Pontifications: Embraer twice became focus of US trade commission complaints

By Scott Hamilton

Jan. 20, 2018, © Leeham Co.: The US aircraft manufacturer claims the foreign company is unfairly subsidized, undercutting pricing in US sales and threatening its future. A trade complaint is filed.

A prominent politician lines up on behalf of its constituent industries, claiming unfair competition. He calls for a trade investigation.

No, it’s not Boeing vs. Airbus.

It’s not even Boeing vs. Bombardier.

The complaints were against Embraer, twice.

Once in 1982 and again in 2010. In both cases, the US International Trade Commission was involved.

The rhetoric is remarkably consistent with the Boeing-Bombardier trade case.

In both Embraer cases, the ITC dismissed the complaints.

Its decision in the Bombardier case will take a preliminary vote next week, absent a schedule change, and a final decision will be issued Feb. 9.

Fairchild Swearingen

The 1982 trade case involved Fairchild Swearingen, which at the time produced the Metro turboprop series of aircraft. These carried 19 passengers and were pressurized. They were ear-splitting in noise for the passengers. SkyWest Airlines, which operated the type for years, made ear plugs available for passengers.

The airplane entered service in 1972; more than 600 of all sub-types were made. Production ceased in 2001.

Embraer offered the competing Bandeirante, an unpressurized aircraft of otherwise similar specifications to the Metro. The “Bandit,” as the plane was commonly known, saw 501 sales. It entered service in 1973; production ceased kin 1990. It could seat up to 21 passengers, as did the last model of the Metroliner. Both usually operated with no more than 19 passengers to avoid requiring a flight attendant.

Looking back at news articles at the time (I couldn’t find the documents from 1982 on the ITC website), it’s remarkable how similar the language was then compared with today’s Boeing-Bombardier complaint. (Updated: Thanks to a reader, the document may be found here.)

It’s also surprising, given today’s “America First” environment, that the US Ambassador to Brazil told the Brazilian government he doubted the ITC would find for Fairchild and levy tariffs on the Bandit.

Embraer was then 51% owned by the Brazilian government. Fairchild claimed unfair subsidies funded 44% of the Bandit’s development, allowing Embraer to underprice Fairchild in the US. Fairchild claimed loss of market share and job losses.

Different specifications

In a news article from the period, the lawyer for Embraer called Fairchild’s claim that Embraer was responsible for the loss of market share “an excess of zeal.” The article, in an indirect quote of the EMB attorney, wrote, “There can be no damage to Fairchild from an airplane of different specifications.” The difference: the Metro was pressurized and the Bandit was not. Pressurization adds to the cost of an airplane.

This contrasts to the larger differences between the Bombardier CS100 and Boeing 737-7 that are the key airplanes in the Boeing-Bombardier trade case.

The president of Embraer at the time, Osires Silva, was quoted directly in the news article: “The regional air market is filled by foreign manufacturers because US companies did not have the vision to fill this gap.”

Sound familiar? This is what Bombardier says about Boeing.

Embraer planned to argue Fairchild received subsidies from the US Department of Defense for research and development, which migrated over to the civil transports.

Sound familiar? It’s what Airbus claimed about Boeing in the WTO trade case.

US components

Embraer also argued that it would be a “legal absurdity” for the US to impose tariffs because 54% of the Bandit’s components were US-made.

Sound familiar? It’s what Bombardier argues about the C Series, for which 52% of the components are from the US. (This will go up by about 5%, in LNC’s estimate, if the proposed Mobile (AL) final assembly line for the C Series is built.)

The ITC rejected Fairchild’s complaint.

It’s hard to see how the ITC can uphold the Boeing complaint, given the facts and precedent, but it’s considered likely that it will.

Business jets

In 2010, then-US Sen. Sam Brownback of Kansas called upon the ITC to do a study of the global business jet market, claiming Embraer received unfair government support to compete with US-made business jets.

His corporate constituents then included Cessna and Hawker Beechcraft, makers of business jets. Bombardier also produced the Lear Jet in Kansas.

Brownback claimed 13,000 Kansas residents lost jobs making bizjets because of alleged illegal Brazilian subsidies to Embraer.

The ITC’s 250-page report may be found here.

The study period was from 2006-2010. This encompassed the start of the Great Recession of 2008, during which bizjet sales (and commercial airline and aircraft orders) were hit hard. A major decline in sales, affecting Brownback’s state, was the lack of financing and credit during the Great Recession.

