has begun the process of converting these commitments into firm orders. At least initially, Embraer intends to build about 10 KC-390s per year.
In 2015, Saab and Embraer signed an agreement that established a partnership for joint management of the F‑X2 project for the Brazilian Air Force. The agreement concluded more than a year of negotiations since Brazil selected the Gripen NG fighter for the contract in December 2013. Under the manufacturing plan for the Gripen NG – named the F-39 in Brazil – Embraer will receive a significant technology transfer package from Saab. The company will also be actively involved in finalizing the single-seat F-39 aircraft’s design and will develop with Saab the two-seat F-39 variant in Brazil. A production line is currently being set up at Embraer’s Gavião Peixoto industrial facility. Deliveries of the 36 Brazilian Air Force Gripen NGs are scheduled to begin in 2019 and to be completed in 2024. Approximately 10-15 of the aircraft are to be assembled in Brazil by Embraer. Looking ahead, Argentina has expressed interest in possibly buying Embraer-built versions of the aircraft.
Finally, Embraer has been actively expanding its global footprint with facilities in key countries around the world. Currently, its global footprint includes its home in Brazil as well as operations in the U.S., Mexico, and Portugal. These facilities include not only pilot training and service centers but also business jet manufacturing operations. For example, in the U.S. (Melbourne, Florida), the company assembles Phenom 100 and 300 aircraft (and recently added the Legacy 450 and 500), while in Portugal, the Évora facility manufactures wings. Such geographic dispersion helps protect the company from single-currency fluctuations. Perhaps more importantly, this diversity changes the mindset that Embraer is simply “a Brazilian company,” and reinforces its position as an international aerospace firm.
A military history enthusiast, Richard began at Forecast International as editor of the World Weapons Weekly newsletter. As the Internet grew in importance as a research tool, he helped design the company's Forecast Intelligence Center and currently coordinates the EMarket Alert newsletters for clients. Richard also manages social media efforts, including two new blogs: Defense & Security Monitor, covering defense systems and international issues, and Flight Plan, which focuses on commercial aviation and space systems. For over 30 years, Richard has authored the Defense & Aerospace Companies, Volume I (North America) and Volume II (International) services. The two books provide detailed data on major aerospace and defense contractors. He also edits the International Contractors service, a database that tracks all the contractors involved in the programs covered in the FI library. More recently he was appointed Manager, Information Services Group (ISG), a new unit that encompasses developing outbound content for both Forecast International and Military Periscope.
