This week’s Wall Street Journal report on the potential merger of Boeing and Brazilian aircraft company Embraer has sent shockwaves through the small jet market and could reshape the competitive landscape. According to the WSJ, negotiations are in a holding pattern while the Brazilian government reviews the deal.

The talks are taking place against the backdrop of an ongoing dispute between Boeing and Canadian jet manufacturer Bombardier. Boeing filed a complaint against Bombardier for allegedly illegally dumping jets into the U.S. market by selling its C-Series to Delta Air Lines for absurdly low prices. The dispute almost incited an international trade war, as Bombardier then gave an ownership stake in the C Series joint venture to Airbus.

The Airbus Bombardier partnership did not only affect Boeing; it fueled speculation about Embraer’s E2 jet program. According to analyst Carter Copeland of Melius Research, “I’m sure Embraer’s view of the likely success of their product in the E2 was materially altered by the Airbus transaction for the C Series. They went from competing against a distressed Bombardier to competing against a healthy and extremely competitive entity in Airbus. That changes the mindset of the leadership team at Embraer.”

Analysts also seem to think that Boeing might look to partner with Embraer on the KC-390 which falls into the category below the 737 MAX 7 which is currently Boeing’s smallest jet at 138 seats.

A Boeing/Airbus Duopoly?

Small jet manufacturers like Russia’s Sukhoi are an emerging competitive threat. Boeing and Bombardier had avoided making the smaller, less-than-100 seat jets since they retired the Boeing 717 in 2006.  Today, the small jet market is arguably getting large enough to garner their interest.

Airlines are increasingly buying more fuel efficient planes. Strategically, Airbus’ agreement with Bombardier and Boeing’s potential merger with Embraer could give the pair a duopoly, solidifying both companies as market leaders in the small jet space. This would create barriers to entry to other manufacturers from Russia, China and Japan who would have less cross-selling opportunity and limited access to suppliers.

However, the Brazilian government itself may be what mucks up the Potential Boeing Embraer merger. Brazil holds a “golden share” in Embraer and may be reticent to give it up.

Insiders, who prefer to stay anonymous because the talks are private, say the two companies are therefore considering not only a merger but a joint venture as well. A JV would give both companies advantages while avoiding an all-out Boeing takeover. Either way, it appears as if Airbus/Bombardier and Boeing/Embraer may wind up being the two big dogs in small jet manufacturing.

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