The lieutenant governor of Florida testified before the ITC in 2011 that Embraer had made a “substantial” investment in the state, where its corporate aircraft have major operations. She testified that the US was EMB’s largest supplier base—an argument that is used by Bombardier in the current trade case.

Despite Brownback’s charges, the ITC concluded that the affects of the Recession depressed bizjet sales and cost US jobs, not illegal subsidies to Embraer.

26 Comments on “Pontifications: Embraer twice became focus of US trade commission complaints

  1. History repeating…

    Given this history, if the US government does this time come down on Boeing’s side, it won’t be painting an especially consistent picture.

    On the other hand the ITC may well do the consistent thing. I wonder if Boeing’s lawyers read as far back as Scott has?! This is exactly the reason why a long, experienced memory is worth it’s weight in gold.

    Apparently HM Queen Elisabeth II has occassionally caught out US presidents during state visits, referring them back to decisions (and the subsequent obligations) of their predecessors that had been forgotten about. She’s been doing the job a long time; they haven’t. Beware the long memory.

  2. Regarding: “Looking back at news articles at the time (I couldn’t find the documents from 1982 on the ITC website), it’s remarkable how similar the language was then compared with today’s Boeing-Bombardier complaint.”

    See the link below for the final report for USITC Investigation No. 701-TA-188: “Certain Commuter Planes From Brazil”. Looks to have been prepared on a typewriter in the era BPC (Before Personal Computers).

    https://www.usitc.gov/publications/701_731/pub1291.pdf

  3. It is strange that Boeing went after Bombardier when they produce a small expensive Aircraft like a Fokker from the 2000’s that they probably will never make Money to its owners, now Airbus stepped in and can pour its engineers over the CS300 to slash its cost and make a profitable Aircraft from it, the CS100 most likely can be a biz Aircraft but probably never make Money as an airliner.

    • Could be the perfect plane for LCY…in ten years it could be all CS100.

      • I can’t help but think SW (LUV) is with Boeing on this attack of The Bomber. With the CS100 and CS300 offering more point-to-point flights, and LUV holding onto all those 737-700 (350 of them) and Boeing trying to dump the MAX8 Shrink-a-dink on them, they’ve got to be CONCERNED. Especially since Delta has come out and said: “We are going after LUV and UAL routes… [As noted before, Mr. Phelps, this posting has been spell-checked and sort of proofread for grammar and readability.]

        • Hello Sam,

          Regarding: “With the CS100 and CS300 offering more point-to-point flights, and LUV holding onto all those 737-700 (350 of them) …”

          What is your source for the number of 737-700’s in Southwest’s fleet being 350?

          According to the Wikipedia page on Southwest airlines the number of 737-700’s in Southwest’s fleet (as of an unspecified date) is 511 out of a total 705 aircraft fleet of 737’s. See link below.

          https://en.wikipedia.org/wiki/Southwest_Airlines

          According to a fact sheet on the Southwest Airlines website at the link below, as of 9-30-17 the number of 737-700’s in Southwest’s fleet was 508 out of a total fleet of 687 aircraft, all 737’s.

          https://www.swamedia.com/pages/corporate-fact-sheet

          A few minutes on planespotters (which lists the number of 737-700’s in Southwest’s fleet as 512 as of 1-15-18) or a similar site, will show that Southwest has continued to induct used 737-700’s into its fleet after taking delivery of its last new 737-700. Planespotters currently shows seven leased 737-700’s, delivered to Southwest from September 2017 to December 2017 in storage. Since one does not use leased aircraft for parts, or sign new leases to put aircraft into storage, these are probably Southwest’s newest used 737-700 acquisitions, undergoing preparation for entry into service.

          According to the above sited Southwest airlines fact sheet.

          “We have an industry-leading balance sheet and remain the only domestic airline with investment grade ratings from all three credit rating agencies.”

          “Southwest is the only domestic airline with 44 consecutive years of profitability.”

          Just think how much better Southwest airlines could have done financially if it wasn’t stuck with a fleet consisting of mostly uneconomic(?) 737-700’s! maybe it it wasn’t stuck with these uneconomic(?) aircraft it could have achieved the same financial results as the financial geniuses at Delta airlines did, i.e. 19 months in bankruptcy from 2005 to 2007. See link below.

          https://www.reuters.com/article/us-delta-bankruptcy/delta-exits-bankruptcy-after-19-month-restructuring-idUSWNAS850820070430

          This post was not proofread for grammar and spelling, but statements of fact were checked and cross checked.

