Boeing [BA] and Brazil’s Embraer [ERJ] on Thursday said they are in discussions for a “potential combination” following a report in the Wall Street Journal that Boeing is in talks to acquire the maker of regional and business jets, light-attack fighters and reconnaissance aircraft, and medium-size military transport aircraft.

The Journal reported that the potential acquisition would be at a “large premium” for Embraer but no price was mentioned. It said the talks by Boeing would give it a hedge against its European rival Airbus, which recently agreed to acquire a majority stake in a partnership with Canada’s Bombardier for the C Series regional jet aircraft, which serves the 100 to 150 seat market segment.

Boeing’s commercial narrowbody aircraft market portfolio serves markets above 150 seats.

Embraer's KC-390 multimission medium airlifter. Photo: Embraer
Embraer’s KC-390 multimission medium airlifter. Photo: Embraer

Boeing said the nature of any combination with Embraer “remains under discussion” and that it’s possible no deal results. It also said that that the Brazilian government and regulators would have to approve any deal, as would the boards of both companies and Embraer’s shareholders.

In October, during the company’s third quarter financial results call with analysts, Dennis Muilenburg, Boeing’s chairman, president and CEO, said in response to a question about its strategy for the below 150-seat market that while “We’ll continue to look at our strategic options … we don’t need to change the path that we’re on. We’re very confident we’re going to continue to look at ways to accelerate our core business, grow organically as our primary growth engine.”

Muilenburg added that Boeing’s priorities for investing its cash are first organic, returns for shareholder second, and third would be mergers and acquisitions.

Robert Stallard, an aerospace and defense analyst with the equity research firm Vertical Research Partners, said in a client note before Boeing confirmed its talks with Embraer that the Journal’s report is contrary to the earlier position Boeing took regarding the hookup of Airbus and Bombardier with the C Series jet.

“If Boeing is indeed talking to Embraer, trying to get hold of its new E2 Regional Jet to fend off competition at the bottom end of its narrowbody portfolio, then this would also appear to indirectly endorse the strategy that Airbus has pursued.”

Embraer's E195-E2 aircraft seats between 120 and 146 passengers depending on configuration. Photo: Embraer
Embraer’s E195-E2 aircraft seats between 120 and 146 passengers depending on configuration. Photo: Embraer

The market size for regional jets between 100 and 150 seats over the next year is close to 7,000 aircraft.

In addition to its regional and business jets, Embraer supplies the single engine A-29 Super Tucano light attack and training aircraft for Brazil’s military, and is being offered for a potential U.S. Air Force competition for a light-attack aircraft. Embraer is teamed with U.S.-based Sierra Nevada Corp. (SNC) for the U.S. Air Force demonstration.

The aircraft are also being used by Afghanistan’s air force and Nigeria is in the process of buying 12 of the aircraft through a U.S. foreign military sale with SNC as the prime contractor.

Boeing doesn’t have a light-attack plane in its product portfolio. The company is teamed with Sweden’s Saab on a jet trainer for the U.S. Air Force T-X competition.

Embraer is also developing the KC-390 multi-mission military transport aircraft for the medium airlift market. The company said on Wednesday that the aircraft attained initial operating capability with the Brazilian air force. The aircraft is being developed for transport and aerial refueling missions.

Boeing’s C-17 large aircraft transport, which is used by the U.S. Air Force and more than a half-dozen foreign militaries, is out of production. The company is developing the KC-46 aerial refueling tanker for the Air Force. The KC-46 will replace the company’s legacy KC-135 tanker used by the Air Force.

Sheila Kahyaoglu, an aerospace and defense analyst with Jefferies, said in a client report that she sees “minimal defense benefit” to Boeing from an Embraer acquisition. She pointed out that the two companies already have an agreement for Boeing to market and support the KC-390.

Kahyaoglu said Embraer’s A-29 pitch to the U.S. Air Force for the light-attack aircraft competition would possibly be bolstered through a combination with Boeing. She believes a deal makes sense for Boeing in the commercial aircraft space.

Embraer’s defense product portfolio also includes aircraft for intelligence, surveillance and reconnaissance missions. 

It expects to generate between $5.3 billion and $6 billion in sales this year. Through the first nine months of 2017 defense and security sales were $680 million.