It is undeniable that the aircraft manufacturing industry is going through one of the most turbulent periods in its history. Difficult to predict what is going to be the next astonishing revelation, emotions go up and down like in a roller-coaster ride.
The deal announcement between Bombardier and Delta Air Lines, for the purchase of 75 CS100 jets in April 2016, can be considered the starting point of all the relevant events leading to the current situation. Some time afterwards, and trying to counteract the upcoming threat of new aircraft selling competitors within U.S. borders, Boeing complained about the deal price. It claimed that it had been lowered below real market one due to the unfair subsidies Bombardier received from Canadian Government.
A year and a half after the deal announcement Boeing complaints were supported by Trump’s administration and by the U.S. Commerce Department, which finally imposed an outrageous 220% increment in customs duties to Bombardier in order to sell CSeries within U.S. borders.
This ruling put Bombardier in a very tough situation pushing it into Airbus arms in a desperate measure to avoid the bankruptcy of its CSeries programme and the consequent impact in the whole company. The partnership between Airbus and Bombardier announced on the 16th of October last year was truly a backfire for Boeing, whose actions eventually strengthened its main competitor.
The next relevant chapter of this story came from the U.S. International Trade Commission (USITC), a politically balanced independent body which investigates the effects of dumping and subsidised imports on U.S. industry. It ruled unanimously on 26 January to overturn last year U.S. Commerce Department decision. This was rightly foreseen by Delta Air Lines stating that the Commerce Department’s decision was preliminary being the USITC’s determination the ‘real decision.’
“We are confident the USITC will conclude that no U.S. manufacturer is at risk because neither Boeing nor any other U.S. manufacturer makes any 100-110 seat aircraft that competes with the CS100.” – Delta public statement
These setbacks forced Boeing to explore other options such as opening negotiations with Embraer, which finally led to a joint venture recently announced on beginning July this year.
Above mentioned facts are history, but what are the similarities and differences between each partnership apart from their origins? What can we expect will be the next steps of each one in the future?
Type of partnership
Both partnerships have been conceived as joint ventures, neither merges nor acquisitions nor any other formula. It means each participant provides with resources to accomplish a common goal, keeping its identities and the rest of business lines and objectives independent.
Embraer’s airliner business will be the target of the partnership, whereas its defense and business jet operations will keep aside. Same as Bombardier’s one, whose CSeries programme will be the only business unit involved in the partnership.
The strategy behind both partnerships seems to be pretty similar: the big ones Boeing and Airbus will provide with their business support expertise (sales, marketing, procurement, customer services, and so on), whereas Bombardier and Embraer will contribute with their technical expertise in small airliners manufacturing.
A similar business strategy does not mean necessarily similar ownership structure, and that is the case if both partnerships are compared:
CSeries Aircraft Limited Partnership (CSALP) is participated by Airbus in a 50.01% whereas Bombardier and Investissement Québec (IQ) own approximately 31% and 19% respectively. On the other hand, Boeing is planned to own the 80% stake in its partnership with Embraer which will hold the remaining 20%.
Decision making is directly related to the ownership structure, and it is clear that the balance is in favour of the big ones in both partnerships, but in a different way:
CSALP will remain independent and led by seven directors composing the Board: four proposed by Airbus, two by Bombardier, and one by IQ, being Airbus entitled as well to name the Chairman. However, Boeing-Embraer partnership is going to be led by a Brazilian management team, President and Chief Executive Officer, having Boeing full management and operational control of it.
The financial aspect could be defined as the more distant feature between both partnerships. The differences are considerable, which might even set different long-term strategies depending on the facing context:
CSALP partnership was agreed at no cost to Airbus which paid a token fee of one Canadian dollar for the majority stake. Nevertheless, Boeing will pay USD$3.8 billion of the total Embraer’s commercial aircraft operations valued at USD$4.5 billion. Besides, Embraer executives assure that much of its debt will be transferred to the new partnership and Boeing will contribute with a capital injection.
In contrast, CSALP will not assume any financial debt and there will be no cash contribution by any of the partners except Bombardier, continuing with its current funding plan and facing if required the cash shortfalls up to a certain amount.
Although more subjective, this is one of the issues that can be a thruster or an anchor for the future of the partnerships. As in any big change, there is always resistance or even aversion to the change coming from some stakeholders involved.
CSeries partnership seems to have been received more willingly due to the context involving Boeing complaints and risk of unbearable custom duties. And although no job losses were assured since the beginning, some uncertainty still remains in the atmosphere and there is a lot of work to be done. This is a long-distance race and it is better not to be blinded by enthusiasm.
Slightly different were the feelings awaken, at least for the time being, by the Boeing-Embraer partnership: Boeing first intentions of acquiring Embraer as a whole were dismissed categorically by Brazilian government due to the strategic value of the Embraer’s defence arm. This movement, perceived as an aggression for some stakeholders, led them to support the veto of any related operation. Moreover, the feeling of price lowering of Embraer’s commercial aircraft unit compared to previous reports gives Embraer shareholders strong odds to demand a higher price for the stake.
Despite everything mentioned, recent signals suggest the Brazilian government is satisfied with the deal conditions, as long as the Brazilian jobs and the development of new technologies by Embraer are guaranteed.
Present and future steps
Some actions have been already performed by CSALP as it has the longest lifetime. The most remarkable are:
- The decision of opening an additional CSeries FAL (Final Assembly Line) at Mobile Airbus site (Alabama, U.S.) to supply U.S. customers, keeping the primary FAL in Mirabel (Quebec, Canada).
- The rebranding of the CSeries aircraft to A220-100 and A220-300.
The last one seems suitable to be followed by the Boeing-Embraer partnership according to its ownership structure similarities with CSALP, whereas a new FAL opening seems quite improbable in an early stage.
It is true that Boeing-Embraer passenger jet partnership has not been formally established yet, but some people familiar with the matter bet for an additional partnership in sales and services for the KC-390 military cargo jet. Despite being a separate partnership, it will strengthen the relationship.
One of the main expectations of both partnerships is a quicker and better expansion worldwide, being their products positioned to target the estimated 6,000 aircraft needed in the market segment at issue over the next 20 years. Additionally, and thanks to the partnerships agreed, the situation of duopoly in aircraft manufacturing industry seems to be maintained at least in the following years making difficult the entrance of new prospective competitors.
It seems nearly impossible to foresee what will be the amazing announcements unveiled in the future concerning this race between aircraft manufacturers. What seems more certain is that upcoming surprises are guaranteed, so keep on watching, hearing and reading news and publications like this one if you want to be up to date.
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