After Boeing and Embraer announced the end of their joint venture plans to cooperate on commercial aircraft yesterday, it was clear that Embraer felt it was wronged. Although indicating that it would seek damages, the Brazilian aircraft manufacturer was keen to partner with the American giant to sell its E2 jets as the A220 gains in popularity.
The end of the deal
Embraer claims that Boeing wrongfully terminated the joint venture agreement to get out of its financial obligations with the deal. These obligations have their origins from before the MAX crisis and current global downturn. However, Boeing says that Embraer did not meet some of the conditions leading to termination. Neither party offered more details, but Embraer is claiming for damages– most likely in the form of monetary compensation.
The E2 is not selling well
At the end of 2019, an Embraer report showed that the E2 family had not sold well. The larger E195-E2 had 165 firm orders with 47 options and seven deliveries. Meanwhile, the E190-E2 had 27 firm orders with 61 options and 11 deliveries. This left Embraer with a backlog of 192 E2 regional aircraft at the start of 2020 compared to the 185 order backlog of E175s and E190s. However, there were some orders not logged in that report– such as KLM Cityhopper’s E2 jet orders. This would increase the backlog slightly.
Meanwhile, per the latest Airbus report, there were 94 A220-100s and 548 A220-300s on order. Both the E2 and A220 compete in the 100-130-seat market, which presents a significant problem for Embraer. There are over four times as many orders for A220s than E2s.
This is one reason why Embraer was looking forward to cooperating with Boeing. Boeing has more relations with existing customers and could lean on them to order E2 jets and take a slice of the profit. This would benefit Embraer greatly.
If sales do not improve, we think a major overhaul of Embraer’s management team could be in the books to give the manufacturer some new visions and structures to help promote the lagging E2 sales.
Embraer could still go ahead with the design. The manufacturer does have a history with turboprops with both the EMB 110 and EMB 120 Brasilia. However, both of those jets were designed, built, and sold in the 20th-century. A revamped version of those planes likely wouldn’t sell well. Instead, Embraer would have to develop a brand new turboprop. Of course, this is easier said than done and would require a huge investment.
Nevertheless, a new endeavor like this could be the way to go if the company wants to keep itself known in the passenger aircraft market. Embraer’s specialty is regional jets. Therefore, a new turboprop would add to its portfolio and support the company’s place in regional jet manufacturing.
A shift to defense and private jets
Two other big arms for Embraer are defense aircraft and private business jets. If the E2 continues with flat sales and a new turboprop design proves unfeasible, then Embraer’s team will likely shift its focus to its defense and private jet divisions and seek to maintain profits.
Defense contracts can be lucrative for aircraft manufacturers. A major customer for Embraer is the Brazilian Air Force. Working directly with the Brazilian government, Embraer could move forth with new defense aircraft designs with guaranteed orders from the government.
Embraer’s E2 jets are not selling well, and it does not appear that sales will improve any time soon. Moving forward, Embraer has several paths it can take. But, for now, the manufacturer must secure cash flow and design a product that will see guaranteed sales and long-lasting appeal.
What do you think Embraer should do next? Let us know in the comments!
Saudi Arabia and Russia have reached a preliminary agreement to extend the current level of the OPEC+ production cuts by one month, provided that the laggards in compliance ensure over-compliance going forward to compensate for flouting their quotas so far, OPEC sources told Reuters on Wednesday.
“Any agreement on extending the cuts is conditional on countries who have not fully complied in May deepening their cuts in upcoming months to offset their overproduction,” an OPEC source told Reuters.
According to the original agreement reached in April, OPEC+ was to cut 9.7 million bpd in combined production for two months—May and June—and then ease these to 7.7 million bpd, to stay in effect until the end of the year. Then, from January 2021, the production cuts would be further eased to 5.8 million bpd, to remain in effect until end-April 2022.
Despite weak compliance from OPEC in May, as per a Reuters survey, the market expects that the OPEC+ coalition is motivated enough to extend the 9.7-million-bpd cuts through July or August.
However, an earlier meeting is being held up by the fact that the leaders of the pact, Saudi Arabia and Russia, will be seeking assurances from all non-compliant members that they will over-comply going forward to compensate for the loose compliance in May, an OPEC delegate told Argus today. According to the delegate, there will be “no free ride” for non-compliant members in the OPEC+ deal. These producers likely include Iraq and Nigeria from OPEC and Kazakhstan from non-OPEC.