          • From the “View History Tab” on the Southwest Airlines Wikipedia page, here is the number of uneconomic(?) 737-700’s in Southwest’s fleet in the last page update every year from 2007 to 2017. For bragging rights in December 2018, does anyone want to predict how many uneconomic(?) 737-700’s Southwest will have in its fleet in December 2018? Will Southwest get rid of some of these uneconomic(?) aircraft, keep the ones they have now but acquire no more, or purchase or lease additional uneconomic(?) 737-700’s? I will guess that Southwest will acquire about the same number of used 737-700’s in 2018 that it did in 2017, which would give it [(511 + 18) = 529] 737-700’s in its fleet in December 2018. Based on Southwest currently having 7 recently leased 737-700’s in storage according to Planespotters, it seems to me to be likely that the number of 737-700’s in its fleet, barring retirements or write-offs, will be at least (511 + 7) = 518 in December 2018.

            Date / # of 737-700’s / Change Since Previous Year
            12-30-17 / 511 / +18
            12-29-16 / 493 / +19
            12-24-15 / 474 / + 50
            12-31-14 / 424 / + 34
            12-30-13 / 390 / + 17
            12-31-12 / 383 / + 11
            12-31-11 / 372 / + 22
            12-31-10 / 350 / + 9
            12-30-09 / 341 / + 14
            12-31-08 / 327 / + 26
            12-31-07 / 301 / +39

            Here is the total breakdown of Southwest’s fleet, according to Wikipedia, on a 3-9-12 update, which was the first update which listed a 737-800 being is Southwest’s fleet, and the 12-30-17 update.

            Date / 737-300 / 737-500 / 737-700 / 737-800 / 737-8
            3-9-12 / 163 / 25 / 372 / 1/ o
            12-30-17 / 0 / 0/ 511 / 181 / 13

            According to this data, Southwest has added (511-372) = 139 uneconomic(?) 737-700’s, 181 737-800’s, and 13 737-8’s to its fleet since March 2012, while retiring a total of 188 737’s, consisting of 163 737-300’s and 25 737-500’s. I believe the last new 737-700 delivery to Southwest was in December 2011, a little more than a year after it acquired AirTran Airways which had a fleet of 52 737-700’s and 88 717-200’s. Southwest inducted the uneconomic (?) 737-700’s into its fleet (partially accounting for the large number of 737-700’s acquired by Southwest in 2014 and 2015 in the above list), and leased the 717-200’s to Delta. For some reason, Delta’s sublease of AirTans’s 88 717-200’s from Southwest is often mentioned in this blog, while Southwest’s acquisition of a greater number of used 737-700’s in the same time period (including 52 from AirTrans) is, as far as I can remember, only mentioned in my posts.

    • The Cseries doesnt need Airbus engineers to slash its cost, its more advanced than their own narrow body.
      What Airbus does bring is ability to buy major components at lower prices due its production per year of hundreds of planes vs Bombardier producing dozens.

  4. There are points in common between the two cases, but we may have to look at what is different. First, the prominent and explicit role of government aid in many different formats. Democracies have more difficulty to hide these values from the eyes of the public. Secondly the great distance between the production costs and sale price. Finally the manifest disrespect for the commission reflected in the refusal to answer what had been asked.

  5. No planes have been built for Delta yet; so how could Bombardier “supply” the costs of doing so? They should Have just picked random numbers out of the air ?

    • Hello VJ,

      Regarding: “No planes have been built for Delta yet; so how could Bombardier “supply” the costs of doing so?”

      They could have submitted a business model that showed that over the lifespan of the C-Series program, the income from sales was projected to cover the costs of the C-Series program. This is what Boeing did in the production cost model that was used by the USDOC to establish a dumping margin after Bombardier refused to submit a rebuttal model that USDOC could have compared to the model submitted by Boeing, or any data at all that could have been used by USDOC to calculate a dumping margin (or lack of one) according to Bombardier supplied data. I find it hard to believe that a for profit company in a market economy would not have completed such an analysis (the “business case”) before authorizing an expensive project. If Bombardier did not complete such an analysis, it might explain much about the results of their recent aircraft projects. C-Series: billions over budget and years behind schedule, Learjet 85 canceled due to being over budget and behind schedule, Global 7000: 2 years behind schedule and over budget.

