Pontifications: Bombardier’s challenges beyond Boeing complaint

By Scott Hamilton

May 8, 2017, © Leeham Co.: The fallout and speculation continues after Boeing filed a complaint April 27 over Bombardier’s deal for 75+50 CSeries with Delta Air Lines.

The complaint was filed with the US government and the International Trade Commission.

Our stories are here, here and here.

Tit for Tat

There’s already speculation that Canada will retaliate by excluding Boeing from defense contracts and competition.

Bombardier and Canada vow to fight the allegations that BBD “dumped” the CSeries in the USA to win the Delta deal. “Dumping” is selling a product for less than it’s purchased in the home market.

Boeing claims Bombardier sold the CS100 to Delta for $19.6m, a figure BBD says is wrong. Boeing says the production cost is $33m and Air Canada bought the airplane for $30m.

The complaint is more than 1,000 pages long (the public document is a mere 147), but this is the crux of the issue.

This will likely take years to resolve.

Delta’s deal

What does this do to the Delta deal?

According to one source who has been in the airplane sales contract business for decades says that typically, any unexpected taxes or tariffs are passed through to the buyer—in this case, Delta.

While this source doesn’t know what’s in Delta’s contract, he says it is possible a “material adverse change” clause would allow Delta to cancel the deal.

The first airplanes are scheduled for delivery next year. Boeing wants a decision from the US and ITC before the first deliveries.

Bigger challenges than this

Whatever the outcome of Boeing’s complaint, Bombardier has bigger problems. It’s still not pulling in orders.

Granted, Airbus and Boeing aren’t doing too well this year, after a poor performance last year. But Bombardier was counting on momentum after the Air Canada and Delta deals, and it’s just not arrived.

LNC previously published reports from a long interview with the leasing company AVi8. The principal focus was on wide-body supply and demand. These stories are here and here. We drifted off onto other topics before ending the interview, and one of them was the CSeries.

AVi8’s chairman and CEO, Ray Sisson, and president, Ed Wegel, love the airplane but have their doubts about its future.

Will they sell enough?

Ed Wegel

“The real question is, what happens with the progress of the CSeries program?” says Wegel. “Are they going to be able to sell enough of them in the timeframe they need to? Delta has committed to the airplane and the word is that Bombardier took a significant hit to deliver those to Delta.

“The positive news is that early reports on the airplane show it’s performing a little bit better than expected,” he said.

“Ray has spent a lot of time up there with the factory guys looking at it. Longer term, I think it’s a great airplane,” Wegel said. “But can you get enough orders? The regionals can’t fly it because of its size. [The CS100 is] better than an A318. It’s better than a 737-600. I think the airplane long-term is going to be good if Bombardier can keep the program vital enough to get to that point.”

Sisson agrees.

Ray Sisson

“The good news is, they have a great aircraft, and a great aircraft that is positioned where no one else is,” he says. “It’s a good aircraft for what it does and nothing else competes with it unless you want to get cheap 737-700s and A319s, but there just aren’t that many of those around.”

Head-to-head in the heart of the market

But the CS300 competes head-to-head with the A319ceo/neo and the 737-700/7.

“As you go toward the larger CS300 variant and begin to compete head-to-head with Boeing and Airbus, the issue of the massive installed global fleet base, and the duopoly’s ability to price campaigns to win are significant issues for them to overcome,” Sisson says.

Although the CS300 can seat up to 160 passengers in high-density, single-class, encroaching on the larger A320 and 737-800/8, and a fully competitive CS500 is often discussed, Sisson believes Bombardier will only be asking for trouble if it takes on Airbus and Boeing in this heart-of-the-market sector.

“If they were trying to do another regional jet or trying to compete head-to-head with another 737 [800/Max8] or A320, they’d be dead in the water,” he says. “In the 100- to 150-seat market, it’s the CSeries and the CSeries. If you think about airports like London City, it’s the perfect aircraft.”

Embraer’s competition

Embraer’s E190/195 cover the very low end of the 100-125 seat sector and the E195-E2 has 12 more seats, which places it squarely in the middle of the sector. (The E190-E1/E2 only taps into the sector in a single-class configuration and falls under 100 seats in two classes.)

Embraer certainly believes the EJet is a competitor with the CSeries. And BBD views the EJet as competition.

A must-do

“Bombardier has to make this program a success,” Sisson says. “I think they will. It’s the future for them in commercial aviation. It’s either do this or go home.

“I think they might have thought the aircraft would sell itself because it was unopposed in the market. [But] that’s not how airlines necessarily evaluate and fleet manage.”

The Delta and Air Canada deals are proof of this.

WestJet

When WestJet announced that it is creating a new ultra-low cost carrier, I couldn’t help but wonder if this April Fool’s joke might be the preview of the new subsidiary.

19 Comments on “Pontifications: Bombardier’s challenges beyond Boeing complaint

  1. The CSeries certainly seems to have found the niche in which it can compete and compete well. My only concern is that the niche is too small on its own to warrant a wholly separate product.

