Pontifications: Boeing-Bombardier complaint revisited

By Scott Hamilton

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.

Why is this happening?

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’s claim

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.

Cash flow loss

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.

The NSA

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.

Depressed MAX sales

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.

NSA vs 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.

 

56 Comments on “Pontifications: Boeing-Bombardier complaint revisited

  1. The CS500 makes for a more modern and efficinet plane than the 737MAX and Boeing knows it, once PWA is getting all the modifications into their Engines it will make volume production real, hence Canadairs problems is cash and production capability. If the Chinese decide to dedicate a few FAL’s to the CS500 and just one for the C919 that will never get its EASA/FAA approval it will be another story where they can produce CS500’s in volumes pretty cheaply. The Chinese make major parts of Canadair/Bombardier planes already and could add a few more sections. The key is to have Canadair to build a few cerification planes at home and certify with Chinese Capital then move CS500 production to China. The CS500 will impact the prices of the 737MAX and A320neo even at 5% market share.

    • But that’s quite a lot „if’s“, isn’t it? Leaving the technology advantage of BCA and AI in 2024 – which they may share with China voluntarily anyway to increase market share….

    • Agreed. Bombardier stand there alone and financially weak, with a fantastic design, ripe for the picking.

      Reaching some sort of deal with Bombardier would seem to be a good way for Boeing to get a new design. Purchase the company? License production? Share the spoils? With Boeing’s backing the aircraft could be turned into a serious commercial competitor to the A320 family, and Boeing could have been in the driving seat.

      As you point out anyone is free to come in and strike a deal with Bomardier, maybe the Chinese. For example, what if Airbus decided to do a deal with Bombardier, simply to infuriate Boeing?

      If Boeing don’t do something, we might at some point in the future be asking whether the Chinese should be allowed to buy Boeing…

      • I think Airbus and Boeing are not interested as the C-series design logic differs too much from their heritage designs. A buyer of the C-series program must have a good home market and access to plenty of cash to do the CS-500. Maybe Mitsubishi as a complement to their MRJ’s? The US would not be too happy if the Japanese become as successful in Commercial Aircraft as they are with cars and precision Equipment. The CS500 would be much lighter and have a bit shorter range compared to the 737-8 and A320neo and it might be a good position taking over the Douglas heritage customers.

        • Or, as sad as it is of an engineering point of view, their will be neither a CS500 nor a “buyer” for the CS programme and the CS100 and CS300 will be highly respected (hopefully financial viable) niche products until the next generation of single aisle aircraft (NSA) come to the market….

        • Someone buying into the program certainly would need a lot of cash, but perhaps not as much as starting afresh. My point is that buying into the C series program would likely be a quick win for someone. Can Boeing risk anyone else doing that? I don’t think so. The only way it has of guaranteeing avoiding that outcome is to act themselves.

          Certainly in Boeing’s case, not having much in common with their heritage designs sounds like a good thing! Judging from various reports is a fine aircraft with a lot of promise.

          • Since Bombardier has taken so much state aid from Canada, Quebec and UK for the Cseries development and production sites, this likely means the future is tied to those locations. Even China has a piece of the pie in the central fuselage, but tellingly hasnt ordered any planes.
            Its not like you can pick up the plane and take it to another location, wings have to b made in Northern Ireland, and major sections in Montreal and Canada.

      • You’re dreaming if you think Bombardier will ever join with Boeing. They’d unify with Airbus first.

        Bombardier will do just fine. Boeing should look in the mirror since they’ve collected more than $15 billion in corporate welfare from the US Gov since the 90’s alone.

    • Your final statement: “But that said, I have no doubt Donald Trump’s Department of Commerce will find for Boeing,” begs the question – What effect will this have on the CSeries Program? I would venture to guess little to none and that Boeing’s actions have validated the CSeries for the marketplace. Trump’s words and deeds are two different things. This decision by Commerce could be a toothless proclamation…

    • Only the water bomber, CL-215 and CL-415, use in Europe is call Canadair.
      ”As part of Bombardier, Canadair lives on in the series of business jets or regional jets known as “RJ Series” or CRJs. More recently the branding has been dropped, and new projects from all of Bombardier’s various aircraft divisions are now known simply as Bombardier Aerospace.”

