FlyRadius Tower Report #2
It has been reported that The Boeing Company (NYSE:BA) is in talks with Embraer, SA (ADR on NYSE:ERJ), the manufacturer of regional and business aircraft, to merge. Boeing has had a long relationship with Embraer and has teamed up with them in the past (See this backgrounder on Boeing's site - PDF). With that in mind, it seemed that Boeing had been preparing the ground work for any potential merger between the two companies. Today, the ground work has now led to a potential merger between the two companies.
Why A Merger
The two aerospace companies may want to merge because of several industry factors and the global economy. One reason, that many are talking about, is the rumor that Boeing wants to compete directly with Bombardier’s new clean sheet airplane, the C Series (CS100 and CS300). Bombardier’s new aircraft is technologically advanced and is well situated in the marketplace. The main knock against it is the reliability problems of its new Pratt & Whitney PW1500G geared turbofan engine and if the engine will be reliable. Performance wise, the aircraft can give carriers more flexibility in the way they operate, while helping them to lower costs. The problem with the idea that Boeing wants to compete with the C Series by merging with Embraer, is that Embraer does not have an aircraft that will be able to match the C Series directly.
Boeing and Airbus: No Regional Operations
Boeing and its other major aircraft competitor, Airbus, have been focused on standard commercial aircraft like the Boeing 737 and the Airbus A320 series and long haul aircraft like the Boeing 787/777 and Airbus A350. By focusing on those types of aircraft they have not looked at potential opportunities in the regional market. Airbus was the first to make its move into the market by entering into a partnership with Bombardier to sell the C Series jets. The C Series, however, is not a regional jet as it can fly over 3,000 nautical miles. The flexibility of having a 108 seat two-class CS100 aircraft fly 3,000 nautical miles is very interesting.
Bridge the Gap
With the C Series, Bombardier is trying to bridge the gap between regional aircraft and regular commercial narrowbody aircraft. Embraer was the first to do this with the E-Jets (E170/175/190/195). The E-Jets jets were larger than the regional jets that existed at the time it was launched (except for the Boeing 717-200). The comfort factor of a larger regional jet was a big factor that helped Embraer succeed with the E-Jet program.
Boeing did have a regional aircraft with the Boeing 717-200, however, the company ended the program in 2006. The Boeing 717-200 is a derivative of the historic Douglas DC-9 program and is a solid and reliable aircraft that is still popular to this day. The Boeing 717-200 was actually the future of the regional aircraft market as it was a mainline jet, with a relatively large cabin, made for regional operations. Now manufacturers are building larger regional aircraft to help maintain comfort standards that many passengers expect.
Above Spanair Boeing 717-200 photo by Javier Bravo Muñoz on Wikimedia Commons. The photo is released under the GNU Free Documentation License, Version 1.2. This photo can also be found on our Boeing 717-200 Specifications and Dimensions page.
Aircraft manufacturers may be seeing the end of an aircraft purchase cycle as a result of factors in the global economy. Embraer has been expressing concerns about their business and the transition to the new E2 jet. Bombardier has also been under pressure with its aerospace operations. Regional aircraft sales have not matched the success that Boeing and Airbus have experienced with their commercial aircraft programs.
The current low interest rate environment (global central bank polices) has also encouraged the development of mergers between companies. Merger and acquisitions (M&A) have become popular during the current low interest rate environment. Just look at the recently discussed mergers between United Technologies/Rockwell Collins, AT&T/Time Warner, Inc, Twenty-First Century Fox Inc/The Walt Disney Company, Lennar/CalAtlantic, Campbell Soup Company/Snyder's-Lance Inc., and Hershey/Amplify Snack Brands Inc. Low cost financing and the effects of low interest rates on the stock market have made companies look for ways to easily grow earnings per share. Mergers can be one route to achieve “growth”.
Merger is Likely
Now that it is known that Boeing is in discussions with Embraer to merge, it is likely that the two companies will merge. Approvals from Brazil, which owns special shares that allow it to control the company, will be required, however.
Boeing and Embraer are both looking for ways to grow and a merger could be the way to accomplish this quickly. Will Boeing team up with Embraer to build a new aircraft or will they work with the E2 Jets that the company is preparing to roll out? What this merger will hold for the future of the commercial aviation industry will be interesting.
More analysis on this topic will covered in future additions of FlyRadius Tower.