AIRBUS SE 
U.S. planemaker Boeing Co (>> Boeing Company (The)) and Brazil's Embraer SA (>> Embraer SA) said on Thursday they were discussing a "potential combination" widely assumed to focus on jetliners, confirming a report in the Wall Street Journal.
News of the talks comes just two months after Boeing's European archrival Airbus (>> Airbus SE) agreed to buy a majority stake in Bombardier Inc's (>> Bombardier, Inc.) 110 to 130-seat CSeries jet, the Canadian rival of Embraer's biggest E-Jets.
"This seems initially to be about blunting the offering of the CSeries," said consultant Jerrold Lundquist, managing director of The Lundquist Group, one of the first industry-watchers to predict the move. "One of the things the CSeries brings to Airbus is the ability to offer a broader product line."
Both Embraer's E-Jets, which generally range between 70 and 130 seats, and to a greater extent Bombardier's CSeries, overlap at the margins of the big-airplane portfolios of Airbus and Boeing, but the products are mainly seen as complementary. Boeing and Airbus smaller planes start at around 125 seats.
Such commercial tie-ups allow planemakers to offer package deals and expand opportunities for generating revenue and profit, a person familiar with the CSeries deal said.
Boeing now appears to be a convert to this approach after initially - at least in public - dismissing the deal between Airbus and Bombardier, several analysts said on Thursday.
But the proposed alliances, neither of which is finalised, are not simply about tacking on revenue and cash flow, analysts and industry sources said.
First, they could quickly lead to technical overlap.
"If Boeing begins to collaborate with Embraer, you could imagine them creating commonality in the Boeing cockpit," Lundquist said. Others see similar benefits at Airbus.
More importantly, they broaden the battlefront for the next round of developments in 2030 and beyond: one in which Western jetmakers will be up against growing competition from China and Russia and could rely on their new partners to spread the risk.
PREPARING THE NEXT GENERATION
Boeing and Embraer had already prepared just such a tryst in confidential talks over a decade ago.
In October, Reuters reported that the template for a possible Boeing-Embraer response to the Airbus-Bombardier deal already existed in dormant plans for a new generation of single-aisle planes, for which there had been a previously unreported collaboration between Boeing and Brazil.
Plans for an all-new plane were put on hold while Boeing and Airbus focussed on engine makeovers for existing models, cashing in on fuel savings that were considered strong enough to hold off Chinese and Russian competitors for another 10 or 15 years.
But the blueprint for deeper co-operation between Embraer and Boeing remained in place and by breaking the status quo, Airbus's Bombardier deal may have brought it back to life.
"Embraer gives Boeing access to technology for smaller jets for application on a next-generation narrowbody aircraft," Morningstar analyst Chris Higgins said in a research note.
A source with knowledge of the matter said Boeing had already approached Embraer twice about a potential deal in 2002 and 2006. At the time, the Brazilian government vetoed any deal, saying Embraer was a "strategic" company for the country.
Brazilian President Michel Temer, who took office last year, has pushed a more market-friendly agenda than predecessors.
Deals with their smaller cousins may give Airbus and Boeing more options when they develop the successors to the best-selling Boeing 737 and Airbus A320, perhaps allowing them to offer a trio of large jets coupled to a pair of smaller ones.
For Boeing, however, there may be another gamble at play.
The American firm is considering launching a twin-aisle 220 to 260-seat jet in the so-called middle of the market, challenging Airbus in the segment where it began life over 40 years ago.
The timing of the talks leaves open the possibility that any core technology Embraer has to offer could be considered for the "new mid-market airplane (NMA)," people familiar with the matter said.
To some, that only increases the chances that Boeing will kick-start the project next year, taking pains at the same time to shore up the lower end of its market with an Embraer tie-up.
"Boeing would apparently prefer to do the NMA and taking on two major developments at once may be considered too ambitious,” Lundquist said.
(Reporting by Tim Hepher in PARIS and Brad Haynes in SAO PAULO; Additional reporting by Tatiana Bautzer in SAO PAULO; Editing by Bill Rigby)
By Tim Hepher and Brad Haynes
