Home Business Embraer deal could put Boeing back in the fighter business

Embraer deal could put Boeing back in the fighter business

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Last month, a Wall Street Journal report that Boeing (NYSE:BA) had approached Embraer (NYSE:ERJ) to discuss a possible merger drove Embraer’s stock up 22% in a single day. There’s more to fighters than just jet engines. Turboprops could power Boeing’s defense profits going forward.

Talks are ongoing among the parties, but the Brazilian government owns a “golden share” in Embraer, and with it, can veto any deal. Thus, no merger can happen until Brazil has given its consent — and by all accounts, while the Brazilians are open to the idea of Boeing making an investment in Embraer, they’re not at all keen to allow Boeing to buy Embraer outright.

Regardless, Embraer stock is holding on to almost all of the gains it enjoyed in response to the initial news. That’s not entirely surprising. This deal actually makes a lot of sense for Boeing.

As my fellow Fool and civilian aerospace enthusiast Adam Levine-Weinberg explained last month, Boeing appears to be looking at Brazil’s Embraer a lot like the way Airbus (NASDAQOTH:EADSY) is looking at Canada’s Bombardier — as a way to co-opt a rising rival before it becomes a threat, and also stake out a position in the market for very small commercial jetliners.

In October, Airbus and Bombardier inked a deal giving Airbus a bare majority (50.01%) stake in Bombardier’s CSeries program. Bombardier will continue to build the CSeries jets, but Airbus will take over the job of marketing and selling the planes, and also provide customer support. In so doing, Airbus will add to its product line a class of aircraft whose capacity (ranging from 108 to 160 passengers) ends right about where Airbus’ own A320 Family of aircraft begins.

The situation with Boeing and Embraer would be similar. Embraer’s E-series jets max out at about 130 seats, which is 10 fewer than the smallest Boeing jet (the 737 MAX 7) can carry. As a side benefit, Boeing would gobble up Embraer before the company gains expertise in building anything big enough to directly compete with Boeing’s 737s.

But there’s a further benefit to Boeing in buying Embraer that’s over and above what Airbus will get from tying up with Bombardier: warplanes.

Of course, there’s still the nagging detail of getting the Brazilian government to agree to the sale. But if it goes through, a tie-up with Embraer could well work to the benefit of both companies — and the U.S. military as well.