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Boeing Changes Its Course -- WSJ

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12/23/2017 | 08:48am CEST

Pursuit of Embraer shows newly placed emphasis on market for smaller jetliners

By Doug Cameron 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 23, 2017).

Boeing Co.'s pursuit of Embraer SA fits one of the goals Chief Executive Dennis Muilenburg has set for the aerospace giant: creating a level playing field in the commercial jetliner business.

Boeing on Thursday confirmed a Wall Street Journal report that it was in talks with Embraer, though factors such as potential objections from the Brazilian government could thwart a tie up. Some analysts said that the chances of a full takeover were slim and that an expansion of the companies' existing joint venture was a more likely outcome.

Buying the Brazilian maker of small jetliners, business jets and military aircraft would give Boeing parity with rival Airbus SE, which plans to expand in the market for jets with 100 to 150 seats through a joint venture with Canada's Bombardier Inc. It also would prevent fast-growing Chinese aerospace companies from scooping up the Brazilian company and give Boeing more leverage in its talks with suppliers.

Mr. Muilenburg hadn't previously put small jetliners high on his agenda. In the two and half years since he took charge, he has focused on cutting costs, reducing Boeing's reliance on some suppliers and cutting pension liabilities, as well as capitalizing on huge demand for its jetliners.

The company has an order backlog of 6,000 jets valued at $420 billion. Sales are generating substantial cash flow, much of which the company has returned to shareholders through dividends and stock buybacks. Mr. Muilenburg has pledged to more than double the size of Boeing's aircraft services business -- a more profitable line than its aircraft sales -- and the company had been expected to pursue a takeover in this area.

A takeover of Embraer would give Boeing jetliners that are smaller than most of its product range, with between 70 and 140 seats, as well as business jets, a market that has been flat since the last financial crisis. Analysts estimated buying Embraer would cost Boeing up to $9 billion, including debt, and while the company had around that amount of cash at the end of the third quarter, a deal would reduce its capacity for buybacks.

Mr. Muilenburg's interest in smaller planes has been kindled by new executives that have joined the company, according to a person familiar with the company's strategy. Notable among those is Kevin McAllister, a former General Electric Co. executive who joined Boeing last year to lead its commercial-aircraft business, the person said.

Another attraction is Embraer's well-regarded engineering workforce. Boeing, which has been trimming its U.S. staff to cut costs, is losing a lot of its engineers to retirement and the company faces a shortage of entry-level engineers. Buying Embraer and expanding other overseas ventures -- including a Boeing research center in Russia -- could help alleviate that problem, analysts said. +

A third motivation cited by industry experts is to prevent China's fast-growing aerospace companies from tying up with Embraer. China is developing regional and single-aisle passenger jets, as well as larger aircraft and more advanced military capabilities.

The Brazilian government has invested heavily to develop a domestic aerospace industry and retains a so-called golden share in the company, giving it a veto over any potential sale or joint venture. Analysts said Boeing had a better chance than a Chinese rival of persuading the Brazilian authorities to sell Embraer, though securing government backing will still be a challenge.

"I don't think any one of these nations that have indigenous aerospace capabilities wants to relinquish these to another nation," said Carter Copeland at Melius Research LLC.

If the deal and the planned Airbus-Bombardier venture proceeds, aerospace suppliers could be the biggest losers.

Airbus and Boeing are already pressuring suppliers to boost production and cut costs. That pressure has unleashed a wave of consolidation among suppliers, including plans by United Technologies Corp -- maker of Pratt & Whitney engines -- to buy Rockwell Collins Inc., a specialist in aircraft electronics and interiors.

Airbus and Boeing have both expressed concern about their suppliers bulking up through deal-making. The plane makers have said acquisitions could distract suppliers from handling the big production increases the aerospace companies are planning, though analysts said the companies don't want to lose their negotiating leverage. Boeing has said it opposes the planned United Technologies-Rockwell Collins deal, which it has said isn't in the best interest of Boeing customers. United Technologies has said the deal would spur innovation and benefit customers.

"The shoe may be on the other foot as major plane makers use M&A and their own, enormous buying power to drive down supplier costs on newly acquired aircraft programs," said David Wireman, global co-head of aerospace and defense consulting at AlixPartners LLP.

Boeing's pursuit of Embraer may also explain its criticism of Bombardier, which competes heavily with the Brazilian company, said aerospace consultant Richard Aboulafia at the Teal Group.

Boeing has accused Bombardier of using illegal state subsidies that have allowed it to sell its planes at below their production cost. The allegations, which have led U.S. trade officials to propose big tariffs on some Bombardier planes, puzzled many analysts as the Canadian company largely operates in different markets.

Boeing has said the pricing and sales of its jets are being damaged by Bombardier's tactics, a charge the Canadian company denies. But the tariff allegations criticism may have been meant to protect Embraer, said Mr. Aboulafia at the Teal Group. "It's about the only thing that would make the trade case against Canada look sensible," he said.

Boeing and Embraer declined to comment on the matter.

Write to Doug Cameron at doug.cameron@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
AIRBUS SE -0.10% 101.62 Real-time Quote.17.84%
BOEING COMPANY (THE) 2.61% 368.25 Delayed Quote.22.11%
BOMBARDIER, INC. 0.75% 4.02 Delayed Quote.32.34%
EMBRAER 0.00% 18.89 End-of-day quote.-7.26%
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Financials ($)
Sales 2018 98 579 M
EBIT 2018 11 412 M
Net income 2018 9 792 M
Debt 2018 3 715 M
Yield 2018 1,83%
P/E ratio 2018 22,14
P/E ratio 2019 19,04
EV / Sales 2018 2,14x
EV / Sales 2019 2,00x
Capitalization 207 B
Duration : Period :
Boeing Company (The) Technical Analysis Chart | MarketScreener
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Technical analysis trends BOEING COMPANY (THE)
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 26
Average target price 413 $
Spread / Average Target 12%
EPS Revisions
Dennis A. Muilenburg Chairman, President & Chief Executive Officer
Jenette E. Ramos Senior Vice President-Supply Chain & Operations
Theodore Colbert Chief Information Officer & SVP-Data Analytics
Gregory L. Hyslop CTO, Senior VP-Engineering, Test & Technology
Kenneth M. Duberstein Director
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1st jan.Capitalization (M$)
BOEING COMPANY (THE)22.11%206 886
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TEXTRON14.99%16 164