Boeing made the right call terminating its $4.2 billion purchase of Brazilian planemaker Embraer‘s commercial jet business on Saturday.
The deal had strategic value and Boeing may have to pay a $100 million breakup fee, or more now that it’s being sued by Embraer for backing out.
But that’s a small price to end a deal that would cause more harm than good to Boeing at this point. Two years after the acquisition was announced, aviation is in shambles, Boeing is on the ropes and the merger approval remains in limbo.
Amid a sweeping reset of the aerospace industry, Boeing must stabilize its house before making costly additions it can no longer afford.
Many changes are coming to Boeing. CEO Dave Calhoun hinted at this during a shareholder meeting Monday, in discussing the outlook for suppliers.
“The plans they have made and the investments they have made around the future, not dissimilar to ourselves, they now have to tear up and start over and resize themselves to accommodate that new future,” Calhoun said, as reported by Times aerospace reporter Dominic Gates.
Boeing should use this reset as an opportunity to jettison its destructive, outdated, GE-style management philosophy that overly prioritizes shareholder returns. For long-term success of the company and the aerospace industry it supports, Boeing must return to its roots as an engineering-driven company where safety is paramount. That also requires new corporate governance.
The company cannot further disperse design and production as it restructures for lean years and seeks to rebuild the trust of passengers, customers and partners.
Instead, Boeing should be preparing to move its headquarters back from Chicago to Seattle. That would increase efficiency, help resurrect its engineering culture and reduce the untenable distance between leadership and its primary manufacturing center.
None of this is advanced by shifting more essential work to foreign countries with lower-cost labor.
Truly, the prospect of sending billions to Brazil is now flatly unacceptable, with Boeing expected to announce substantial layoffs on Wednesday and seeking federal assistance to preserve U.S. jobs.
One motivation for the Embraer deal was access to a lower-cost engineering workforce in Brazil, where Boeing could shift work from the U.S. and potentially help design its next plane, according to Scott Hamilton, a Bainbridge Island-based aviation analyst.
The deal also included substantial dividends for Embraer investors, who would have received around $1.6 billion of the $4.2 billion.
While those dividends wouldn’t be paid directly by Boeing, enabling such a payout contradicts the intent of the CARES Act that is providing federal support during the pandemic to U.S. companies. Recipients of CARES support — likely to include Boeing — are prohibited from paying dividends until 12 months after the support is repaid.
Boeing’s success is critically important to Washington and the nation. The company was already in crisis before the pandemic, and has much work ahead to stabilize its business and restore its proud reputation. Terminating the Embraer deal was a prudent and necessary step in this broader reconstruction.