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.
It would be quite amusing if this led to Delta going Airbus on large single aisle, I really do not see what Boeing are hoping to achieve by doing this
Boeing is hoping to lose potential customers.
Maybe it’s a Chicago-bore-out-syndrome?
what was, like 350 aircraft or so into production before they delivered the first “cash flow positive” 787?
sounds like $30+ Billion worth of dumping to me.
corporate accounting rules in the US are clownshoes.
Is there any way how this complaint can delay the delivery of C100s to Delta by, for example, prohibited deliveries during an ITC investigation? According to WP the deliveries are scheduled from 2018 on, this would be within the timeframe of such a legal initiative.
Delivery delays would affect Delta’s core business, so in order to avoid that they might place a (bigger) order at Boeing and in return Boeing would withdraw its complaint.
It seems to me if Boeing replaced its aircraft when needed and had competitive products then there is no issue.
I have to wonder if some day we pay Boeing not to build aircraft?
It look like it may get to the point its cheaper to do that than keep give them tax subsidies.
I don’t think it would be an issue to take a loss on an early build/sale, but rather clearly, it’s that the state directly subsidized it with the 3 billion dollar “investment/bailout.”
The “so what” attitude sure seems odd juxtaposed with the repeated condemnations regarding Washington’s 77X “deal.”
This site harps on and on about how horribly unprofitable 787 sales are, but though property tax shelter(s) were given for the program, very little else was. Certainly, the state of South Carolina (nor Washington) didn’t build the factory there or “invest” 20 billion dollars into Boeing to help it pay for the program. But, proportionally, BBD get’s a “so what?”
Bombardier isn’t dumping, it’s receiving illegal state aid just like everyone else. Unless you use programme accounting (and who knows how many planes you might end up selling) it’s essential and a universal practice to sell for less than the cost of production. It’s interesting that they had to sell for so much less than Boeing considering that it will cost much less to operate a c series. This is presumably to account for the risk that Delta is taking buying an immature product. No one knows why Boeing used it’s state subsidies to sell quite so many 787s for so little when it was obvious that they had a major hit on their hands.
Only property tax shelters? This is from Seattle Times, for South Carolina:
• $270 million in upfront money from the state
• $456 million in property-tax breaks
• $47.5 million in state corporate tax credits
• $33 million for a state-funded worker-training program
Washington State tax breaks are $8.7B over 16 years; in 2015 they were over $300M, including:
• $106 in business and occupation (B&O) taxes
• $106 million B&O tax credit for design and development work
• $51 million in sales taxes on construction materials.
Sadly, subsidies and bailouts are endemic in this industry.
I really don’t understand Boeing’s position. The only word that comes to mind to describe it is “tantrum”.
The Canadian government is about to order 18 Super Hornets. I hope it suspends this order until Boeing comes to its sense.
And if not, I hope it slaps a tax on all new Boeing planes sold to Canada, given all the subsidies Boeing has received, either from the state of Washington, or indirectly (like the Japanese suppliers of the 787 having been heavily subsidized by the Japanese government).
Canada has a GST/VAT type tax ( at 5%) that rebates for exports, and is added to imports. As oil is a very big Canadian-US export, they could remove the US export rebate. US could switch to Venezuela for its oil imports!!!
Canadian HST is indeed a value-added tax. As such it is charged based on the value added at every step and rebated for exports. The net effect is that it’s charged to end consumers only. And, no, you can’t remove the HST rebate for exports for a specific country.
Yes. that would be a problem, but you could say Canada only exports its electricity and oil to the USA, so target specific products.
Harmonized Sales Tax.
Delta and maybe AA, Air Canada, Lufthansa-Swiss, Iberia and SAS could decide it is time for the CS150 as a modern light weight replacement competitior to the 737MAX. By tradition from the DC-9/MD-80 they are used to the 2+3 seating. The PW1525G should be suffcient. With a Canadian assembled fuselage and Canadian assembled PW1500G Engines they should be able to get some launch aid besides the Chinese paying for the Shen Yang built fuselages. This will force Boeings hand for a carbon fly by wire 737 replacement.
Don’t get your hopes up on a CF 737 replacement. The case for a 737 replacement was made back when the A320 flew for the first time. Taller, slightly wider; it was always going to be easier to have the A320 family out-develop the 737 family. And so it has.
OK, so perhaps it wasn’t quite that clear cut back in the 1990s. But the principal “Develop or Die” holds true throughout the history of commercial aviation. It should be a ruling tenet, something that guides every investment decision. Boeing didn’t develop a new 737 replacement then, and they still haven’t.
And now there’s talk about a NMA or a new MOM, like they’re considering exiting the market for 737 sized airliners altogether. This is free money for Airbus, and probably for Bombardier and Embraer too.
Even if Boeing did announce a new CF 737 replacement, Airbus has so much momentum in the A320 market that it can afford to see what Boeing offer and then announce something just a little bit better.
They kinda did that already with A350 vs 787; and the A350 scales up just enough to take on some of the new 777X in the market place too.
This is exactly the position Boeing were in back in the 1990s, and they threw it away by resting on their laurels for the next 10 years, after which it was already too late.