  2. CSeries is not a “Static” design… Bombardier already have an upgrade kit for another 5%+ effiency… Nice of Boeing to scrap their $5billion superhornet deal with Canada for this. And for the USA to make Canada Scrap 80 F-35 deal $60B-$80B deal and have Canada go with Dassault Rafale who will assembled them in Canada… Thank you Boeing 🙂
    Sylvain
    http://www.fliegerfaust.com

    • I think that it will cost BA&AB more than that, but they will be much cheaper to build and amortized over a much larger total.If Boeing are serious about the Cseries being a competitor, might 2 wings and 2 different fuselages be the way to go?
      That way they can also do the job in 2 stage’s. If I were in their shoes I would be getting very nervous about replacing the 737.Boeing are not milking a C series competitor, because they don’t have one.

      • That was supposed to come after Sam’s comment! Canada can inflict a considerable amount of pain by not ordering the P8.

  3. ”…China is Boeing’s largest customer and Boeing isn’t going to do anything to piss off China.”
    But for China, Bombardier could be an important key for transport worldwide because Bombardier include Aviation and Transport (Rail, Metro, tramway etc…) an China need Bombardier to be in competition in Europe and America. Bombardier is already in China in transport.
    I see China to be independent with political with Boeing. On political basis, China and USA could be at anytime in bad relations with Trump presence!

    • If Boeing can maim Bombardier as a Chinese customer of subcontractor work
      They have a better ( cheaper ) standing in work share cost for project items going to China?
      Did China say no to a Boeing participation offer recently?

  4. US aviation industry should do quite well out of a successful C series, possibly slightly ahead .A lot of swings and roundabouts, P&W win ,safran lose etc.It would take out some Airbus plane’s as well, which have a lower percentage of US parts.
    In fact the US can barely lose,all the serious competitors for the smaller than B737A/320 market have a large percentage of US parts.The only US large passenger plane manufacturer decided to bale out of this market.Boeing could easily produce a worthy competitor to the C series with or without using its own vast subsidies.Airbus is the only remotely plausible target of this nonsense.

    • “Boeing could easily produce a worthy competitor to the C series with or without using its own vast subsidies.”

      But isn’t this exactly what Boeing and Airbus are trying to push off as far into the future as they can? They have so many orders for the A320neo and the B737Max, that all they want is the money from that for as long as they can milk it. I do believe that all the suppliers have a jump on the parts for a CSeries type plane, but I’m guessing it would cost BA and AB between 15-20 Billion in today’s money to build three different lengths of the NSA.

  5. Oersonally, I think Boeing is using this as an opportunity to probe Bombardier to get free research for their NSA.

    “But that said, I have no doubt Donald Trump’s Department of Commerce will find for Boeing.”

    A sweeping, ignorant statement.

    • “A sweeping, ignorant statement.”

      Care to place a bet, Pegasus?

      • The way the complaint is framed I can’t see how Boeing can lose.

      • Fair enough Scott. But you can admit its conjecture at least?

        • Scott said he has no doubt. That inherently makes it a personal opinion, not a fact.

          That said, I have no doubt Scott is correct!

    • Free research for NSA and/or pushing to try to win the T-X trainer program. Not following Defense that much but understand it is big program that could help Boeing after loosing the F-35 program.

    • In an alternate universe, even Hillary Clinton’s Department of Commerce would find for Boeing.

  6. I note that you mention the subsidies that BBD received and that the Chinese and Russian competitors receive but no mention of the massive subsidies that Boeing receives on an on going basis.

  7. Interesting time frames, so in relation to the CS500 it has a brief opportunity to shine perhaps 2024-30 before it is superseded. During that time it has to hope that fuel prices spike to give it a competitive edge as compared to existing offerings. This looks like a relatively small opportunity and the trade dispute is there to muddy the waters as well.

    From my perspective BBD will pay a high price and struggle to get a reasonable reward for their ambition. The only thing they have done is kept BA/AB honest by forcing them to react with neo/MAX and to consider NSA in the future.

