Even beyond the woes of the 737 Max, The Boeing Company (NYSE: BA) and other plane-makers have seen all of their customers go from healthy to questionable in just one quarter. Boeing announced over the weekend that it has terminated its Master Transaction Agreement with Embraer S.A. (NYSE: ERJ).

The deal that was in place was for the two companies to establish a new strategic partnership in a joint venture. Embraer’s response was that Boeing has wrongfully terminated the Master Transaction Agreement and the path for seeking damages appears to be in motion.

The two airline makers had originally planned to create a joint venture which was to be made up of Embraer’s commercial aviation business and a second joint venture to develop new markets for the C-390 Millennium medium airlift and air mobility aircraft. The COVID-19 insta-recession has been brutal for both plane-makers, and this may just set the stage for even more uncertainty ahead.

Boeing’s press release indicated that it exercised its rights to terminate after Embraer did not satisfy the necessary conditions. The press release also indicated that April 24, 2020 was the initial termination date and that it was subject to extension by either party if certain conditions were met. The planned partnership was also shown to have already received unconditional regulatory approval from the necessary regulatory bodies except for the European Commission.

Boeing’s press release also indicated that it and Embraer will maintain their existing Master Teaming Agreement, which was signed back in 2012 and was expanded in 2016. That agreement is for the companies to jointly market and support the C-390 Millennium military aircraft. While this was short of a merger, it also comes at a time when airplane sales are becoming much harder to come by.

Embraer S.A. has confirmed that it received a notice sent by Boeing regarding its decision to exit the Master Transaction Agreement. Embraer also pointed out Boeing’s assertion that “supposedly certain closing conditions in the MTA have not been satisfied by Embraer.” Embraer’s release also said that it strongly believes Boeing has wrongfully terminated the agreement.

Embraer also said in its release that Boeing has manufactured false claims as a pretext to seek to avoid the company’s commitment to close the transaction agreement and to pay Embraer $4.2 billion as the agreed purchase price. The press release further outlined Boeing’s role:

Embraer believes Boeing has engaged in a systematic pattern of delay and repeated violations of the MTA, because of its unwillingness to complete the transaction in light of its own financial condition and 737 MAX and other business and reputational problems.

Embraer believes it is in full compliance with its obligations under the MTA and will pursue all remedies against Boeing for the damages incurred by Embraer as a result of Boeing’s wrongful termination and violation of the MTA.

The Transaction involved a long, costly and complex process, which was supported by government authorities and the substantial majority of Embraer’s shareholders, all understanding that the Transaction would be in the best interest of Embraer, its employees, suppliers and customers in commercial aviation.

Boeing’s statement came from Marc Allen, president of Embraer Partnership & Group Operations. He said:

Boeing has worked diligently over more than two years to finalize its transaction with Embraer. Over the past several months, we had productive but ultimately unsuccessful negotiations about unsatisfied MTA conditions. We all aimed to resolve those by the initial termination date, but it didn’t happen. It is deeply disappointing. But we have reached a point where continued negotiation within the framework of the MTA is not going to resolve the outstanding issues.

Embraer’s press release leaves the door open for action. It concluded:

Embraer will keep its shareholders, the market in general, and all employees, suppliers and clients informed about any relevant updates.

It was just on April 22 that the Wall Street Journal noted that the European Commission’s review extension would act a s a backdoor liquidity boost for Boeing because it delayed the $4 billion Boeing would have to pay Embraer for the twin deals involving commercial and military jets.

When S&P downgraded Embraer’s credit rating to ‘BBB-‘ from ‘BBB’ earlier in April the credit ratings agency indicated that Boeing’s credit was stronger than Embraer’s and that the European Commission had recently stopped the clock after previously updating its June 23 deadline and that the review was then expected to be finalized by the middle of the third-quarter of 2020.

There were also reports even in late-2018 that a Brazilian ruling had originally been unfavorable for a deal between Boeing and Embraer.

Boeing is already expected to post a dismal earnings report in the coming week. Boeing’s current problems are extensive beyond delayed and cancelled plane orders, and the is some thought now in the recession that the elusive recertification of its 737 Max may no longer matter even as it restarts operations in the United States. There is also a concern that with less international travel demand from the recession and from new fears of flight-related coronavirus exposure that the 787 Dreamliner orders may come under at least some pressure ahead.

Embraer’s ADSs closed down 13% at $5.82 on Friday and the 6.16 million U.S.-listed shares that traded appears to be the largest trading volume day in at least a year. Embraer’s ADS’s closed out 2019 at $19.49 and it had traded above $20 briefly in January. That $5.82 close is also lower than the March 23 close of $6.11 when the stock market selling panic had peaked.

Boeing’s shares closed down almost 6.4% at $128.98 on Friday and the 35.4 million shares was about 50% higher than normal. Boeing’s stock price was $323.83 at the end of 2019 back when the world was still strong, but it closed as low as $95.01 on a dividend-adjusted basis ahead of the panic selling peak in March.

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