Collapse of the Boeing-Embraer deal - A Warning of What's to Come?
The recent coronavirus pandemic has sent the global economy into a downward spiral. Supply chains on a global scale have been disrupted, US oil prices have turned negative for the first time in history, reaching an all-time low of -$40USD on the barrel, and businesses have shut down causing unprecedented levels of unemployment. Recently, restructuring, insolvency, and bankruptcy lawyers have been working around the clock attempting to revive whatever hope the collapsing economy has.
Meanwhile, litigation lawyers have also been busy at work. As people are losing their jobs, and confidence in the economy has plummeted, many businesses, companies, and airlines are facing cash flow issues. This has led to the recent Boeing-Embraer deal collapsing, leading to a civil case being brought by Embraer.
After Embraer’s rival in the regional jet business, Bombardier, gave Airbus a 50.01% in the Company’s C Series program after coming close to bankruptcy, Boeing and Embraer, determined to consolidate their dominance in the market formed an alliance.
As Embraer’s rival, Bombardier, gave Airbus a 50.01% share in the Company’s C Series Program, Boeing and Embraer quickly struck an alliance, determined to consolidate their position in the market. The deal, initiated in July of 2018, involved Boeing buying 80% of Embraer’s commercial aircraft business for $4.2 billion USD. With prospects weakening for the smaller plane maker amid the increasing dominance of heavyweight Boeing and Airbus, Embraer needed the deal more than ever. The deal would also give Boeing access to a wider line-up of airplanes and additional engineering resources, giving it the competitive edge it needs to consolidate its dominance against Airbus.
While Boeing claims that Embraer had failed to satisfy conditions of the contract, Embraer claims that Boeing had engaged in ‘a systematic pattern of delay’ and was unwilling to complete the transaction due to its stressed financial condition. Embraer referred to the two fatal crashes of Boeing’s 737 Max aircraft, its recall causing the aircraft maker at least $18.7 billion USD. In support of this claim, Moody’s argues that Boeing will need at least $30 billion in external funding in 2020 to stay afloat. Boeing has funded nearly half of that need with a $13.8 billion term-loan draw in February and is currently considering applying for aid from the federal government.
The deal between Airbus and Embraer has called for a $100 million break up fee, however, Boeing asserts that it is under no obligation to pay the damages. As Embraer promises to ‘pursue all remedies’, they are poised to sue Boeing for significantly more, after long periods of uncertainty has hampered sales of its E2 jets. As Embraer continues to fight for its survival, they may turn to rivals of Boeing, such as Airbus, to strike deals, potentially weakening Boeing’s position in the aerospace market.
The collapse of the Boeing-Embraer deal is just an example of the potential legal problems companies will continue to face while uncertainty remains and consumer confidence is lacking. With limited cash flow to keep businesses going, more deals may continue to fall through and redundancies will have to be made, keeping lawyers busy as they find loopholes in exclusionary and non-compete clauses to defend their client’s businesses.
by Marcus Cheung