Sept. 27, 2017, © Leeham Co.: The aviation world is still in shock over the size of the tariffs the US Department of Commerce plans to impose on Bombardier C Series deliveries to Delta Air Lines.
The DOC yesterday preliminarily decided to impose a 220% tariff on each CS100 delivered to Delta.
Deliveries are scheduled to begin in April.
And this is only half the case. This week’s decision is about launch aide and the equity investments BBD received for the CSeries.
Next week, it will be a determination whether Boeing and the US airline industry faces the threat of injury. Observers believe DOC will conclude there is.
Boeing asked for tariffs of 79% for the subsidies and injury complaints. It also asked for a 147% penalty to punish Bombardier for allegations the company refused to answer DOC’s questions.
DOC published its reasoning for the decision, but the math behind the tariff isn’t due to be shared with the parties for up to five days. Given the amount of commercially sensitive information, how much of the math will be in public documents remains to be seen.
Whether DOC levied a penalty may be revealed in the next publication.
As recently as last week, Boeing officials told aerospace analysts at its investors days that they expected $16m in tariffs to be levied this week and again next week.
Boeing was as surprised as anyone by the size of the tariffs.
The DOC studied launch aid, subsidies and tax breaks in this proceeding. It also studied the credit and equity standing of Bombardier and the CSeries program.
The program launch began in 2008 with launch aid, DOC determined. All else flowed from there.
The Determination Memo, which LNC linked here, speaks for itself. In a nutshell, the DOC concluded neither Bombardier nor CSeries were creditworthy when launch aid was provided.
Non-commercial terms were associated with financial aid, DOC concluded. Equity was provided by governments when none would have been available from equity markets. The company was near bankruptcy when these equity investments were provided.
The launch aid and equity investments constitute aid subsidies under US law, the DOC determined.
Tax breaks and below-market property leases were also examined. Government airport leases at Mirabel Airport, where the CSeries is assembled, were examined, but the DOC didn’t have enough information to draw a conclusion on these rates. It continues to consider this.
If all this sounds familiar, it is. These are precisely the kinds of issues the World Trade Organization was asked to consider in the USA-European Union complaints about Airbus and Boeing subsidies.
Among other things, the WTO found that launch aid per se wasn’t illegal, but that Airbus (the EU) violated terms by offering it to Airbus at less than commercial rates.
Bombardier maintains that its initial launch aid and its subsequent equity investments comply with WTO rules. It will have the chance to find out. Brazil filed a complaint on behalf of Embraer over the equity investments. This will likely take years to process.
But the US DOC case will undoubtedly be used as evidence against Canada and Bombardier.
The impact on trade following this week’s DOC decision and the ones to come caused concern before this week’s decision was handed down. Canada and the United Kingdom, where the CSeries wings are made in Northern Ireland, had threatened retaliation if an adverse decision was issued.
The shocking tariff level elevated concern to volcanic outrage. The premier of Quebec Province, where BBD is headquartered and the CSeries is assembled, demanded that the Federal government ban any new Boeing (and any “bolts” for Boeing) from entering Canada.
Aside from the harm this would do to Air Canada and WestJet, both with large Boeing orders, the legal basis for this is unclear.
Boeing also has facilities in Canada (Boeing Winnipeg) that employ Canadians. Boeing buys from Canadian suppliers, as does Bombardier from US suppliers. While US suppliers certainly will be hurt by the DOC decision (something that seems to, so far, totally escaped the DOC), the US suppliers are far better positioned to withstand the harm than Canadian suppliers may be if the government retaliates broadly against Boeing.
Likewise, the UK government is outraged at the size of the tariff. Unwinding defense contracts may be difficult. Perhaps the easiest retaliation is for building departments and inspectors to suddenly et cold feet over the construction of Boeing’s new production facility in the UK. Call it a Stop Work order, if you will.
Naturally, Bombardier’s sales prospects in the US have just received, in effect, a Stop Work order of its own. No US airline will consider buying the CSeries now. (What happens with the Delta order is unclear, pending lawyers looking at options.)
But LNC considers the near-term opportunities in the US to be nearly nil anyway.
American Airlines is committed to the Airbus A319. United Airlines is schizoid about 100-seat aircraft for the moment. Southwest Airlines is married to Boeing. Frontier Airlines is married to Airbus, as is Allegiant.
Only JetBlue and Spirit Airlines seem possible near-term prospects. Both are Airbus operators (hence unlikely prospects for the Boeing 737-7). Both sent letters to the DOC in support of Bombardier. But any prospective orders are likely in the scores of airplanes, not the hundreds.
LNC believes Bombardier’s greatest near-term prospects for CSeries sales are outside the US.
Boeing’s complaint and the DOC’s shocking tariff may, in fact, hurt Boeing outside the US even as the domestic market is protected. (As noted above, LNC didn‘t see the ground shifting under Boeing anyway.)
Airlines that been considering CSeries, Airbus and Boeing may decide to reduce or eliminate Boeing’s chances to support more competition in the future against a powerful duopoly.
Lufthansa Group placed the launch order for the CSeries in part to support a third competitor against this duopoly. The possibility of others following shouldn’t be ruled out.
Perhaps Boeing and the DOC validated Bombardier’s underdog status. Everybody likes to root for an underdog.