Boeing offers Embraer a deal it can’t refuse

Less than a year ago, at a briefing in Singapore, Boeing declared the market for regional jets in Southeast Asia – a region with 640 million people – was just 40. The planemaker forecasts demand for passenger aircraft in Southeast Asia to reach 4,210 units. Of these, 3,230 will be single-aisle, narrowbodies like the B737NGs.

On 5 July Boeing announced it is joining forces with Brazilian regional jet maker Embraer. It will take control of Embraer’s commercial aircraft and services operations in a deal valued at USD4.75 billion.

Boeing will take an 80% stake in the joint venture worth USD3.8 billion with Embraer holding the remaining 20% and more importantly, keep control of its defence and business operations.

Why is Boeing gobbling up Embraer if it feels there’s just a small market in a region such as Southeast Asia?

Here’s our analysis earlier this year, in January and another one in February. Admittedly we didn’t expect the deal to go through simply because there was no solid case for Embraer to do so, and we under-estimated how persuasive Boeing – flush with cash – can be when it comes to enticing the eager beaver Brazilians.

On 1 July Airbus officially became the majority partner of the C Series Aircraft Limited Partnership (CSALP). The Toulouse-based planemaker has a 50.01% stake, with Bombardier and Quebec province holding minority stakes.

There will be a grand event in Toulouse on 10 July where Airbus is expected to reveal a rebranding of the CSeries family of aircraft: the CS300 and CS100.

Airbus CEO Tom Enders was guarded when he spoke to Bombardier employees in Montreal mid-week but hinted to reporters there could be orders during the Farnborough Airshow starting 16 July.

For Embraer itself, having Boeing as a partner will certainly help boost sales, especially in Southeast Asia – even if Boeing believes there is a market for only 40 regional jets.

Globally Embraer trails Bombardier in the small but increasingly lucrative 70- to 120-seat aircraft market. Embraer’s orderbook stands at 280 but this includes up to 50 E190-E2 and E195-E2 planes for India’s Air Costa, which is no longer in operation.

Bombardier’s CSeries (CS100 and CS300) is already at 402 orders, with a potential 60 CS300s order looking likely from Moxy Airlines, a startup carrier founded by David Neeleman. Neeleman previously founded JetBlue in 1999; ironically the carrier is one of the largest operators of Embraer E190 aircraft.

Embraer’s E2 jets are slightly smaller than Bombardier’s CSeries family of aircraft but promises better fuel burn and are capable of achieving similar (or better) costs per seat of larger re-engined narrowbody aircraft such as the A320neo and B737MAX. Additionally there are no middle seats on the E2s.

Norwegian carrier Wideroe was the launch customer for the E2, taking delivery in April. Kazakhstan’s Air Astana is also a fan: it is taking its first (of five) deliveries in October and has indicated plans to add another 10.

airBaltic CS300 SG Airshow

That said, Bombardier’s CS100 and CS300, which seats between 100 and 150, is no less impressive, and promises a very comfortable ride with 20% increase in fuel efficiency. Unlike the E2, the CSeries is an all-new designed plane, lighter than the competition due to the use of advanced structural materials. It went into service with Swiss Air Lines in July 2016.

What this latest move signifies, in the broader picture, is the continued duopoly in the marketplace and further strengthening the influence and footprints of Airbus and Boeing.

Other regional aircraft makers, particularly the ambitious COMAC (China), Russia’s Sukhoi and Japan’s Mitsubishi Regional Jet (MRJ) will be seriously affected. The MRJ programme, mired by delays and other technical issues, and with a negative net worth of minus JPY51 billion, is perhaps the worst hit. The people behind MRJ would do well to re-assess the viability of the aircraft under the current conditions.

Apart from North America, a traditionally strong market for Embraer’s E-jets, the challenge for Boeing is to coax, cajole and convince skeptical Asians – particularly those in Southeast Asia – the benefits of the E2s. There are reasons why the E2, despite being a very strong performer, has yet to gain traction in this part of the world.

The region is ripe for regional jets, with several airlines already flying Bombardier’s products, including the Q400 and CRJ1000 that are currently in service in the Philippines and Indonesia.

Boeing will soon discover, if it hasn’t already, that the demand isn’t just for 40 regional aircraft but at least five-fold over the next 20 years.

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