    As the average size of the narrowbody has grown (ignoring scope limited regionals) the volume of the market in this sub-sector has diminished. Is that because there was previously no viable product (e.g. A319 does not stack against the A320), or is it because of more fundamental factors?

    It is beginning to look like a CS500 is needed to gain more of the middle ground and I am thinking that without substantial sales of the existing CS100/300 that BBD are not keen to ‘double down’ on their investment.

    If they are not careful they will simply used as a bargaining chip to shave off a few $m on each A320/B737 sale.

    • How many planes has Embraer sold in its E series ‘niche’ ?
      1474!

  2. I am always surprised when a new airline starts up in this extremely competitive business. By all accounts they’ll probably manufacture of fair amount of CS100s and CS300s. If a number of these aircraft end up in the hands of someone who knows what they’re doing, there could be great potential for the plane. Things to keep in mind are: carbon footprint, cost of fuel, low maintenance. All Bombardier has to do is hang in there, and do a good job. Note: Poster owns BBD stock.

    • Every Canadian owns BBD stock. We don’t have a choice when the government keeps throwing money at them.

  3. I don’t see why a simple stretch CS500 would be a “problem” for BBD in terms of “they don’t want to go head to head vs. A/B.” Surely, it wouldn’t be a direct competitor as it would be much shorter ranged anyway. ANY funding would be a problem though, I would think, unless they somehow get a miraculous launch order/user quite quickly.

    BBD’s biggest mistakes with this series was probably the way the aircraft was sold before they wound up firing their sales staff and starting from scratch a couple years ago. It’s easy to look at the program and see it as “5 plus years old and now in service.” But really they hit reset on how to sell/market it just a couple years back. Production will continue to be an issue, as they’re going to miss substantially from their (miniscule, in the big market scheme) annual goal of something like 30 deliveries this year. Pratt will continue to work to prioritize A320NEO deliveries/goals.

    It’s tough to demonstrate good support for an aircraft you can neither produce/deliver nor sell in substantive quantities at a fair price.

  4. I think the CS300 comes into its own when the A319 and 737-700s come out of the system. Airbus and Boeing are now hardly selling any of those planes. The problem is that there is a large installed base of the smaller Airbus and Boeing planes that require little capital investment. It’s going to take a decade, I believe, before there will be demand for new planes in this sector.

  5. So Boeing can ‘price campaigns to win’ (per Sisson), but Boening gets pissy that Bombardier, who doesn’t have the advantage of long-amortized costs of the 737, isn’t allowed to?

    Boeing may be claiming dumping, but I’m claiming oligopoly on Boeing. They are in the process of abandoning even the -700 end of the market, but they want to destroy the CS100 (which doesn’t compete with Boeing) and the CS300, which kick’s the “Max7.5″s butt.

    This is why we can’t have nice things. Duopolist behemoths attacking new entrants. Classic late-cycle capitalism forcing bad choices. Ugh.

    • And, on the other hand, socialist governments continue to pour massive citizens’ funds into airlines, shipyards, subway car makers,…and, wait for it, airplane manufacturers/assemblers.

      • Are you thinking of the “socialist” government of Alabama ? Pouring citizens funds into Airbus ?

  6. Exclude Boeing from competiton? Like what? The interim fighter? Nope; that’s sole sourced to Boeing for the F-18E/F. What else does Canada have on the horizon? Sure the Liberals are talking about spending tens of billions on defence, but that will never, ever happen. Funny how those promises are always set to kick in after the next election. Boeing has nothing to lose as the future of both Air Canada and Westjey are all Boeing. Well expect for the CS aircraft AC was bribed into buying buy those same Liberals. BBD might make a fine airplane but can’t survive as a business without taxpayer support.

    • Even the idea of having interim fighters is considered as an overall waste of money. So just scrap that plan and the Boeing problem disappear…

      In the meantime, drastically reduce CF18 flying to strictly NORAD commitments. (until some wings come off).

  7. The trouble is that people persist in regarding Bombardier as an aircraft manufacturer alone – it does make planes (and usually loses money on them) but its real business is in making trains, locomotives and even high speed railroads (on which it makes a very great deal of money). Because of that the really serious cloud on its horizon is the utter incapability of its train-making factory in Canada itself, which has turned into a massive condemnation of the Bombardier management in North America (as opposed to that in Europe which is world class) by both political and industrial groups in Canada. Today the Caisse (essentially the province-operated lending and investment organization of Quebec) voted against both the chairmanship and the pay-structure of the company – and of course it was the institution (not the Government of Canada) that stepped in and funded the company to achieve the Delta order.

    Now if the ordinary Canadian is well aware of the management issues shuddering around Bombardier in Canada you can be utterly sure that any interested prospective airline most certainly is – which may well be a factor in the dearth of orders.

