What happened
Shares of Embraer (ERJ 5.36%) spiked 17% on Friday following a report that a Chinese manufacturer has expressed interest in joining forces with the world's third-largest commercial airplane manufacturer. Embraer was left at the altar by Boeing (BA 3.45%) just last month, but it appears to have other options.
So what
Brazil's Embraer is a maker of small commercial jets, and until recently had a deal in place to sell 80% of its commercial operations to Boeing for $4.2 billion. That valuation arguably did not reflect the post-COVID-19 reality of commercial aerospace, with airlines scrambling to cut costs and cancel expansion plans. But there is still value in Embraer's portfolio.
Image source: Embraer.
Reuters reported Friday that aerospace manufacturers including China's state-owned COMAC have voiced an interest in forming an alliance with Embraer, and companies in Russia and India have also conveyed interest.
There's logic in a deal for both sides. COMAC and Russia's Irkut are both trying to develop planes to rival mainstay offerings from Boeing and Airbus (EADSY 0.18%) and attempt to undo a global duopoly in mid-sized aircraft. Embraer has established engineering talent and technology used on its popular ERJ smaller jet series and would lend credibility to those efforts.
A deal would also give Embraer added heft as it attempts to sell its new generation of E-Jet planes against similarly sized Airbus A220 aircraft.
Now what
Investors should be warned that the talks appear preliminary, and it is possible a deal with either China or Russia would face pushback from the United States and other Western nations.
But if a tie-up does happen, the big loser would appear to be Boeing. Not only would an alliance with Embraer help the Chinese or Russians manufacture a credible rival to Boeing's offerings, it would mean there are two strong competitors -- Embraer's E-Jet and Airbus' A220 -- in a segment of the market where it has no real alternative to offer.