To their credit they did invest in the 787 programme. Ok so it went wrong, but the end result is not as bad had they not built the 787. Can you even begin to imagine where Boeing would be now if they hadn’t done the 787 programme? 737 – end of life; 777 /747 – victims of the downturn in the VLA market; 767 / 757 – obsolete. It was an undoubtedly painful episode, but at least they finished it and have sown the seeds of other programmes that, hopefully, will be easier. I sincerely hope that they benefit from it, but they’ll only do that if they retain all those engineers who learned from the experience.
So I think their management and shareholders should be brave and do a CF 737 replacement. They’re not going to dominate that market again (unless Airbus get really lazy), but they can get a decent and profitable slice of it, so long as they do something.
Though I fear that the structure of the modern investment market in America, which has gotten used to big returns in the short term from tech companies like Apple and Google, will make it difficult for the management to persuade shareholders to take a short /mid term hit. If the money men aren’t prepared to stump up the cash, it ain’t happening. Airbus, whose background economic environment is more willing to take the long term view (e.g. Government loans instead of tax breaks, and sober-minded European investors) , have a big advantage in that regard.
If they did a 767 NEO they would probably be doing quite well and have another 28B in the bank to stretch and do a 777 NEO. So 787 = unmitigated DISASTER. the 767 NEO could have been stretched and have a CF wing prob for about $5B. It would have sold like HOTCAKES!!!!
Boeing did it for the same reasons that Delta did it for the Middle East airlines. Boeing would have looked dumb if they had not presented the complaint. Why are we so shocked when companies choose to use available levers? Delta knew Boeing was going to do this, just as much as Boeing knew Delta has faught their prize Middle East customers. It’s not to attack the current Delta order specifically, but to put the CS program on notice for the next round of orders with Delta, American and United. $19 Mil is not acceptable folks, move the price up.
Heaven to mergatoids, exit stage right.
$19M is Boeing’s claim, none of us here (I believe) know the actual selling price.
And at what price did Boeing offer to sell the MAX-7 to Delta?
Duke: “As oil is a very big Canadian-US export… …US could switch to Venezuela for its oil imports!!!”
Sure, let’s escalate it even further. Let’s boycott each other products! We currently have a somewhat balanced ($) trade relation.
Except Canada tends to export more raw materials, and the US tends to export more manufactured goods. Which type of goods do you think is easier to sell / faces less barriers worldwide?
We must look at facts, and have less rhetoric. Do you sincerely believe Boeing is less subsidized, or is not performing predatory pricings (versus Bombardier)?
Canada and US have had at times quite a bit of pushing and shoving on trade issues. With fishing it was a bit more than that even- the Salmon war!
The US has moved heavily into a rhetoric phase, its OK to push back with your own ‘sledging’- the sporting metaphor used in my part of the world.
Duke: “its OK (for Canada) to push back with your own ‘sledging’”
Well, Canada is never going to win a sledging contest with a bullying US – the US economy being 10 times bigger.
If common sense + facts don’t prevail, we’ll have to diversify our trading partners list fast. Priority will be completing additional pipelines to the west coast and, maybe, to the east coast.
And sure, buy your oil in Venezuela or Middle East, you have some many “real friends” over there… For sure, you’ll be better off in throwing your dollars to those “allies”, on which you can depend on when hell breaks loose.
FWIW, in my military career I worked with so many great / genuine / competent US officers. I just don’t get the current situation.
BA should, in this case, paramountly “protect” its relationship with Alaska. Plus it has some scores to settle with Delta/that [Edited] Anderson. After 40 years in business I’ve found, looking back–there are also some customers that are just truly not worth having–Delta (always trying to cut your pricing to the bone) should be one of them re: Boeing. (Qatar/Al Baker and Iran Air, I’m looking at you both too!)
It is always a customer’s job to try to cut prices to the bone; they’d be failing their own shareholders if they simply paid the list prices. Ok, so some of them might try to take that too far…
However, Boeing should be asking themselves, how is it Airbus and Bombardier are willing to bend that bit further? Airbus can probably afford to, simply to annoy Boeing. Bombardier know they have a technically fantastic product, and are desperate to get going in the market. Both know that their aircraft are more comfortable than Boeing, and derive benefit from having Delta passengers thinking “that was a comfy ride” (assuming Delta don’t mess it up in some way); Delta will go back for more, and maybe others too.
The point is that Delta have concluded that they, in buying Airbus and Bombardier, are getting “superior” (prices, design) aircraft, and that Boeing are selling inferior aircraft. Prices are only part of that decision. The “Made in USA” label is no longer a sufficiently powerful distinguishing factor to make up perceived inadequacies in Boeing’s offering. This means that Airbus and Bombardier are in Boeing’s back yard and Boeing have no means by which to throw them out. That’s an uncomfortable feeling I expect…
I think that it is easy for Boeing to underestimate the halo effect of the A380. There’s videos on YouTube of people out on the streets looking at A380s landing for the first time in LAX, Miami, etc. It’s not just spotters either – it’s women and children too, all looking skywards going “wow!”. And there’s Casey Neistat doing vlogs about the amazing ride on an Emirates A380 (his first vlog earned him an upgrade on his return flight). Say what you like about the commercial merits of the A380 programme, but it has generated an awful lot of positive publicity for Airbus, to Boeing’s cost. If nothing else it means that airlines in America don’t have to worry too much about explaining to their passengers what an Airbus is, and why it’s OK to be on one.