May 1, 2017, © Leeham Co.: Boeing’s complaint against Bombardier’s CSeries transaction with Delta Air Lines, and a request for millions of dollars in antidumping and penalties might be coming at a bad time.
“Boeing requests that the Department initiate an antidumping investigation and impose antidumping duties on Aircraft from Canada in an amount sufficient to offset unfair pricing above.”
If Boeing is successful in its request of the US government and International Trade Commission to impose duties before the first CS100 is delivered to Delta next year, the cost of the airplane will balloon from the $19.6m Boeing calculates (and which BBD denies) to at least $33m.
It’s unclear from the complaint who would pay this penalty—Bombardier, maintaining the price to Delta, or would Delta have to pay the reset price?
Regardless, this kerfuffle can’t be welcome news to Delta, which already has a ruffled relationship with Boeing due to its opposition to the ExIm Bank and orders for Airbus aircraft.
Delta is one of the few major airlines that has yet to order the re-engined A320neo or 737 MAX families. It preferred to order low-priced, end-of-line A321ceo and 737-900ERs while waiting to see how the new Pratt & Whitney GTF and CFM LEAP engines performed.
The CSeries GTF doesn’t have the issues that the A320neo GTF does. So far, the CFM A320neo LEAP is performing well and flight tests on the 737 MAX, with the LEAP, also went well.
So Delta is ready to issue a Request for Proposals in August or September for the neo and MAX, according to Market Intelligence. The suggest quantity is 75 firm orders and 75 options.
With Boeing attacking the Delta CSeries deal and asking the US government to impose millions of dollars in tariffs, Delta may not receive the news with equanimity.
LNC has no way of knowing whether the sales contract protects Delta against being liable for potential tariffs or penalties. We’d be surprised if there wasn’t some protection.
But will Boeing’s action serve as an irritant to Delta and have some influence on the outcome of the RFP in a close competition?
Delta has proven its willingness to split its orders between Airbus and Boeing despite an uneasy relationship. It’s become one of the largest customers for the 737-900ER. But it’s also ordered the A321ceo.
Delta chose Airbus over Boeing for 50 wide-bodied aircraft.
But it will be a target in the coming RFP for the 737-10 and potentially the Boeing 7M7.
Boeing’s claim is that Bombardier engaged in “dumping” the CSeries on the US market because of Boeing’s calculated $19.6m sales price of the CSeries, a price BBD denies.
(Denials, of course, can be quite nuanced. If the price is $19.7m, this opens the door for a denial.)
At the time, LNC heard through market sources that the price was between $20m and $24m, and at the lower end of this range. This never was confirmed.
BBD took a C$500m write off for “onerous contract provisions” for the Delta deal, along with Air Canada and airBaltic.
Our view is, so what?
Under the accounting system Bombardier must use, it must take write-offs as they occur. If Bombardier used program accounting, as Boeing does, such a write-off would not have been necessary.
It’s well known that early production orders are upside down on cost-vs-sales prices. The earliest Boeing 787s cost an estimated $400m to build against contract prices of some $80m. It wasn’t until late 2015 that the cost-vs-sales price went positive for Boeing—but because of program accounting, Boeing has never taken a write off beyond the test aircraft. If it had, billions of dollars would have been written off. In this case, would those early, low contract prices constituted “dumping?” Instead, these are viewed as launch customer pricing.
The deals with Air Canada and Delta were made under special circumstances; one might even say duress, due to BBD’s corporate distress at the time. The brand name deals were sorely needed.
When the Canadian and Quebec governments and the Quebec-run pension fund invested nearly $3bn in Bombardier and the CSeries, in what was clearly a bail-out, LNC raised the issue whether these violated World Trade Organization rules. Bombardier replied the deals were structured to be in compliance. Embraer disagreed. Brazil, on EMB’s urging, filed a complaint with the WTO. The US government didn’t go this far, but it made a filing raising questions.
Boeing can’t file a direct complaint with the WTO—the US Trade Representative must. But Boeing can and has filed a direct complaint with the US and International Trade group.
LNC doesn’t have the expertise to weigh in on the legalities of antidumping laws. But on the surface, the Delta deal to us doesn’t seem any different in principal than standard loss-leading, launch-customer dealings that are common in the airline industry. Bombardier does it. Embraer does it. Airbus does it. And so does Boeing.