By Jeffrey May, J.D.
Concerns raised that the proposed transaction removes Embraer as the third largest global competitor in the highly concentrated commercial aircraft industry dominated by U.S.-based Boeing and Europe's Airbus.
The European Commission (EC) announced today that it has opened an in-depth investigation to assess the proposed creation of two joint ventures by aircraft makers Boeing and Embraer. According to the statement, the EC is concerned that the transaction may reduce competition as regards commercial aircraft.
The EC announcement comes just one day after U.S.-based Boeing and Brazil-based Embraer issued a statement, confirming that they were continuing to work closely together to establish their strategic partnership. At that time, the companies noted that Brussels had indicated that it would be conducting an in-depth or Phase II investigation. Boeing also pointed out that the FTC cleared the deal following a detailed assessment. The companies expect the transaction to close in early 2020, as the EC has until February 20, 2020 to make a decision.
"Markets for commercial aircraft need to function well to deliver innovative and efficient products to customers at a fair price," said EC Competition Commissioner Margrethe Vestager in today’s EC statement. "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 EC explained that the planned transaction consists in the creation of: (1) a joint venture solely controlled by Boeing that would take over Embraer’s global commercial aircraft business (product development, production, marketing, services); and (2) a joint venture controlled by the two companies that would be in charge of the marketing of the Embraer KC-390 military aircraft. The parties have announced that Embraer will own a 51 percent stake in the military aircraft joint venture and Boeing will own the remaining 49 percent.
The EC has identified two particular issues: (1) competition between Boeing and Embraer in the segment for small single-aisle commercial aircraft (100-150 seats); and (2) competition in the overall single-aisle market (100-225 seats). According to the EC, despite Embraer’s comparatively small market share, it seems to exert some price constraint on the market leaders Boeing and Airbus even beyond the boundaries of the lower 100-150 seats segment. Thus, the transaction may therefore eliminate a small but important competitive force in the concentrated overall single-aisle market, it was noted.
The use of single-aisle aircraft by airlines continues to grow, even for long-haul flights. In June, Airbus announced at the Paris Airshow the launch of its A321XLR, the longest range single-aisle airliner. That jet is set to start delivery in 2023.
The EC announcement may bring to mind disagreements between Europe and the United States over another major combination of aircraft makers in the 1990s. At that time, the FTC and the EC reached differing conclusions on the competitive impact of the combination of Boeing and McDonnell-Douglas. Some had questioned whether the EC’s position was based on a desire to protect Airbus. Ultimately, the EC approved that deal but with significant conditions.
Companies: Boeing Company; Embraer S.A.
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