European probe to delay Boeing’s Embraer deal

October 07, 2019
Image: Embraer.

A decision by the European Commission to launch an in-depth probe into joint ventures between Brazil’s Embraer and US giant Boeing is expected to delay the closure of the transaction until early 2020.

The Europeans announced the review late last week, citing worries about reduced competition between commercial aircraft manufacturers.

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They said they would probe whether the Boeing-Embraer commercial aircraft joint venture could result in higher prices, less choice and reduced product development.

A $US4.2 billion deal allowing Boeing to take a majority stake in Embraer has already received Brazilian government approval and would see the US firm take 80 percent of the company’s commercial aircraft and services operation.

It followed a decision by Airbus to take a controlling stake in Bombardier’s C Series Aircraft Limited partnership and add the regional jet family to its aircraft portfolio as the A220.

The commission said it would look particularly at how the merger affected the market for smaller single-aisle aircraft of 100-150 seats where Boeing, Airbus and Embraer  “seem to engage in head-to-head competition as regards price and other parameters in important aircraft purchasing campaigns globally”.

Also under scrutiny would be the wider single-aisle market of up to 100 to 225 seats into which Embraer has been expanding in recent years.

The commission is concerned that potential entrants into aircraft manufacturing from China, Japan and Russia faced high barriers to entry and expansion and would not be able to match the competition provided by Embraer for at least another five to 10  years.

“Markets for commercial aircraft need to function well to deliver innovative and efficient products to customers at a fair price,” said Commissioner Margrethe Vestager, who is in charge competition policy.

“Therefore, with our in-depth investigation, we want to make sure that mergers in commercial aircraft do not significantly reduce effective competition on prices and product development.”

The Europeans have until February 20 to make a decision and will also look at a joint-venture controlled by Boeing and Embraer to market the Embraer KC-390 military aircraft.

Boeing and Embraer issued a joint statement saying they continue to work closely together to establish their commercial aircraft partnership.

They said the partnership, to be called Boeing Brasil – Commercial, would position both companies to deliver greater value to airline customers and the flying public.

It would also accelerate growth in global aerospace markets, they said.

The transaction had been due o be completed by the end of 2019 but the companies said it would now be delayed.

“The transaction remains subject to regulatory approval; the two companies are actively engaged with authorities in relevant jurisdictions and have obtained a number of regulatory approvals,” the joint statement said.

“Following a detailed assessment by the U.S. Federal Trade Commission, the parties’ strategic partnership has received clearance to close in the United States.

“The European Commission recently indicated it will open a Phase II assessment in its review of the transaction, and Boeing and Embraer look forward to assisting with that review.

“Based on this development, however, the companies now expect the transaction to close in early 2020.”

The European investigation adds to turbulence for both Boeing, which is still struggling with 737 MAX issues, and the US-European trade relationship.

The World Trade Organization announced last week that it would allow US President Donald Trump to announce retaliatory taxes on European imports worth as much as $US7.5 billion.

The WTO said the US could impose the tariffs to counteract years of European loans and illegal subsidies to Airbus relating to the entire family of Airbus aircraft.

Still to come is a decision on a counter case against Boeing that will decide what penalties the EU can levy against the US and alleged illegal subsidies to Boeing

Airbus issued a statement warning that any US-imposed taxes on aircraft or aircraft parts would create insecurity and disruption not just the aerospace industry but for the wider global economy.

The European manufacturer called for talks to reduce trade tensions between the US and the EU.

“Airbus will continue working with its US partners, customers and suppliers, to address all potential consequences of such tariffs that would be a barrier against free trade and would have a negative impact on not only the US airlines but also US jobs, suppliers, and air travelers,’’ Airbus chief executive Guillaume Faury said.

“Airbus is therefore hopeful that the US and the EU will agree to find a negotiated solution before creating serious damage to the aviation industry as well as to trade relations and the global economy.”