{"id":259138,"date":"2018-06-20T16:24:28","date_gmt":"2018-06-20T19:24:28","guid":{"rendered":"http:\/\/revistapesquisa.fapesp.br\/?p=259138"},"modified":"2018-06-29T15:35:57","modified_gmt":"2018-06-29T18:35:57","slug":"a-deal-in-the-air","status":"publish","type":"post","link":"https:\/\/revistapesquisa.fapesp.br\/en\/a-deal-in-the-air\/","title":{"rendered":"A deal in the air"},"content":{"rendered":"

The news caught everyone by surprise. A few days before Christmas 2017, The<\/em> Wall Street Journal<\/em> revealed that Boeing, the world’s largest airline company, was negotiating the purchase of Embraer, the world\u2019s third-largest commercial jet manufacturer and a leader in the regional market. According to the report, the US aviation giant was looking to take total control of the S\u00e3o Paulo\u2013based company, which would mean acquiring all divisions, among them a successful line of commercial aircraft focused on the regional market, an impressive portfolio of executive jets, and a number of defense products, including the A-29 Super Tucano turboprop light attack and advanced training aircraft, and the recently launched KC-390 military transport aircraft.<\/p>\n

The market and the Brazilian government responded immediately, but in opposing directions. Embraer shares on the B3 stock exchange\u2014formerly Bovespa\u2014soared by 25%, reflecting investor approval. The Brazilian government, however, was not in favor of the proposed deal. “Embraer is Brazilian. (…) We will not consider any transfer of control,” said President Michel Temer. When Embraer was privatized in 1994, the government received a ‘golden share’ in the company, giving it veto power over certain business decisions, including changes in its controlling interest. The concern in Bras\u00edlia, mainly at the Ministry of Defense, relates to Embraer’s military projects, considered essential to the country’s defense strategy.<\/p>\n

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Facing government resistance, Boeing and Embraer began confidential discussions on alternative partnership models. The complex negotiations also involve a working group made up of representatives from the Finance and Defense Ministries, the Brazilian Development Bank (BNDES), the Brazilian Air Force (FAB), and other agencies. At the time of writing this report, the most likely result is a partnership in commercial aviation specifically through the creation of a third company\u2014a joint venture\u2014while the executive and military divisions would remain under Embraer’s control.
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More on the possible deal between Boeing and Embraer
\n<\/strong>– Global fight for the skies<\/a>
\n– High-level engineering<\/a><\/div>Both multinationals have avoided commenting on the issue. Through its press office, Embraer announced that “it has maintained understandings [with Boeing], including through the working group in which the Brazilian government participates, in order to assess possibilities for potential business alliances.” Phil Musser, senior vice president of communications at Boeing, meanwhile, released a statement earlier in the year saying that the partnership is “a great fit for both companies” and “a powerful opportunity to align two national aerospace leaders.”<\/p>\n
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Embraer<\/span><\/a> The A-29 Super Tucano military turbopropEmbraer<\/span><\/p><\/div>\n

Five months after the talks were first revealed, there are still uncertainties about the deal, which could be finalized at any time. There are questions, for example, over the role each partner would hold in the shareholder structure of any joint venture. Sources close to the negotiations indicate that Boeing wants a majority interest, with 90% of the shares in the new company and full control over the composition of its board of directors, while Embraer is demanding at least 20% ownership and the right to nominate board members.<\/p>\n

It is also unclear what will happen to the Embraer engineering division, which is responsible for fostering innovation and is one of the company’s greatest assets. “Embraer’s engineering department is fantastic, world-class,” says Richard Aboulafia, an aviation industry analyst and vice president of American aerospace and defense consultancy the Teal Group. The Brazilian government has stressed how important it is that Embraer maintains a technical staff capable of innovating, designing, and building new aircraft, regardless of the final business arrangement (see article High level engineering<\/em><\/a>).<\/p>\n

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Embraer<\/span><\/a> The new E195-E2 jet, manufactured by EmbraerEmbraer<\/span><\/p><\/div>\n

Another question over the share structure of the new company is how to ensure Embraer remains financially and operationally sustainable. Currently, about 60% of the company’s revenue comes from the regional jets division; it is its most profitable sector and the main object of Boeing’s interest. Without the income provided by the sale of commercial aircraft, the Brazilian company could face difficulties in the long term.<\/p>\n

Analysts are also concerned about Embraer’s ability to continue working on military projects. The company\u2019s civil and defense areas have historically worked closely together, as is the case at most aerospace manufacturers around the world. Technological innovations developed during military projects are later applied to commercial jets, and vice versa. These technological innovations are also often adopted by Brazilian companies outside the aerospace industry, positively impacting economic development and long-term growth for the country\u2014and the government wants to ensure that this continues.<\/p>\n