  8. See below for “Key Dates” for Boeing’s dumping complaint, copied from from the USITC website at the following link.

    https://www.usitc.gov/investigations/701731/2017/100_150_seat_large_civil_aircraft_canada/preliminary.htm

    Active Investigations
    100- to 150-Seat Large Civil Aircraft from Canada
    Inv. No. 701-TA-578 and 731-TA-1368
    Preliminary Phase

    Key Dates
    04/27/2017: Start
    05/11/2017: Return Questionnaires
    05/18/2017 9:30 am: Staff Conference
    05/23/2017: Postconference Briefs
    06/05/2017: Report to the Commission
    06/09/2017: Proposed Vote
    06/12/2017: Determination(s) Issued
    06/19/2017: View(s) Issued
    06/19/2017: End

    The “End” above would be the end of the USITC’s role. The US Commerce Department is also involved in dumping cases. The quote below, explaining the different roles of the ITC and the Commerce Department, is from the following link.

    https://www.usitc.gov/trade_remedy.htm

    “The USITC and the U.S. Department of Commerce both have roles in these investigations, but each addresses a different question. Commerce determines whether the alleged dumping or subsidizing is happening, and if so, the margin of dumping or amount of subsidy. The USITC determines whether the U.S. industry is materially injured or threatened with material injury by reason of the imports under investigation. If both Commerce and the USITC reach affirmative final determinations on their individual questions, then Commerce will issue an antidumping duty order to offset the dumping or a countervailing duty order to offset the subsidy.”

  9. I have noted in several posts in previous threads that international and governmental trade bodies treat dumping and improper government subsidies as separate issues, and have different procedures and rules for pursuing each type of complaint. For instance, the following definition of dumping is from the WTO website at the link immediately below.

    https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm8_e.htm

    “If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product.”

    The quote below describing the difference between dumping and subsidy cases is from See “Chapter 6: Fair Market Value”, of the U.S International Trade Administration’s Antidumping Procedure Manual, which can be found at the link immediately following the quote.

    “Also, many people tend to confuse dumping and subsidies, mistakenly seeing them as a single phenomenon. The two are, in fact, distinct – one involves the pricing behavior of individual firms, while the other stems from the decisions of governments to provide preferential assistance to exporters or specific industries. While a foreign government’s decision to provide export subsidies or to protect its domestic market may create conditions conducive to dumping, a finding of dumping will ultimately turn solely on the pricing decisions of the firm in the two markets. Other U.S. trade laws, such as the countervailing duty law, are available to address more directly the trade-distortive actions of foreign governments.”

    http://enforcement.trade.gov/admanual/index.html

    Based on press coverage that described Boeing’s complaint as a dumping complaint, I have been preaching that the ultimate decision on Boeing’s complaint would, under US law, depend only on whether Delta had been offered C-Series airplanes at a lower price than was offered to Air Canada in Bombardier’s home market and if such pricing occurred, whether it had caused material damage to Boeing.

    Some documents that I just ran across on the US ITA website, seem to indicate that the US ITA has both dumping and subsidy (countervailing duty) investigations underway in response to Boeing’s complaint.
    The following excerpt is from the document at the link immediately following it. Note that it refers to an “Anti-Dumping Investigation” with an “A” case number.

    “In the Matter of the Antidumping Duty Investigation of 100- To 150-Seat Large Civil Aircraft from Canada (A-122-859)”

    http://web.ita.doc.gov/ia/webapotrack.nsf/4773e69949fcb53c852569df00718b70/7970e0a16c4d346e8525810f00506dbd?OpenDocument

    And this excerpt is from the document at the link which immediately follows it. Note that it refers to a “Countervailing Duty Investigation” with a “C” case number.

    “In the Matter of the Countervailing Duty Investigation of 100- To 150-Seat Large Civil Aircraft from Canada (C-122-860)”

    http://web.ita.doc.gov/ia/webapotrack.nsf/4773e69949fcb53c852569df00718b70/8d86ada64ea76d398525810f005098b0?OpenDocument

  10. I just looked at the public version of Boeing’s complaint, which Mr. Hamilton provided a link to in his first post on Boeing’s complaint on 4-27-16. Re-reading the first few pages of this document now that I know the difference between dumping and countervailing duties, which I didn’t when I first skimmed through it shortly after Mr. Hamilton posted it, it is now clear to me that Boeing was filing both a dumping and a subsidy complaint. The following quote is from the first two pages of Boeing’s complaint.

    “On behalf of The Boeing Company (“Boeing” or “Petitioner”), we respectfully submit to the U.S. Department of Commerce (the “Department”) and the U.S. International TradeCommission (the “Commission”) petitions for the imposition of antidumping and countervailing duties on U.S. imports of 100- to 150-seat large civil aircraft (“LCAs”) from Canada (the”Petitions”) pursuant to Sections 701 and 731 of the Tariff Act of 1930, 19 U.S.C. §§ 1671 and 1673. Boeing is a U.S. producer of 100- to 150-seat LCAs, and thus, is an interested party within the meaning of 19 U.S.C. § 1677(9)(C).

    Part One of the Petitions contains an overview of the allegations, along with associated exhibits. Part Two contains general information about the product and industry and the allegations of material injury, along with associated exhibits. Part Three contains the countervailing duty allegations and associated exhibits. Part Four contains the antidumping allegations and associated exhibits. There are proprietary and public versions of the petitions.”

    Lesson to me: When posting about what a document means, it might be a good idea to re-read the document if you haven’t looked at it recently.

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