      Much has been made on this blog about USDOC allegedly not allowing for early production costs being higher than average production costs over the life of an aircraft program; however, the model that Boeing submitted included allowances for this. If Bombardier disagreed with how Boeing modeled the decline in production costs over the life of a program, they could have submitted a rebuttal model; however, they refused to submit any data at all, with the completely predictable consequences under US law, which are no different than they would have been under UK, Canadian, or WTO law or policy.

      Below are excerpts from pages 123 to 125 of the original Boeing petition (to which a link may be found in a 4-27-17 post by Mr. Hamilton on this site), that outline the assumptions that Boeing used in their cost model, which in view of this model being accepted by USDOC, are the same type of assumptions thta Bombardier could have used in a cost model. When Boeing submitted a new cost model with program costs amortized over ten years instead of twenty, which would have resulted in a higher dumping margin, it was rejected by USDOC because they said they had reviewed the first cost model, and found it to be consistent with industry practices.

      “Both the Air Canada and the Delta orders are scheduled for deliveries early in the program’s life cycle. Because of the “learning curve” effect, the actual variable manufacturing costs in those years will greatly exceed the average variable manufacturing costs over time. Therefore, as a conservative measure for its calculation, Boeing used average variable manufacturing costs, expressed in constant U.S. dollars, over the life of the C Series program. These costs have been spread over the projected number of deliveries over a twenty-year period,which is a reasonable estimate for the life of an LCA program. In essence, for purposes of this petition, notwithstanding the limited grounds on which the Department will grant a start-up adjustment under 19 C.F .R. § 351.407, Boeing has applied a start-up adjustment to Bombardier’s POI production costs. In its normal books and records, Bombardier, following International Financial Reporting Standards (“IFRS”), does not allocate learning curve costs over the life of
      the program. Thus, Boeing’s calculation.of Bombardier’s recurring costs is very conservative.

      To estimate Bombardier’s recurring costs, Boeing constructed a Bombardier recurring cost curve model using the following known information:
      • Bombardier’s published delivery schedule;
      • The published break-even point of the first quarter of 2020;
      • Bombardier’s expected loss of USD 32 million per unit over the first 50
      aircraft·
      • Published list prices; and
      • Boeing’s own experience on the shape of the cost curve for a new aircraft series.
      In addition, Boeing assumed the following:
      • A total production run of 2,085 units for the C Series program; and
      • An average list price discount for the first 206 aircraft of 50%.
      Boeing’s estimates of Bombardier’s production costs are provided at Exhibit 42, Tab 3. A detailed explanation of the model and how the public data were incorporated into the model to derive Bombardier’s production cost for the C Series is provided at Exhibit 152.

      Non-recurring expenses include pre-commercial production research and development, design and tooling costs. According to Transport Canada, total non-recurring expenses for the C Series, including the cost of an entirely new factory, are USD 5.4 billion. To calculate the cost per aircraft of the non-recurring expenses, Boeing divided the total amount by the total quantity of expected production over the life of the program. The expected production quantity was based on Bombardier’s published delivery schedule for the early years and the upper range of expected delivery rates in later years.”

      • In the above post when I wrote “This is what Boeing did in the production cost model that was used by the USDOC to establish a dumping margin..”, I meant that Boeing constructed a model to compare total income and expenses over the life of the C-Series program, and not that in the model submitted “income from sales was projected to cover the costs of the C-Series program”. Boeing’s model projected that income would not cover expenses, I am asserting that Bombardier, it they wanted to win the dumping case, should have submitted a rebuttal model showing that income over the life of the program could plausibly cover program expenses.

      • Regarding the following statement in my post above: “Boeing submitted a new cost model with program costs amortized over ten years instead of twenty, which would have resulted in a higher dumping margin, it was rejected by USDOC because they said they had reviewed the first cost model, and found it to be consistent with industry practices.”

        When I went looking for where I read this in order to provide a link to the document on which I was basing this statement, I realized that my memory about this issue was not fully correct. Boeing actually proposed reducing the amortization period to the period of delivery for the Air Canada and Delta aircraft, rather than to 10 years as I said in my post above. According to Boeing’s calculations this would have increased the dumping margin from 79.82% to 143.35%; however, USDOC rejected Boeing’s request and instead selected the 79.92% dumping margin based on Boeing’s model with a 20 year amortization period. USDOC couldn’t consider selecting a model submitted by Bombardier, because Bombardier refused to submit one. See the excerpts below form the “Application of Adverse Facts Memo” which was posted on the USDOC/USITA ACCESS website on 10-11-17.