Embraer Defense & Security (EDS), the division responsible for military projects, accounts for about 16% of revenue and controls several other companies operating in critical areas of aerospace technology, such as Atech (air traffic control), Visiona (satellites), and Savis-Bradar (border surveillance systems and radars). The latter has an important role in the Brazilian army’s Integrated Border Monitoring System (SISFRON).<\/p>\n

Analysts are concerned that an agreement with Boeing could harm Brazilian military projects<\/p><\/blockquote>\n

Swedish fighter jets<\/strong>
\nThere is another knot to be untied if Boeing and Embraer successfully agree a deal: the potential impact on Brazil’s purchase of 36 Gripen NG fighter jets. The planes are produced by Swedish company Saab, one of Boeing’s competitors in the military sector. In 2014, Saab signed a US$5.4 billion contract to provide the Brazilian Air Force with 36 of the jets, some of which will be produced in Brazil. Two years ago, Embraer and Saab inaugurated the Gripen Project Development Center in Gavi\u00e3o Peixoto, S\u00e3o Paulo State. Designed as a technological development hub for the Gripen NG in Brazil, the center is separate from other Embraer departments\u2014only registered and authorized technicians are granted access.<\/p>\n

The industrial collaboration involves sharing Swedish technology with a group of companies in the Brazilian aerospace sector, and with Embraer in particular. Experts warn that selling the company could affect its business with Saab. A few weeks after news of the talks between Boeing and Embraer broke, Defense Minister Raul Jungmann said that any deal reached will include safeguards to protect the contract with the Swedish company. “It is not acceptable for a technology developed by one Embraer partner to be given to another [company], or vice versa,” he said at the time. It is worth noting that Boeing and Saab are also working together on the design of a military training jet for the US Air Force.<\/p>\n

Response to airbus and bombardier<\/strong>
\nBoeing’s offer to acquire Embraer came to light just two months after an agreement was announced between European aeronautics company Airbus, the second largest in the world after Boeing, and Canada’s Bombardier. In October 2017, Airbus took control of the Bombardier C Series program, whose CS100 and CS300 jets seat 100\u2013160 people. The deal will expand the product portfolio of the European group, based in Toulouse, France, and adds to its range of lower capacity aircraft\u2014the A319neo, Airbus’s most compact model, carries up to 140 passengers.<\/p>\n

“Boeing’s move to buy Embraer was largely a response to the partnership between Airbus and Bombardier,” says economist and aeronautical expert Marcos Jos\u00e9 Barbieri Ferreira, a professor at the School of Applied Sciences of the University of Campinas (FCA-UNICAMP). “The Seattle-based giant wants to stay ahead of its European competitor by commencing operations in a sector where it has previously been absent,” he explains. The smallest Boeing jet, the 737 MAX, has 138 seats.<\/p>\n

Boeing is eyeing the regional aviation market, with a projected demand of 10,500 aircraft over the next 20 years<\/p><\/blockquote>\n

In addition to contending with its European competitor, Boeing is also eyeing the heated regional aviation market. Embraer estimates a demand for 10,550 commercial aircraft of up to 150 seats over the next 20 years, including turboprop models (see article Global fight for the skies<\/em><\/a>).<\/p>\n

Losses and gains<\/strong>
\n“This would be a great deal for Boeing. In addition to partnering with the regional aviation leader, it would also gain access to Embraer’s aircraft development capabilities. Embraer has conceived an incredible number of new projects in recent years,” says Barbieri Ferreira. The UNICAMP professor’s PhD thesis, which he defended in 2009, was titled “Dynamics of innovation and structural changes: A case study of the world aviation industry and Brazil’s market position.”<\/p>\n

Since it was founded in 1969, the company, based in S\u00e3o Jos\u00e9 dos Campos, has developed 37 different aircraft models and versions, and has produced nine others under license. “No aviation company has developed as many planes as we have in the last 17 years,” says Rodrigo Silva e Souza, vice president of marketing for Embraer Commercial Aviation. Over the course of its history, Embraer has manufactured 8,000 planes. An aircraft made by the Brazilian company takes off from somewhere on the planet every 10 seconds.<\/p>\n

Acquiring such a successful company would be very good business for Boeing, but not necessarily for Brazil, or for Embraer itself. “Ceding control of Embraer would move political and strategic decisions outside Brazil, including choices of new projects and the freedom to sell aircraft, especially military jets, to other countries,” says aeronautical engineer Jorge Eduardo Leal Medeiros, a professor at the Department of Transport Engineering of the University of S\u00e3o Paulo Polytechnic School (Poli-USP). “It would be best to establish a strategic alliance in the technological and commercial areas.”<\/p>\n<\/a>