On January 27, 2020, the Administrative Council for Economic Defense ("CADE"), an administrative entity of the Federal Government of Brazil's Ministry of Justice and Public Safety, issued its positive recommendation regarding the partnership agreement between two major players of the global aviation sector, Embraer S.A. ("Embraer") and The Boeing Company ("Boeing"), CADE concluded that Embraer and Boeing do not compete in the same markets and that this partnership therefore presents no competitive issues.
Embraer and Boeing negotiated a partnership agreement covering two areas of Embraer's business operations (the "Agreement"): commercial aviation operations, which include the commercialization of regional transport aircrafts and larger commercial aircrafts (the "Commercial Operation") and military aviation operations specific to the KC-390 aircraft (the "Defense Operation"). The Agreement provides for a new company in which Boeing will acquire 80 per cent of the share capital of Embraer's Commercial Operation and for the creation of a joint venture (EB Defense, LLC) for the Defense Operation, of which 51 per cent will be owned by Embraer and 49 per cent by Boeing.
The Agreement was subject to approval by the CADE due to the value of the Commercial Operation and Military Operation, which exceeds the thresholds set out by Brazilian federal legislation. Through its analysis, CADE sought to prevent acts of economic concentration involving the elimination of competition in a substantial share of the market at issue or the creation and/or strengthening of a dominant position in said market. CADE may authorize acts of economic concentration where the following positive effects are observed and are of benefit to consumers: an increase in productivity or competitiveness, an improvement in the quality of goods or services or an improvement in the efficiency and technological or economic development of the market at issue.
In its analysis, CADE thus investigated the markets likely to be affected by the Commercial Operation, i.e. the segment comprising regional and commercial aircrafts with a seat capacity ranging from 100 to 200, and correlated market segments (regional and commercial aircraft parts, components and maintenance services),and the markets likely to be affected by the Military Operation, i.e., the military transport aircraft segment and correlated market segments (military aircraft parts, components, maintenance services and modernization services). With respect to the Commercial Operation, it should be noted that CADE focused specifically on the submarket comprising aircrafts with a 100- to 150-seat capacity because of the combined Boeing and Embraer offer on this market (i.e. the 737 Max for Boeing and the E195-E2 for Embraer).
In concluding its analysis, CADE stated that the Agreement regarding the Commercial Operation does not negatively affect the level of competition in the market and actually helps to exert competitive pressure against the frontrunner Airbus. This conclusion by CADE is based on a number of factors, including Embraer's low participation in the market for commercial aircrafts with a 100- to 200-seat capacity; the lack of connection between the Commercial Operation and the current market concentration; the fragmentation of the markets correlated to the Commercial Operation; the neutral impact of the Commercial Operation on the submarket for commercial aircrafts with a 100- to 150-seat capacity; the reasonable bargaining power of commercial aircraft clients; and the complementarity of commercial aircraft offers by Embraer and Boeing.
In conclusion, the CADE stated that the Agreement regarding the Military Operation would not create an opportunity to exercise market power on the military aviation market since the partnership does not cover all Embraer and Boeing military aircraft. CADE based its conclusion on some of the following factors: the lack of connection between the Military Operation and the concentration of the military aircraft market, as well as the fragmentation of the markets correlated to the Military Operation. CADE's decision is subject to a potential administrative review that may be requested within 15 days following January 27, 2020, and to any other review or appeal process provided for by Brazilian legislation.
CADE's approval of the Agreement would essentially remove one of the last barriers to completing the planned partnership between Embraer and Boeing. The actual economic impact of the Agreement remains to be verified over the years to come, as does the accuracy of the CADE's predictions concerning its effects on the commercial and military aviation markets.