  8. Hey Scott –

    What about the following scenario: After losing the trade complaint – Bombardier then puts a C Series line in Wichita and moves the Learjet production to the Challenger 350 line in Toronto ? Seems this could nullify the Boeing complaint ( may actually make these C Series with higher US content than the 737 Max, given the engines) and perhaps enhance the sales campaigns for US Airlines. They may need the trade loss to get permission from Quebec to put a line outside Montreal. They have an employee base and infrastructure in Wichita that could make this go fast.

    • The Quebec and Canadian federal bailouts require CSeries production remain in Quebec.

      • I don’t know where you got this idea of a bailout Scott. For one was only an “investment” while the other is a reimbursable loan. It’s just another way of doing business. 🙂

        • @Norman: If it looks like a duck, walks like a duck and quacks like a duck, it’s a duck.

          • Yes of course, but according to Boeing it looks like a hawk, walks like a hawk and screams like a hawk. 🙂

          • Again, if it is a non-US entity it is always referred to as a subsidy but you never mention subsidy in relation to Boeing? Federal, State, fat military contracts etc… If it walks like a duck …

  9. I wonder if the fact the CSeries has a high US content will figure into the commerce department decision? I read that the CSeries has about 50% American content. Flight testing was done in Wichita where Bombardier employs 1,000’s of American’s building Learjets and Challenger Jets. It would seem very unfair to penalize a company that employs so many American’s just because it is based in Canada. Also what about American Airlines? They benefit from having COMPETITION!

    Whatever the outcome I – as a Canadian – hope that my government will completely boycott Boeing products in the future – no order’s for F18’s or P8’s. If the commerce department sides with Boeing I would expand that boycott to all American made aircraft. No F35’s What we can’t build ourselves we can buy from Europe including fighter jets.

    • Could be the other way round, confirm order for F18 & P8 and we’ll back off.

      • Actually, now I think about it, maybe that’s the most plausible explanation

        • Maybe, but it seems to have had the opposite effect so far Grubbie!

          • Not to mention the potential damage it has done to their relationship with Delta.

  10. Maybe Bombardier will set up a FAL in China for the Chinese and some Asian markets? With Europe and rest of the world being served by the Canadian FAL. If planes are coming of the Chinese FAL I doubt Boeing will have the gumption to file a complaint against a Chinese product. Perhaps this will be done in conjunction with a 500 unit order and BBD assistance in certifying the C919.

    • If it becomes necessary to establish a FAL outside Canada perhaps a better choice would be Wichita but hopefully this will not be necessary. Canada and the U.S. have one of the largest trading relationships in the world – a trade relationship in which the U.S. enjoys a $12.5 Billion SURPLUS in the trade of goods and services despite the widespread perception south of the border that Canada is hurting the U.S. when it comes to trade.

      https://ustr.gov/countries-regions/americas/canada

      “The U.S. goods and services trade surplus with Canada was $12.5 billion in 2016.”

      • I thought that too. Amazing how a few vested interests and dirty politicians have managed to create that impression.
        USA, the neighbors from hell.

      • Well, if Boeing somehow gets its way, a CS500 FAL in China will probably happen – plus all the “know how” transfer.

        A sale to COMAC could be the optimal financial solution left for BBD Commercial Aircraft.

        The US seems to consider China a better partner than Canada, and would certainly accept a Chinese made CS500 (even if fully subsidized – for real this time…)

        Boeing might get more than it bargained for – plus the loss of some Super Hornets/P8s sales.

        • It’s not that the US considers China a “better business partner” the issue is China is too big to bully whereas as tiny Canada can be easily kicked around. The US would happily snuff out an aerospace company in the country that is its best trading partner then take on China on trade (despite having a 400 Billion trade DEFICIT with China).

          Whatever happens I sure hope this beautiful aircraft – designed and built in Canada – doesn’t fall into Chinese hands – that would be the ultimate tragedy – I would rather see the program cancelled outright and the production tooling turned to scrap metal.

          • Wouldn’t be surprised if (if Boeing gets its way) the Quebec Gvt eventually sells (with conditions) its CSERIES participation to COMAC WITH profit. (They only paid a fraction of the costs).

