In a move that was telegraphed by only a day or so – unusually for an event of this strategic import – Boeing announced last weekend (25 April) that it has terminated its Master Transaction Agreement (MTA) with Embraer – an initiative that two years or so ago was hailed as a canny strategic consolidation of capability and a global ‘win-win’ agreement.
Two joint ventures were proposed under the MTA: one comprising Embraer’s commercial aviation business and a separate venture to develop new markets for the KC-390 MILLENIUM medium airlifter. The initial deadline for a definitive agreement to be reached between the companies expired on 24 April and Boeing announced just hours later it was exercising its right to terminate “after Embraer did not satisfy the necessary conditions,” according to a written statement. The existing Master Teaming Agreement to jointly market and support the MILLENIUM, signed in 2012 and expanded in 2016, is to stay in place, according to Boeing’s statement.
“Boeing has worked diligently over more than two years to finalize its transaction with Embraer. Over the past several months, we had productive but ultimately unsuccessful negotiations about unsatisfied MTA conditions. We all aimed to resolve those by the initial termination date, but it didn't happen,” commented Marc Allen, president of Embraer Partnership & Group Operations. “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.”
Embraer, for its part, reacted immediately and with unmistakeable candour. Commenting that it had met all conditions required under the MTA prior to the 24 April deadline, the company issued a statement that said, in part, “Embraer believes strongly that Boeing has wrongfully terminated the MTA, that it has manufactured false claims as a pretext to seek to avoid its commitments to close the transaction and pay Embraer the US$4.2 billion purchase price. We believe Boeing has engaged in a systematic pattern of delay and repeated violations of the MTA, because of its unwillingness to complete the transaction in light of its own financial condition and 737 MAX and other business and reputational problems […] Embraer will pursue all remedies against Boeing for the damages incurred by Embraer as a result of Boeing's wrongful termination and violation of the MTA.”
The planned partnership has received unconditional approval from all pertinent regulatory authorities – with the exception of the European Commission – but the two companies have failed to agree details of their proposed ventures within the same timeframe. It would be difficult to overstate the complexity of the proposed partnerships – which does much to explain the failure to reach a timely agreement, perhaps. It is tempting, however, to ask why those complexities were not more carefully considered before deciding on so bold a move in the first place. Some observers believe the original initiative had less to do with the purported intent and much more to do with a possible counter by Boeing to Airbus’ strategic move in 2017 in acquiring a majority stake in Bombardier’s C-Series aircraft. The Canadian-designed aircraft has subsequently been renamed the A220, in which Airbus now has a 75% share as of February this year, with the Québecois government owning the remaining 25%.
If this is the case – and given Boeing’s recent history of misfortunes – it is difficult to raise a viable objection to Embraer’s stated view of the reasons behind Boeing’s termination of the MTA on 25 April. MON understands that there is a $100 million ‘breakup fee’ that Boeing will have to pay as a result of its decision – but it is evident from the language of Embraer’s rather aggrieved statement that the jilted airframer will be pursuing its erstwhile suitor for payments much closer to the foreseen $4.2 billion price tag.
Boeing’s much-publicised woes are unfortunate and place the company in an extraordinarily difficult situation. From that perspective, the decision taken this weekend is, perhaps, understandable. It is very difficult, however, to find any outcome in which Boeing is not the loser – in strategic, market penetration and reputational terms. Embraer will also suffer, since its strategic planning has been based on an environment in which the merger of interests with Boeing was a given. However – the Brazilian company ended 2019 with some $2.3 billion cash in the bank: perhaps, one might speculate, it is in a more resilient position than its former partner. A speculation borne out, perhaps, by reading between the lines of the final paragraph of Embraer’s 25 April statement. “Our history of over 50 years is lined with many victories but also some difficult moments. All of them were overcome. And that’s exactly what we are going to do again. Overcome these challenges with strength and determination.”