Farnborough Air Show

Boeing’s McAllister Optimistic about Potential Embraer Deal

 - July 12, 2018, 1:00 PM
Boeing Commercial Airplanes CEO Kevin McAllister sees “synergies” between the major structures and flight decks of airplanes in Embraer’s lineup, such as the E195-E2, and Boeing’s own narrowbody portfolio, which includes the 737 Max 7.

Boeing’s proposed acquisition of Embraer’s commercial airplane business has drawn few public protests from either of the two companies' top executives and, judging by comments during a pre-Farnborough briefing at his Seattle-area office, Boeing Commercial Airplanes CEO Kevin McAllister appeared unlikely to deviate from the majority view. In fact, McAllister appeared to see little downside to the prospect of a tie-up, under discussion since at least last December, when the companies issued a statement confirming the existence of talks. Since then, executives from both sides—including Embraer CEO Paulo Cesar de Souza e Silva—have expressed nothing but positive attitudes over the proposed joint venture, a non-binding agreement on which the companies announced on July 5. 

Under the terms of the proposed deal, Boeing will take an 80-percent share of Embraer’s commercial aviation business. The transaction values 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. Boeing said it expects the partnership become accretive to its earnings per share in 2020 and to generate annual pre-tax cost “synergies” of some $150 million by its third year. 

The companies expect completion of the financial and operational details of the partnership and negotiation of transaction agreements to continue “in the coming months.” The transaction would then remain subject to shareholder and regulatory approvals, including approval from the government of Brazil, as well as other customary closing conditions. Assuming the approvals come in what the joint statement characterized as a timely manner, the companies expect the transaction to close by the end of 2019, or 12- to 18 months after execution of the definitive agreements.

A joint statement announcing the deal indicated that Boeing will take full operational and management control of the new company, but that Brazil-based management team, including a president and CEO, will lead the joint venture and report to Muilenburg. It also noted that the joint venture will become one of Boeing’s centers of excellence for “end-to-end” design, manufacturing, and support of commercial passenger aircraft, and will fully integrate into Boeing’s broader production and supply chain. 

Notwithstanding reported resistance by the Brazilian government to allowing Embraer to cede control of its defense business, the companies also announced they will create a separate joint venture to develop new markets for defense products and services, in particular Embraer’s KC-390 multi-mission aircraft. The statement did not indicate whether or not Embraer would hand over any stake of the KC-390 program to Boeing, however. 

Asked how the commercial deal would most benefit Boeing, McAllister talked of “synergies,” not only between the two companies' product lines but also in their respective engineering expertise.

“They’ve got an attractive set of airplanes that sit below ours in the portfolio,” said McAllister. “So I think, first, it’s a nice addition to the portfolio in terms of airplanes. But I think also, if it goes through, there are some real technical synergies there. It’s a very good engineering company; they have a lot of capabilities that could be attractive from a vertical standpoint in commercial airplanes. If it comes together, it could be good—more than just a suite of airplanes—from an engineering and production standpoint.”

Such “vertical” capabilities extend to both major structures of the companies’ respective airplanes and the flight decks, McAllister explained. “So we’ve gone through section by section to look at what they really do well, and what are the opportunities that might help us on the BCA side.”

Without naming the so-called NMA, or New Mid-market Airplane, McAllister acknowledged that Embraer could lend expertise and knowledge to future Boeing projects, as Boeing could to Embraer projects. “When you look at what’s happening inside of Boeing today, we’re always looking for understanding capabilities from one airplane family into the other, one production facility into the other,” he said. “And so I think there are a lot of learnings that are applicable from Embraer on the engineering side and production side that would be of interest to us, and vice versa.”

From Embraer’s perspective, the combination would help realize what Silva called “a natural aspiration” to grow faster than it has in the past. Silva also acknowledged that the motivation for Embraer lay in part with a desire to mitigate the “challenge” associated with selling the E190 and E195 in a capacity segment approaching that dominated by Boeing and Airbus. Nevertheless, he insists Embraer stands ready to compete with Boeing if the sides don’t eventually reach a deal.

“We are not at all afraid to compete with the narrowbodies,” said Silva during an April briefing at Embraer's offices in Sao Jose dos Campos, Brazil. “We do believe that we have a very efficient, if not the most efficient, family of aircraft in the segment from 70, 80 to 150 seats. However, we have to be mindful of the dynamics of the market.”

Of course, market dynamics changed dramatically when Airbus assumed majority control over the Bombardier C Series on July 1. The arrangement for the first time gives the European airframer a foothold in the segment of the market covering a seating capacity below its A320 family, albeit to the detriment of the A319, whose fate now appears sealed by the similarly sized but lighter and more efficient CS300.

Boeing, meanwhile, will continue to compete in that part of the market with the 737 Max 7, now involved in flight testing and due for first delivery next year.

“Game on,” McAllister declared in response to a question about the threat to the smallest member of the Max family posed by the C Series. “The thing I love is we have the commonality benefit of the Max 7 all the way up to the Max 10. We don’t have to juggle a CS300 versus an A319. Independent of what happens between us and Embraer, I feel great about the strength of the Max family competing against the Airbus-Bombardier team.”