Embraer Files Arbitration Proceedings Against Boeing

On April 25th, multinational aerospace giant Boeing sent shockwaves through the aviation industry by announcing the unexpected termination of its agreement with leading Brazilian aircraft manufacturer, Embraer, claiming the latter “did not satisfy the necessary conditions” for the deal to go ahead. Embraer swiftly responded by accusing Boeing of intentionally sabotaging the agreement and has now filed arbitration proceedings in what is set to be one of the largest dispute resolution cases of the decade.

Boeing’s grounds for terminating the Master Transaction Agreement (MTA), in which the Seattle-based company would acquire 80% of Embraer’s commercial division for $4.2 billion, are that unspecified contractual pre-conditions were not met by Embraer. Embraer emphatically challenged these claims via an official statement, indicating it will “pursue all remedies against Boeing for the damages incurred by Embraer as a result of Boeing's wrongful termination and violation of the MTA.”

Embraer, which spent R$485.5 million throughout 2019 separating its commercial and defense branches to pave the way for the deal, pulled no punches stating: “We believe Boeing has engaged in a systematic pattern of delay and repeated violations of the MTA, because of its unwillingness to complete the transaction in light of its own financial condition, [issues with the] 737 MAX and other business and reputational problems.”

Soon after the news broke, in a video shared with all Embraer employees, Embraer’s CEO, Franscisco Gomes Neto, stated: “We were surprised and very disappointed with Boeing’s decision not to go through with the strategic partnership which we had been negotiating since 2017.” Mr. Gomes Neto went on to confirm that the Brazilian company would seek full reparation for the expenses incurred in lead-up to the deal.

According to the terms of the agreement signed by both parties in January 2019, Boeing would be required to pay Embraer a termination fee of $100 million if it pulled out of the deal with all the closing conditions being met.  However, on the day of the termination, Boeing spokeswoman, Allison Bone, stated that due to a disagreement on the conditions for the deal to move forward, “we don’t believe a termination fee applies in these circumstances.”

According to Brazil’s Special Secretary of Productivity, Carlos Da Costa, Boeing’s termination of the deal can be explained by Embraer’s steep drop in market value. In December 2018, when the $4.2 billion transaction was first announced, Embraer’s market value stood at $3.6 billion, whereas today the Brazilian company is worth just $1.1 billion. He stated: “We performed a preliminary evaluation [of the deal], as we do not have access to the terms which Boeing alleges that Embraer did not meet. Boeing’s annulment of the agreement was already priced in the market.”

Amidst this war of words, industry analysts have sided with Embraer and believe the ongoing coronavirus pandemic and the subsequent sharp fall in demand for new airplanes is the real reason behind Boeing’s decision to scrap the deal. Moreover, with the American aviation titan negotiating a $4 billion loan from the US federal government to prop up its finances, going ahead with such an expensive deal may well have become politically unviable.

On April 27th, Embraer confirmed it had launched arbitration proceedings against Boeing, although it has yet to confirm further details, such as the seat of the arbitral court or whether the arbitration will be accompanied by court litigation in either Brazil or the United States.

Finally, on May 4th, the Brazilian Development Bank (BNDES) announced it would be investing at least $1 billion in Embraer to ensure the company has enough liquidity to survive the coming months of the coronavirus pandemic. It thus seems fitting that the last lines of Embraer’s official statement reads: “Our history of over 50 years is lined with many victories but also some difficult moments. All of them were overcome. And that’s exactly what we are going to do again. Overcome these challenges with strength and determination.”

By: François Le Grand