The duopoly in the commercial-airplane market just got reinforced once again, with The Boeing Company (BA) and Airbus SE (EADSY) taking over Embraer SA (ERJ) and Bombardier Inc.’s (BDRAF) respective regional-jet operations roughly at the same time. The sky has after all become too limited for the two makers of smaller planes. Occupying only limited spaces, Embraer and Bombardier have at last bowed out of the commercial-aviation market. Boeing and Airbus now are closer to achieving full dominance of all things civilian aircraft, leaving out only business and private jets–for now.
Boeing: Diving Right in
Boeing is officially in the regional-jet-making business after acquiring 80% of Embraer’s regional-jet operations. Selling a super majority control for $3.8 billion, Embraer is letting Boeing dive right into its ERJ family series, popular with regional airlines in the U.S. Having agreed to a significant upfront investment, Boeing obviously believes it can get its money’s worth through greater integration of Embraer’s E-Jets with its own design, manufacturing and supply systems.
Retaining only a 20% stake, Embraer’s role is reduced to helping manage the joint venture under Boeing’s control, a situation whereby the Brazilian company cannot lose, no matter what happens to the program. But it’s a different outlook for Boeing as it bets on the success of its regional-jet foray.
Unlike Airbus with the Bombardier deal in which the European plan maker contributes only its marketing and other management prowess in exchange for a 50.1% stake in its regional-jet venture with the Canadian company, Boeing is making an initial investment in the billions for the co-ownership of the regional-jet assets with its Brazilian partner. How Boeing can turn its investment into satisfactory sales for its new regional-jet business is a quick measurement of the investment’s effectiveness.
Embraer estimated commercial-aviation sales of its E-Jets at $2.45 billion on the high end for 2018. Based on its 80% stake, Boeing’s share of the sales would be $1.96 billion. This equals to a turnover ratio of about 50% for the $3.8 billion investment. Had the $3.8 billion remained within Boeing’s own asset pool, it would be expected to produce an asset-turnover ratio of above 80%, the measure’s company-wide figure for 2017. Since the deal’s valuation and investment outlay is already a given, to match up to Boeing’s existing performance, the investment has to generate a much higher growth for the E-Jets under Boeing.
Airbus: Hovering Over Still
Airbus, on the other hand, is taking a more hands-off approach when it comes to its desire of owning a regional-jet product. But how effective is the Airbus way, comparing to the path Boeing is taking? Clearly, Airbus has a financial advantage over Boeing at the start, having spent a nominal $1 for a majority stake in the joint C-Series operations.
But will the less involvement early on in getting the right regional jets to the market hurt Airbus in the long run? Meanwhile, Boeing may accumulate a product advantage by really taking over the E-Jets right from the start. In essence, Boeing is tightly hooking itself onto the regional-jet business, whereas Airbus is kind of hovering over it. However, per their deal terms, Airbus must decide later about whether to eventually buy out the C-Series program or quit itself after all.
A buyout would make Airbus’ financial commitment only a delayed one. Still, given the valuation of about $2 billion for the C-Series program, less than half of the $4.75 billion worth for Embraer’s E-Jet program, Airbus’ investment outlay would be much less than Boeing’s. In the most likely event of the C-Series doubling its value as a joint venture–by Bombardier own admission–Airbus is still looking at a much lower price tag to own the C-Series outright.
Investor Note
The question remains regarding the two regional-jet programs: how Airbus’s financial savings may stack up to anything positive that may come out of Boeing’s more direct involvement? Imagining a future head-to-head competition between the two programs, we’re projecting more confidence towards the Boeing-Embraer program, simply because it has ridden of the kind of uncertainty that the Airbus-Bombardier program still faces. What a challenge for investors, when having to speculate on whether Airbus may still quit its regional-jet program at the very end.
JW Investments Associates: Research & Management 