Pursuit of Embraer shows newly placed emphasis on market for
smaller jetliners
By Doug Cameron
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (December 23, 2017).
Boeing Co.'s pursuit of Embraer SA fits one of the goals Chief
Executive Dennis Muilenburg has set for the aerospace giant:
creating a level playing field in the commercial jetliner
business.
Boeing on Thursday confirmed a Wall Street Journal report that
it was in talks with Embraer, though factors such as potential
objections from the Brazilian government could thwart a tie up.
Some analysts said that the chances of a full takeover were slim
and that an expansion of the companies' existing joint venture was
a more likely outcome.
Buying the Brazilian maker of small jetliners, business jets and
military aircraft would give Boeing parity with rival Airbus SE,
which plans to expand in the market for jets with 100 to 150 seats
through a joint venture with Canada's Bombardier Inc. It also would
prevent fast-growing Chinese aerospace companies from scooping up
the Brazilian company and give Boeing more leverage in its talks
with suppliers.
Mr. Muilenburg hadn't previously put small jetliners high on his
agenda. In the two and half years since he took charge, he has
focused on cutting costs, reducing Boeing's reliance on some
suppliers and cutting pension liabilities, as well as capitalizing
on huge demand for its jetliners.
The company has an order backlog of 6,000 jets valued at $420
billion. Sales are generating substantial cash flow, much of which
the company has returned to shareholders through dividends and
stock buybacks. Mr. Muilenburg has pledged to more than double the
size of Boeing's aircraft services business -- a more profitable
line than its aircraft sales -- and the company had been expected
to pursue a takeover in this area.
A takeover of Embraer would give Boeing jetliners that are
smaller than most of its product range, with between 70 and 140
seats, as well as business jets, a market that has been flat since
the last financial crisis. Analysts estimated buying Embraer would
cost Boeing up to $9 billion, including debt, and while the company
had around that amount of cash at the end of the third quarter, a
deal would reduce its capacity for buybacks.
Mr. Muilenburg's interest in smaller planes has been kindled by
new executives that have joined the company, according to a person
familiar with the company's strategy. Notable among those is Kevin
McAllister, a former General Electric Co. executive who joined
Boeing last year to lead its commercial-aircraft business, the
person said.
Another attraction is Embraer's well-regarded engineering
workforce. Boeing, which has been trimming its U.S. staff to cut
costs, is losing a lot of its engineers to retirement and the
company faces a shortage of entry-level engineers. Buying Embraer
and expanding other overseas ventures -- including a Boeing
research center in Russia -- could help alleviate that problem,
analysts said. +
A third motivation cited by industry experts is to prevent
China's fast-growing aerospace companies from tying up with
Embraer. China is developing regional and single-aisle passenger
jets, as well as larger aircraft and more advanced military
capabilities.
The Brazilian government has invested heavily to develop a
domestic aerospace industry and retains a so-called golden share in
the company, giving it a veto over any potential sale or joint
venture. Analysts said Boeing had a better chance than a Chinese
rival of persuading the Brazilian authorities to sell Embraer,
though securing government backing will still be a challenge.
"I don't think any one of these nations that have indigenous
aerospace capabilities wants to relinquish these to another
nation," said Carter Copeland at Melius Research LLC.
If the deal and the planned Airbus-Bombardier venture proceeds,
aerospace suppliers could be the biggest losers.
Airbus and Boeing are already pressuring suppliers to boost
production and cut costs. That pressure has unleashed a wave of
consolidation among suppliers, including plans by United
Technologies Corp -- maker of Pratt & Whitney engines -- to buy
Rockwell Collins Inc., a specialist in aircraft electronics and
interiors.
Airbus and Boeing have both expressed concern about their
suppliers bulking up through deal-making. The plane makers have
said acquisitions could distract suppliers from handling the big
production increases the aerospace companies are planning, though
analysts said the companies don't want to lose their negotiating
leverage. Boeing has said it opposes the planned United
Technologies-Rockwell Collins deal, which it has said isn't in the
best interest of Boeing customers. United Technologies has said the
deal would spur innovation and benefit customers.
"The shoe may be on the other foot as major plane makers use
M&A and their own, enormous buying power to drive down supplier
costs on newly acquired aircraft programs," said David Wireman,
global co-head of aerospace and defense consulting at AlixPartners
LLP.
Boeing's pursuit of Embraer may also explain its criticism of
Bombardier, which competes heavily with the Brazilian company, said
aerospace consultant Richard Aboulafia at the Teal Group.
Boeing has accused Bombardier of using illegal state subsidies
that have allowed it to sell its planes at below their production
cost. The allegations, which have led U.S. trade officials to
propose big tariffs on some Bombardier planes, puzzled many
analysts as the Canadian company largely operates in different
markets.
Boeing has said the pricing and sales of its jets are being
damaged by Bombardier's tactics, a charge the Canadian company
denies. But the tariff allegations criticism may have been meant to
protect Embraer, said Mr. Aboulafia at the Teal Group. "It's about
the only thing that would make the trade case against Canada look
sensible," he said.
Boeing and Embraer declined to comment on the matter.
Write to Doug Cameron at doug.cameron@wsj.com
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December 25, 2017 02:47 ET (07:47 GMT)
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