Boeing has walked away from its $4bn deal to acquire the regional jet business of Brazil’s Embraer as the US aircraft maker reels from the impact of a crisis in aviation.
The company said on Saturday that it had tried for two years to finalise the deal before the termination date which fell on Friday, but ultimately negotiations were unsuccessful.
“It is deeply disappointing. But we have reached a point where continued negotiation within the framework of the MTA is not going to resolve the outstanding issues,” said Marc Allen, president of Boeing’s Embraer Partnership & Group Operations.
The collapse of the deal will be a blow to Boeing which had moved to broaden its portfolio of aircraft to compete with European rival Airbus, which in 2017 had swooped on Bombardier’s C-Series, a 100-150 seater regional jet.
Embraer could also find it tougher to compete against the Airbus backed C-Series — now renamed the A220 — in a market which is expected to be substantially smaller in the coming years as a result of the global crackdown on air travel.
The Boeing-Embraer tie-up has faced several obstacles over the past year and a half, with substantial political opposition in Brazil while in Europe regulatory approval has taken longer than expected.
But the year long grounding of the 737 Max had already strained Boeing’s cash resources and now the coronavirus has significantly reduced expectations for aircraft demand in the coming years. Roughly two-thirds of the global fleet has been grounded, with airlines around the world seeking government bailouts to survive. Many expect to emerge from the crisis with significantly smaller fleets.
Boeing which has estimated the cost of the Max grounding at $19bn, is also under severe cash pressure as airlines cancel and defer large volumes of orders.
This had reduced the likelihood of any deal taking place, said one analyst.
“It’s a liquidity question,” said Bank of America analyst Ron Epstein. “Is Boeing in a position to spend $4bn on an acquisition given what’s going on in the broader commercial aviation market?”
Boeing is widely expected to receive financial support from the US government’s recent stimulus plan. The company’s chief executive Dave Calhoun has said Boeing and the wider aerospace supply chain would need $60bn to survive the current crisis.
The group is expected to slash production next week when it announces first-quarter results, and will have to revise cash flow expectations as a result.
Airbus earlier this month cut production rates by one-third, including its best-selling A320 single-aisle family. Further cuts are possible, depending on the extent of the aviation downturn.
The collapse of the Boeing-Embraer deal follows the decision by Hexcel and Woodward — two of the US company’s big suppliers — to pull the plug on their $6.4bn merger, the first big deal to collapse due to the coronavirus pandemic.
Boeing moved to acquire Embraer’s regional jet business in 2018, after European rival Airbus swooped on Bombardier’s C-Series, a 100-150 seater single aisle.
Under the agreement, Boeing would have taken an 80 per cent stake in Embraer’s jet business. Boeing on Saturday said it would continue a separate partnership agreement with Embraer to jointly market and support the C-390 military transport. Embraer will hold 51 per cent of this separate venture and Boeing 49 per cent.
After some intense back-and-forth, the agreement granting Boeing 80 per cent control over Embraer’s commercial aircraft and services operations for $4.2bn was approved in January 2019 by Brazil’s president Jair Bolsonaro.
The tie-up would have enabled Embraer to boost sales by providing more heft in negotiations with the world’s biggest airlines, while helping Boeing gain a strategic foothold in the market for smaller regional jets. It would have also given Embraer the ability to move up into larger aircraft, while giving Boeing the ability to move down into smaller ones.
Embraer declined to comment on Saturday. But the cancellation is a blow for the Brazilian aircraft maker.
Nelson Salgado, Embraer’s chief financial officer, told the Financial Times last year that the deal would have allowed “revenue growth for Embraer which it otherwise would not be able to achieve on its own”.
Donna Hrinak, Boeing’s president for Latin America, said in 2019 that Boeing’s “original intent was to buy the whole company”.