Embraer Ready to Litigate Over Boeing’s Termination of Joint Agreement

Embraer E195-E2
The Embraer E195-E2 was a popular new entry in the market and would be complimentary to the Chinese COMAC aircraft now in testing phase

The dissolution of the joint agreement that Boeing filed against Embraer is being challenged by Embraer. There are two variables here that deserve discussion; one is the claim of wrongful termination by Embraer and the second is the flirtation of Embraer with the Chinese manufacturing consortium, COMAC. This may have been the news that was the final straw for Boeing. This is only rumor so far but reading of this possibility in several aviation industry journals and blogs gives it some credence.

Embraer in its counter-claim says that Boeing cannot afford to pay the 4.2 billion-dollar purchase price with its myriad financial woes, primarily caused by the B-737 MAX debacle. Both companies are in a weakened position because of the Coronavirus – no orders, no revenue. It was further learned that Embraer will seek damages. Comments came out in a statement to the press on April 25th. The deal would have seen Boeing and Embraer cooperating on the production and sale of jets in the 100-seat market.

In the wake of Boeing’s announcement that it had terminated its Master Transaction Agreement (MTA) with Embraer, the Brazilian aircraft manufacturer released its own statement claiming that the termination was wrongful. Using strong language, Embraer claims that Boeing “manufactured false claims” in order to avoid paying the agreed upon purchase price.

The case for damages comes down to this; the two sides are at odds over whether or not the termination of the MTA requires Boeing to pay any damages to Embraer. While Boeing does not believe that any termination fee applies to this deal, Embraer says otherwise and is claiming that it has been wronged. It does not appear that either side is ready to return to the table and seal the deal.

The other part of the disagreement could be the unverified talk in the industry of Embraer hook-up with the Chinese, and the possibility of Embraer making a similar deal with COMAC. 

The Airways blog written by Ricardo Meier who has closely followed Embraer, points to the  adverse outlook in the aerospace industry which has increased skepticism about the joint venture between Boeing and Embraer. The coronavirus crisis has made the two companies struggle to survive amid cuts in orders and the shutdown of their factories.

Boeing is in a delicate position to invest so much money in the Brazilian company. Despite opening a new market for the Americans, Embraer has lost much of its market value since then, now estimated at one third of when it signed the agreement.

The Airways blog commented; “Among the possible solutions, according to analysts consulted by the Brazilian newspaper O Estado de São Paulo, one would be to postpone the conclusion of the agreement. If the joint venture does not succeed, Embraer will need help from the Brazilian government or could close a similar agreement with China.”

For Embraer, it would be the return to China, where it maintained a joint venture with the AVIC company for 13 years and which ended in 2016.

The Chinese aviation industry has made huge investments to compete with Boeing and Airbus. The most visible face of this effort is the C919 jet, manufactured by the state-owned COMAC, equivalent to the A320 and 737, but which has experienced several problems in its development. To say their progress has been slow is an understatement. 

The Chinese have lacked precisely what Embraer has, the market experience and a high level of technical capacity, which attracted Boeing’s interest. In addition, the E2 jet lines would be complementary to the C919, which has a passenger capacity greater than the E195-E2, Embraer’s largest aircraft. In theory, Brazilian jets would have unrestricted access to the Chinese market while Embraer could provide support for the COMAC jet in other parts of the world.

At the moment, the aerospace industry is experiencing severe financial stress across the globe, and the situation is so discombobulated that anything is possible. One thing certain, joint ventures such as the Boeing-Embraer venture will be the rule rather than the exception. Consolidation is one of the ways to mitigate the heavy debt the industry will be carrying in the foreseeable future.  

Crawling out of this mess according to industry analysts will take the minimum of a year taking us to the summer of 2021.     

Joseph Alba
Mr. Alba was previously Editor of the Airport Press for 12 years covering both local as well as global aviation news. Prior to this, Mr. Alba had Executive positions in Systems Engineering and Marketing with IBM World Trade, and had foreign assignments in the Far East and Latin America earning three Outstanding Achievement Awards. Mr. Alba also directed a new function dealing with Alternate Fuels for Public Service Electric & Gas company in New Jersey and founded a Natural Gas Vehicle Consortium consisting of car company executives and fleet owners, and NGV suppliers in New Jersey. Mr. Alba was a founding partner of ATA, an IT Consulting company which is still active in Central and South America. After leaving the armed forces, Mr. Alba’s initial employee was the U.S. Defense Department as an analyst.

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