In January 2007, Montreal-based Bombardier Inc. sanctioned the C-Series models of aircraft for development in 100-150 seat configurations (CS100 & CS300, respectively).[i] The program was estimated to carry a $2.1 Bil. (all dollars in CAD) price tag.[ii] The attractive selling points of the new aircraft were 18% lower operating costs (maintenance & fuel), quieter engines, and a more comfortable flying experience for business-class customers.[iii] By 2009, the program cost had swollen to $3.4 Bil. Amid delays, low order volume, and cost overruns, Bombardier took a $3.2 Bil. write-down. Government bail-outs in 2015 and 2016 were needed to keep the company afloat, with Canada and Quebec taking a stake in Bombardier.
Cause For Concern:
Finally, in April 2016, Delta Airlines ordered 75 units of the CS100 model with expected deliveries to begin in 2018. The deal was touted as the program’s saving grace. However, Boeing filed a complaint with the U.S. Chamber of Commerce on the basis that the Canadian and Quebec governments had heavily subsidized the program which in turn enabled Bombardier to sell the planes well below market values. Though disputed by Bombardier, Boeing alleged that a 75% discount had been given to Boeing (from the original $79.5 Mil. unit price). In response to the allegations, U.S. authorities announced a 300% trade tariff on the planes, effectively eliminating any pricing differences. If the tariffs were to stay, Bombardier’s managerial concern is that the U.S. would no longer be a market for the aircraft.[iv]
Realizing that the U.S. trade policy would preclude its ability to deliver the planes to Delta, a surprise deal with Boeing’s France-based archrival, Airbus, was announced on October 16, 2017.[v] Airbus acquired a 50.01% stake in the project and will become the operating partner in 2018 for just $1, pending U.S. regulator review[vi]. Airbus is now slated to move final assembly from Quebec to an existing plant in Mobile, Alabama.[vii] The CSeries’ parts are sourced primarily from the United States (50+%)[viii]; now the move to Alabama will also create jobs in the U.S. In its appeal, Bombardier asserts that with a 100 seat capacity, the CSeries does not compete directly with any of Boeing’s models[ix]. Boeing is also quick to forget that it has a similar discounting practice in foreign markets during the launch of its 787 Dreamliner.
In the short term, the joint Airbus/Bombardier group will have to make its appeal case to the to the U.S. Commerce Department. First, it needs to gain clarity on what is expected from it in the future. If procuring supplies primarily in America, employing Americans, and then selling to U.S. Airlines at a low price is still not sufficient, it will likely never be allowed to compete in the U.S. Is there a difference between the CS100 & CS300 or does the Commerce Department intend to tread them as one and the same? Given the long lead time on orders, trade rules with longer horizons need to be secured. Ongoing NAFTA negotiations need to support the industry by eliminating the potential for one-off tariff increases by executive order. The Canadian government has threatened to cancel a $5 Bil. order of military aircraft on order from Boeing.[x] That is one pressure tactic. Boeing’s aggressive tactics reveal that it may indeed feel threatened by the entry of the more efficient and technologically advanced aircraft.[xi] Until clearer boundaries are set, the introduction of impulsive trade tariffs will continue to create turbulent times for Airbus & Boeing.
Are there any other tactics that Airbus or Bombardier can employ in this situation to reverse the tariffs?
[i] Bombardier Inc. Website. “CSeries Technology” http://commercialaircraft.bombardier.com/en/cseries/Technology.html, accessed November 12, 2017.
[ii] Bombardier Inc. Website. “CSeries Technology” http://commercialaircraft.bombardier.com/en/cseries/Technology.html, accessed November 12, 2017.
[iii] Bombardier Inc. Website. “CSeries Technology” http://commercialaircraft.bombardier.com/en/cseries/Technology.html, accessed November 12, 2017.
[iv] “Why Airbus’ Tie-Up With Bombardier is so Damaging”, The Economist, Print Edition, October 19, 2017.
[v] Peggy Hollinger, “Airbus Challenges Boeing With Vow to Create US Jobs”, Financial Times, October 17, 2017.
[vi] Peggy Hollinger, “Airbus Challenges Boeing With Vow to Create US Jobs”, Financial Times, October 17, 2017.
[vii] Frederic Tomesco, “Airbus Snaps up Bombardier Jet in New Challenge to Boeing”, BloombergBusinessWeek, October 16, 2017.
[viii] Benjamin Zhang, “Here’s the Bombardier jet at the heart of a simmering trade war between the US and Canada”, Business Insider, September 25, 2017.
[ix] “Boeing Takes Off on a Flight of Hypocrisy Against Airbus”, The Economist, Print Edition, September 21, 2017.
[x] “Why Airbus’ Tie-Up With Bombardier is so Damaging”, The Economist, Print Edition, October 19, 2017.
[xi] “Passengers Like Flying on Planes Not Made by Boeing or Airbus”, The Economist, Print Edition, February 10, 2017.