Boeing not the Wind beneath Embraer’s Wings: Aircraft deal crashes

May 13, 2020

2 min read

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What's going on here?

Boeing has terminated a $4.2bn joint venture deal with Brazilian aircraft maker Embraer to acquire 80% of its commercial jet division.

What does this mean?

The deal was announced in 2018 and would have given Boeing a stronger presence in the regional market for smaller planes. According to Boeing, its decision to pull out was due to Embraer’s failure to satisfy the conditions of the agreement. Embraer, however, denied Boeing’s reason, asserting that Boeing had wrongfully terminated the agreement by making “false claims”. It claimed that Boeing was unwilling to proceed with the transaction because of its own financial issues resulting from the catastrophic impact of the coronavirus crisis and the grounding of Boeing’s 737 MAX aeroplanes in 2019 after two recent fatal plane crashes.

What's the big picture effect?

From a legal perspective, Boeing is able to terminate the deal if it can prove that Embraer has breached the very vital terms that amount to conditions of the contract under common law. If it is unsuccessful in doing so, Embraer may be able to seek remedy for wrongful termination. Embraer has already said that it will go after Boeing for the damages incurred, so whether Embraer had met the conditions of the contract would be the main point of dispute between the parties’ lawyers.

Embraer’s claim is certainly not without basis. The coronavirus outbreak has worsened Boeing’s troublesome financial situation. The long-haul jet demand, which is one of Boeing’s primary focuses, has been ravaged as countries close borders to fight the pandemic. Under difficult economic conditions and earlier problems regarding the grounding of the 737 MAX, Boeing’s decision to terminate the deal did not come as a shock to many. Plenty of major corporate transactions, like the Boeing-Embraer deal, have been scrapped as a result of the coronavirus crisis. Companies, especially airline companies like Boeing, are looking for means of raising cash and cutting costs to increase their liquidity to withstand the lockdown period when they cannot make any revenue.

The threat of litigation seems inevitable for Boeing. Even if Boeing can walk away from the agreement with Embraer without having to pay for any damages, it might still have serious problems. In March, it called for a bailout for the US airline industry. The proposal was supported by President Donald Trump, and it is likely that Boeing will receive financial support from the US government after all. But without such support, who knows how one of the biggest aircraft manufacturers in the world will survive during this tough time.

Report written by Long Dinh

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