What the breakup means for Embraer

Embraer must plan the future of their commercial passenger aircraft without Boeing. The US group has cancelled the contract for the far advanced joint venture in Brazil. Embraer must now get along without Boeing’s billions and their global sales power. What will happen now for the Brazilian aircraft manufacturer?

Embraer boss Francisco Gomes Neto did not yet comment on Monday (27 April) on whether his company would need state aid. However, the chances of that would probably not be bad, since Embraer and the state are closely connected: The government is the largest military client and holds a veto over a so-called golden share. Neto explained that they have reserves of around one billion dollars for 2020. It remains to be seen whether this is enough to survive the Corona crisis and the failed Boeing deal.

New partner is an option
The Brazilians have also announced that they intend to claim contractual penalties against the US aircraft manufacturer. Lawyers and judges will have to clarify this issue. Meanwhile, Embraer is faced with the decision to reintegrate the spun-off division into the group or to continue it separately. The company has already pushed ahead with the spin-off and the preparation for Boeing Brasil right up to IT systems.

Embraer might look for a new partner now. Brazil’s president, Jair Bolsonaro, said, «Perhaps we will begin new negotiations with a new company.» Vice President Hamilton Mourão brought up the idea of partnership with China, despite Brazil’s government’s repeated attacks on China in the Corona crisis.

Interest from China?
Even analysts are already speculating that Chinese aircraft manufacturers such as Comac or Avic could join Embraer. Potential new partners from the industry could benefit from engineering skills in particular. The low production costs compared to the USA and Europe also speak in favor of Embraer.

However, there are currently not many in the industry who could financially support an entry into Embraer. Therefore, a participation of a financial investor from outside the industry in the aircraft manufacturer is quite conceivable.

E2 family not yet a blockbuster
The national currency, the real, is at a record low level. A large proportion of the costs – for example, labour costs – are therefore lower than those of the competition, which should lead to discounts on the sale of the planes. Nevertheless, the new E2 aircraft family is not yet a bestseller. By the end of 2019, Embraer had open orders for 137 of the large E195-E2, only 16 for the E190-E2 and none for the E175-E2. However, it remains to be seen how many customers wanted to wait until the joint venture was ready to make a purchase and how they will act now.

Embraer boss Neto said that no cancellations have yet been received in the wake of the Corona crisis. In addition, the success of the E175-E2 depends on whether it will meet future scope clauses in the USA. These are rules that all major airlines in the USA negotiate with their pilots’ unions and also revolve around the size of the aircraft. Whether Mitsubishi will become a serious competitor with its regional aircraft called Spacejet is also likely to affect sales figures.

Desire for more customers in Asia
Embraer had hoped that the partnership with Boeing would enable it to better position its aircraft in regions where sales had previously been weak. The focus is particularly on China and Southeast Asia, said John Slattery, head of Embraer Commercial and intended head of the now failed joint venture, in 2019 in talks with aeroTELEGRAPH. «We are not yet where we would like to be,»said Slattery.

If Embraer does not find a new partner, it will have to face such challenges alone. Then the Brazilians might remain a successful aircraft manufacturer, benefiting from the fact that the regional aircraft segment could recover fastest after the corona crisis, because demand will be significant. Nevertheless, Embraer’s market share would remain limited and it would not be able to match the sales figures of an Airbus A220.

Is Embraer building turboprops again?
Embraer might be able to implement its plans to build a turboprop aircraft again. «I believe there is great potential in the turboprop market,» Slattery said last year. The technology of the aircraft available today is now some 30 years old. He also referred to ATR and De Havilland Canada, which currently dominate the market. However, Embraer had actually wanted to implement the project with its partner Boeing. Whether it could also lift that alone, is questionable.

What the failed deal means for Boeing, you can read here.