            That would prove this Qc gvt investment was basically at market value to begin with. (Despite walk ing like a duck)

          • Ex ME. Its not just the Quebec government, its the Canadian federal government, plus the British and North Ireland governments who have put money into the Cseries.
            Its really inconceivable that it could be just fobbed off to China and essentially killing off aerospace in Canada and Northern Ireland. Rumours about Cseries being offered to Airbus, and being rejected were likely because it moving the design HQ and main production facilities was non negotiable.
            Canada stood up to help save GM, because of its connection to the car industry, Bombardier is the same for aerospace, cutting loose the whole ‘sector by selling to China’ is a political disaster.
            If the plane itself was a lemon it would be hard to offload, when its such a technical success makes it impossible to shift.
            Boeing pushing its weight around makes it easier for the average Canadian to say , “we want ‘our plane’ to succeed commercially”

      • Didn’t Canadá agree to a renegotiation of NAFTA? I wouldn’t bet on the US having a surplus in 10 years, and I suppose now Boeings products might be a subject in those talks.

        • Under the current NAFTA agreement Canada has taken the US twenty times to court about illegal tariffs imposed by the United-States. Canada won twenty times and the US never won a single case.

          Guess what, under the new agreement the US want to remove the right to Canada to have recourse to tribunals to solve any issue about the lumber industry.

          And there are still many people who believe that the United-States conduct business based on free entreprise principals.

  11. But the crux of the matter is still undiscussed. Is Delta paying a mere 18 million dollar for each plane? If so this is dumping especially when the product is so heavily subsidized. If CS100 and CS300 are such great plans Delta should be content to buy them on their own merits. Maybe getting some discounts due to number of planes acquired or the additional cost incurred to Delta as result with a new Aircraft supplier .

    • Interesting and obvious question. Why did Boeing force a desperate vendor so low and why didn’t Airbus follow them down? Were Airbus scared of anti dumping action or were they just not that stupid?

      • “Were Airbus scared of anti dumping action or were they just not that stupid?”

        Just not desperate.
        Why should they force an airplane on a customer that does not fit well? for that segment the CS* is the better product.
        The money for Airbus is in A321, less so the A320 and really no pressure to sell A319. cost span across the line is much less than revenue span.

        Boeing doesn’t have that luxury.

    • What kind of offer did Boeing make?
      $17m for an inferior product? Or even lower 🙂

    • @David: Where do you come up with “$18m” per plane? Not even Boeing suggested this price.

      • I probably misremembered your report “Boeing alleged BBD sold the CS100 to Delta for $23m, or $19.6m after adjustments. Delta and BBD denied the $19.6m and said the price was “millions” higher. Testimony didn’t specifically address the $23m claim.”
        The Sub 20 which Boeing claims got stuck in my mind. I am not a very accurate person …

  12. @Gweilojoe

    “If it is a non-US entity it is always referred to as a subsidy.”

    Subsidy is a misnomer for the Canadian and European aerospace industry. But in the US any form of governmental support, whichever form it may take, is called a subsidy. Which is okay with me as long as the same standards are applied to the United-States aerospace industry, or any other American industry for that matter.

    For example, if the US government subsidizes the development of say the B-47 and B-52 and Boeing applies that technology to commercialise the 707 this is not considered a subsidy in the United-States, when everywhere else around the world it is referred to as military welfare.

    Personally I think it’s all right if Boeing can thrive with military contracts. But please, my dear friends across the border, also let other companies thrive around the world and don’t be afraid of competition.

  13. I really don’t see how such a fuel consumption improvement can be possible by 2024. There are no transformational engine architectures on the way the likes of the P&W GTF and GE Leap. Yes the RR ultrafan is on the way, and perhaps a GE GTF, but the P&W will also improve and advance with PIPs . I do not see any huge leaps in materials that can deliver such a gain. The only possible path is a lifting body airframe which will be a “moonshot” type endevour. Does Boeing have the appetite for such a project after the 787 debacle? So I think there is a HUGE business case for CS500, a simple stretch, maximum commonality. No extra tankage

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