July 31, 2017, © Leeham Co.: It’s been in a quiet period in the trade complaint between Boeing and Bombardier.
The issue moved over to the US Department of Commerce (DOC) after the US International Trade Commission (ITC) concluded there were grounds to continue the probe. Then Boeing moved for a two-month delay, to September. There it sits. But as July moves into August and with the September decision date around the corner, it’s time to revisit the issue.
Nobody in the know that I know of believes Boeing’s claim that Bombardier, if left unpunished, will put Boeing out of business and with it the US aerospace industry.
So why is Boeing doing this?
Boeing may well be standing on principal about government support to Bombardier. But, then, where is the stand on principal when it comes to government support to COMAC and its C919 and to Russia and its Irkut MC-21? Both are building aircraft that are directly competitive to the “heart of the market” Boeing includes in its complaint against Bombardier, and the Chinese and Russian governments are funding these competitors.
The answer, of course, is that China is Boeing’s largest customer and Boeing isn’t going to do anything to piss off China.
Boeing has a Russian engineering center and buys titanium from there, so a complaint there is unlikely.
Bombardier, meanwhile, is one-sixth the size of Boeing in revenue and its balance sheet is not just weak from its own troubles but can’t begin to compare with Boeing’s, its cash flow and other strengths. In other words, Bombardier is the proverbial 98-pound weakling and easy to pick on.
Bombardier doesn’t even have a competitor in the heart of the market (the CS500), and may or may not in the future, but this is the airplane Boeing seems to fear most.
Boeing claimed in its complaint that the non-existent CS500 will kill the 737-800, but this is silly. The -800 is going away due to the MAX 8. The last -800 is scheduled to be delivered in 2021, according to the Airfinance Journal Fleet Tracker. The conceptual CS500 has nothing to do with this.
BBD testified that if it does a CS500, it won’t be for a decade—ie, 2027 EIS. Let’s assume there is a little hyperbole in this timeline. I personally don’t think Bombardier will be in a position to launch the CS500 before 2021, simply as it digs its way out of the near-bankruptcy experience brought on by the CSeries program (and other factors), getting the CS100 and CS300 broadly into service and the production rate to 10/mo (120/yr) in 2020. I’d give it another 2-3 years from launch to EIS, since the CS500 should be a straight-forward derivative of the CS300.
By 2023-24, with an optimistic CS500 EIS, the MAX 8 will have been in service six or seven years and will have established a solid customer base. BBD’s ability to significantly penetrate this base is limited at best.
Furthermore, we must recognize that the CS500 will also compete with the Airbus A320neo. It’s safe to assume that half the CS500 sales would eat into Airbus as well as Boeing.
How many airplanes are we talking about?
BBD has a goal of building 10 CSeries a month by 2020. It’s speculative, but let’s say BBD increases this by three by 2024. By then, Boeing can make a case it will be building 60 737s a month (and Airbus will be doing the same, or more, for the A320).
What ratio of that 13 could be CS500s?
If market forecasts can be believed, we conclude that BBD would build four CS100s a month. The other nine will be split between the CS300 and the CS500. (There’s a rationale for this, but I won’t go into it here.) Since the CS500 would be in the “heart of the market” (~160 seats), let’s weight the remaining nine to this production and give it five per month.
Splitting this with Airbus, this suggests BBD will produce 2.5 CS500s per month to Boeing’s 60/mo for the 737. This is 4%.
I have a hard time seeing how the CS500 is a serious threat to the MAX 8.
Boeing also points to the CS300, which is the direct competitor to the 737-700 and 737-7, but the -700 is dead already and the MAX 7 is essentially stillborn. Only some 60 have been sold, and this is through no fault of the CS300. The MAX 7’s original design was so unappealing that Boeing added two rows of seats to make it more economical. So far, there’s been a commitment (yet to be changed into a firm order) for 10 and a firm order for five for the redesign. Hardly a barn-burning success.
Wait, you may say: 4% loss of the 737 cash flow is still losing 4%. Well, yes.
But, Boeing by then will have a fully functional 777X program. The 787 program will be throwing off huge amounts of cash. (And if you believe Boeing, by then the 787 deferred production and tooling costs should also be recovered.) The KC-46A tanker will be throwing off cash.
There’s even money to develop the Middle of the Market aircraft, or New Midrange Aircraft (NMA), which if the timeline is what people expect, will be in production by then, perhaps even in flight testing.
In other words, plenty of cash flow at Boeing.
But wait, you come back. What about the R&D for the New Small Airplane (NSA)? Won’t this program be gearing up by then, too?
This is the presumption, yes. But if Boeing CEO Dennis Muilenburg sticks to his business plan to keep R&D spending at a level pace, the NSA won’t be launched until the NMA R&D spending is well over the peak—which by 2024 it would be. So this shouldn’t be impacted.
But won’t the launch of the NSA depress MAX sales?
According to the Airfinance Journal Fleet Tracker, there currently are nearly 7,400 737s of all types operating (including Classics, NGs, cargo, the very few MAX 8s that have been delivered and BBJs). There are 3,800 MAX orders through June. This leaves 3,600 737s that need replacement, plus growth.
Just the replacement demand over the next seven years is 514 orders per year. Add growth. One can conclude that by then the demand for the MAX (and the neo) will start to decline of its own accord, without any push from the CS500.
When Boeing and Airbus launch an NSA, it must be at least 15%-20% more economical than the MAX and the neo to make sense. This would make it perhaps 7%-10% more economical than the CS500 (I’m guessing).
So, why buy the CS500 with a new, better airplane around the corner (so-to-speak), unless fuel prices by 2024-25 spike back up to $100/bbl?
I have a hard time seeing the business case for a 2024 CS500. But this is another story.
If we grant Boeing the assumption that BBD will proceed with the CS500, the production doesn’t begin to mount a challenge to Boeing (and Airbus) and, in my view, it comes too late: Boeing and Airbus will be gearing up for the NSA, with technology and economics that will leave the CS500 behind.
Therefore, I still have a hard time understanding why this complaint has merit. But that said, I have no doubt Donald Trump’s Department of Commerce will find for Boeing.