OPEC’s second-largest producer and the biggest laggard in the output cuts, Iraq, said on Tuesday that it would further reduce production and that it remains committed to the OPEC+ pact.
Oil prices retreated following the reports of a one-month extension, after earlier on Wednesday prices had hit nearly three-month highs, with Brent Crude breaking above $40 a barrel.
It said the impact of the pandemic on the global economy appears to have peaked, although uncertainty about how the recovery will unfold remains high.
The bank said it believes Canada has avoided the most severe economic scenario painted that it painted in April, updating its GDP figures for the second quarter of the year.
The central bank now expects GDP to decline between 10 and 20 per cent compared with the fourth quarter of 2019, down from the 15 to 30 per cent decline forecasted in April.
In a statement announcing the rate decision, the central bank said it still expects the economy to resume growth in the third quarter.
“Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery,” the statement said.
The announcement comes on the first day of Tiff Macklem’s tenure as governor, taking over from Stephen Poloz whose seven-year term ended Tuesday.
Macklem participated as an observer during deliberations by the bank’s governing council over the past few days, the statement says, adding that the new governor “endorses the rate decision and measures announced.”
The bank also announced it was reducing the frequency of its term repo operations and purchases of bankers’ acceptances citing improvements in short-term funding conditions.
Other programs to purchase federal, provincial, and corporate debt will continue unchanged, the bank says, but adds it could change tactics in response to economic conditions.
“As market function improves and containment restrictions ease, the Bank’s focus will shift to supporting the resumption of growth in output and employment,” the statement says. “The Bank maintains its commitment to continue large-scale asset purchases until the economic recovery is well underway.”
Economic reports continue this week with Statistics Canada’s look at the May jobs market scheduled for release Friday.
This report by The Canadian Press was first published June 3, 2020
The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of ¼ percent. The Bank Rate is correspondingly ½ percent and the deposit rate is ¼ percent.
Incoming data confirm the severe impact of the COVID-19 pandemic on the global economy. This impact appears to have peaked, although uncertainty about how the recovery will unfold remains high. Massive policy responses in advanced economies have helped to replace lost income and cushion the effect of economic shutdowns. Financial conditions have improved, and commodity prices have risen in recent weeks after falling sharply earlier this year. Because different countries’ containment measures will be lifted at different times, the global recovery likely will be protracted and uneven.
In Canada, the pandemic has led to historic losses in output and jobs. Still, the Canadian economy appears to have avoided the most severe scenario presented in the Bank’s April Monetary Policy Report (MPR). The level of real GDP in the first quarter was 2.1 percent lower than in the fourth quarter of 2019. This GDP reading is in the middle of the Bank’s April monitoring range and reflects the combined impact of falling oil prices and widespread shutdowns. The level of real GDP in the second quarter will likely show a further decline of 10-20 percent, as continued shutdowns and sharply lower investment in the energy sector take a further toll on output. Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery. While the outlook for the second half of 2020 and beyond remains heavily clouded, the Bank expects the economy to resume growth in the third quarter.
CPI inflation has decreased to near zero, as anticipated in the April MPR, mainly due to lower prices for gasoline. The Bank expects temporary factors to keep CPI inflation below the target band in the near term. The Bank’s core measures of inflation have drifted down, although by much less than the CPI, and are now between 1.6 and 2 percent.
The Bank’s programs to improve market function are having their intended effect. After significant strains in March, short-term funding conditions have improved. Therefore, the Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations. The Bank stands ready to adjust these programs if market conditions warrant. Meanwhile, its other programs to purchase federal, provincial, and corporate debt are continuing at their present frequency and scope.
As market function improves and containment restrictions ease, the Bank’s focus will shift to supporting the resumption of growth in output and employment. The Bank maintains its commitment to continue large-scale asset purchases until the economic recovery is well underway. Any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target.
Tiff Macklem assumes his role as the Bank’s tenth Governor today. He participated as an observer in Governing Council’s deliberations for this policy interest rate decision and endorses the rate decision and measures announced in this press release.
The next scheduled date for announcing the overnight rate target is July 15, 2020. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.
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