NEWTOWN, Conn. -- As Boeing scrambled to conserve cash in the wake of the COVID-19 pandemic, the $4.2 billion merger with Embraer became a casualty in April 2020. As a result, both the commercial joint venture, Boeing Brasil-Commercial (BBC), and the military venture, Boeing Embraer- Defense, were canceled as a result of this decision.
With the deal dead, Embraer may look to China as a possible partner in the operation. While an earlier venture in China has been phased out, this may present a fresh opportunity for the two to renew discussions.
The previous joint venture effort between the two, Harbin Embraer Aircraft Industry Company Ltd, was phased out in 2016. The venture was originally formed in December 2002 to manufacture 50-seat ERJ 145 jets in China. These aircraft were marketed primarily in the People’s Republic of China (PRC), where the market had slowed at the time. The company had wanted to produce the E-190 regional jet in China after local production of the ERJ 145 ceased, but failed to obtain approval from Chinese authorities. In addition, Embraer was embroiled in tax disputes over the venture that likely impacted the decision to close the operation. Embraer owned 51 percent of this company.
Other potential partners are India and even Russia, according to news reports. While the company is not currently negotiating with any partner's such as China's COMAC, India's Hindustan Aeronautics or Russia's Irkut, Embraer is investigating all possible options as it moves forward. Any such merger activity will likely speed up once the COVID-19 crisis abates, which may take a year at least if not two or more.
For the near term, Embraer must put its house back in order. The company had listed its Commercial Aviation as discontinued in preparation for the Boeing merger and has since reintegrated the operation back into its books. As it dealt with the one-two punch of the merger fallout and COVID-19 pandemic, Embraer was able to secure $600 million in export financing and loans. The loans, which will be due in four years, will provide working capital to shore up production of commercial and executive aircraft.
On the plus side, the company said that for the first quarter of 2020 it has been able to postpone deliveries and avoid outright order cancellations. According to the company's 1st quarter 2020 earnings call, "key markets for Commercial Aviation in Europe and United States are already resuming operation and in many cases, using smaller regional jets that should lead the aviation recovery."
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.
One area that Embraer is looking to expand is its maintenance, repair and overhaul (MRO)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 the near term, MRO demand has declined along the with the pandemic. However, as regional travel increases so too will demand for MRO services.
In its third market, defense and security, Embraer began deliveries of its rebranded C-390 Millennium in 2019. Currently, Embraer also has letters of intent (LOI) for 33 KC-390s, and is in the process of converting these to firm orders. At least initially, Embraer intends to build about 10 KC-390s per year.
Embraer and Boeing had been planning to establish a joint venture to promote and develop new markets for the C-390. Embraer would have held a 51 percent majority stake in the Boeing Embraer – Defense joint venture. Despite the termination of the joint venture plans, Boeing intends to continue its previous level of involvement in the C-390 program. As defined by agreements from 2012 and 2016, Boeing and Embraer jointly market and support the C-390. Formation of the joint venture would have expanded Boeing's role in the program, though, while access to the large Boeing supply chain and Boeing's considerable influence over supplier relationships might have led to some reductions in program costs. The question remains is whether or not Embraer wants Boeing's help. The acrimony over the failed deal might have strained the relationship too much.
Embraer also has a key role on Brazil's most recent fighter procurement. Under the manufacturing plan for Saab's 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 has been established at Embraer's Gavião Peixoto industrial facility. Deliveries of the 36 Brazilian Air Force Gripen NGs are scheduled to begin in 2019 and be completed in 2024. Approximately 10-15 of the aircraft are to be assembled in Brazil by Embraer beginning as early as 2021.
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 important, this diversity changes the mindset that Embraer is simply "a Brazilian company," and reinforces its position as an international aerospace firm.
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