Boeing takes On Bombardier and Airbus with Embraer deal

Boeing said Thursday that it planned to take over the commercial jet business of the Brazilian aerospace company Embraer, a move into smaller jetliners that mirrors a deal last fall by rival Airbus to join in a partnership with Bombardier.

Boeing would own 80 percent of Embraer’s commercial aircraft and services arm, which the companies said was worth $4.75 billion. Embraer would own the rest.

Under the memorandum of understanding announced by both companies, management would be based in Brazil, but the venture will be controlled by Boeing, which is based in Chicago.

The companies also said that they would form another joint venture focused on “new markets and applications for defense products and services,” such as Embraer’s KC-390 military transport plane.

The two companies have collaborated on projects for decades and have been in talks since last year on a partnership for planes with 70 to more than 450 seats and for freighters.

Embraer is one of the largest producers of so-called regional aircraft, which seat 70-130 passengers. In May, American Airlines signed a $705 million contract for 15 E175 jets from Embraer to be delivered next year.

Boeing’s smallest advertised plane, a version of the 737, seats 126 people. But Embraer’s appeal to Boeing may stem from its talent pool rather than a desire to shuttle passengers on short-hop flights, analysts said.

“The passenger airline market is much more interested in larger aircraft,” said Jonathan Root, Moody’s senior vice president and an aviation expert. “The industry gains operating leverage by operating larger aircraft.”

In the next decade, more than 5,500 engineers and technicians at Boeing will reach retirement age, exacerbating a supply shortage made worse by layoffs in recent years and defections to technology companies, analysts said.

“They want to get into Embraer to get access to its engineers,” said Scott Hamilton, the managing director at Leeham, an aviation consulting firm.

Boeing and Embraer are uniting at a tense juncture for major players in international trade, as the Trump administration edges toward a trade war with governments in Europe, Canada and Asia.

In October, Boeing’s main rival, the European jet maker Airbus, announced that it would team up with Bombardier, the Canadian company whose CSeries aircraft carry 100-150 passengers. Embraer’s family of E2 jets are often considered to be an alternative to the CSeries.

The Airbus deal, which called for 6,000 planes to be produced over the next 20 years, closed this week, and could allow Bombardier to sidestep American duties because the planes would be produced, at least in part, in Alabama.

Boeing spent months clashing with Bombardier after Delta Air Lines ordered 75 CSeries planes in 2016. Boeing said Bombardier had sold them at artificially low prices with the help of subsidies from the Canadian government, a practice known as dumping.

The Commerce Department called for duties of nearly 300 percent on the CSeries, but the U.S. International Trade Commission, an independent agency, struck down the recommendation.

Still, Canada suspended plans to spend billions of dollars on Boeing fighter jets, and Prime Minister Justin Trudeau pushed for Boeing to drop its complaint.

In another case, the World Trade Organisation ruled in May that Europe had illegally subsidized Airbus, a practice that hurt Boeing.

Boeing and Embraer will spend the next few months negotiating details of their agreement, which is expected to close by the end of 2019 and result in $150 million in annual pretax cost savings by its third year, the companies said.

Pairing with Boeing gives Embraer shelter from the competitive scale now afforded to Bombardier through the Airbus deal, analysts said.

“Trade tensions and barriers highlight the marginal positions of smaller producers who have less political clout and less industrial mass,” said Richard Aboulafia, a vice president with the aerospace consultancy Teal Group. “The political circumstances that played into the Bombardier move almost certainly helped accelerate this.”