        From page 8:

        “Regarding its argument that the Department should revise the Petition dumping margin, the petitioner stated the following:

        In relying on Petition information, however, the Department should account for the strategic choice Bombardier has made in preferring obstruction and noncompliance over cooperation. The Department should infer that Bombardier’s refusal to cooperate reflects its belief that obstruction will yield a lower dumping margin than compliance with the Department’s requests. Bombardier’s intransigence is egregious, and the Department cannot permit Bombardier to game the investigative process in this manner. In the interests of inducing compliance, the Department should make an upward adjustment to Boeing’s conservative estimate of a 79.82 {percent} dumping margin for Bombardier.

        The petitioner further argued that the Department should revise the Petition dumping margin by using Petition data on average costs over the periods of delivery for the Delta and Air Canada sales rather than data on average costs over the life of the C Series aircraft program. In other words, the Petitioner argued that the Department should calculate costs by allocating them over a shorter period of time. This requested revision to the cost calculation contained in the Petition, which results in an increase in the normal value used to derive the estimated dumping margin, would increase the estimated dumping margin from 79.82 percent to 143.35 percent.”

        From pages 19 and 20;

        “In selecting a rate based on AFA, the Department selects a rate that is sufficiently adverse to ensure that the uncooperative party does not obtain a more favorable result by failing to cooperate than if it had fully cooperated. The Department’s practice, in less-than-fair-value investigations, is to select, as an AFA rate, the higher of: (1) the highest dumping margin alleged in the petition, or (2) the highest calculated rate of any respondent in the investigation.

        Consistent with the statute, court precedent, and its normal practice, the Department has assigned, as AFA, a rate of 79.82 percent to Bombardier. As noted above, this rate is the estimated dumping margin for aircraft from, and the only estimated dumping margin in, the Petition. We disagree with the petitioner’s suggestion that we should adjust this petition rate to reflect a revised cost calculation, and a correspondingly revised normal value (based on constructed value). Prior to the initiation of this investigation, the Department examined both the factual information and methodology proposed by the petitioner to derive the estimated margin contained in the petition, and determined it was reasonable and reflective of accounting practices common to the aircraft industry. Further, while Boeing asserts that the revised calculation reflects a “unit cost” accounting methodology practiced by Bombardier in the normal course of business, there is no evidence on the record of this proceeding that explains exactly how Bombardier calculates costs under such a methodology. Moreover, the Department preliminarily determines that the unadjusted petition margin is adverse to Bombardier’s interests, and making the further adjustment suggested by the petitioner is not warranted for this preliminary determination. The Department is not aware of any new factual information that calls into question the accuracy of the petition margin, and for this reason the Department has not adjusted the petition margin of 79.82 percent, which it has preliminarily applied to Bombardier as AFA.”

        In the above, note in particular the following.

        “Prior to the initiation of this investigation, the Department examined both the factual information and methodology proposed by the petitioner to derive the estimated margin contained in the petition, and determined it was reasonable and reflective of accounting practices common to the aircraft industry.”

        In other words, USDOC found nothing wrong with basing dumping margins calculations on average production costs over 20 years and several thousand aircraft, or giving 50% discounts to early customers. Bombardier could have submitted such a cost model instead of complaining that it wasn’t allowed to do so, without ever actually having tried to submit such a model. If they had submitted such a model and had it rejected by USDOC, then they could have disputed the rejection on appeals, but since they didn’t submit anything, they have nothing to appeal rejection of.

  6. From the USITC EDIS website (Electronic Data Information System? – or some programmers wife is or was named Edis?).

    “Due to a lapse in federal appropriations USITC applications are operating in a read-only capacity. USITC applications will not be updated until appropriations are allocated. Similarly, submissions to EDIS will not be accepted until appropriations are allocated. Full services will be restored the next business day after appropriations are allocated.”

    • From the USITC website at the link below.

      U.S. International Trade Commission
      Plan for an Orderly Shutdown in the Absence of an FY 2018 Appropriation
      Revised: January 19, 2018

      Continuing significant activities:
      1. Protection of federal land, buildings, and property.
      2. Network services required to maintain security services (circuits, card readers, etc.)
      3. Incoming mail processing to facilitate the receipt of possible court orders requiring action by agency attorneys.
      4. Litigation activities for which time extensions have not been granted.
      5. Other activities necessary to support excepted functions, e.g., emergency procurement of a critical component in a security or safety system.

      Significant activities that will be disrupted:
      • Investigative activities, including proceedings under sections 332, 337, and 201, and Title VII of the Tariff Act of 1930, maintenance of the Harmonized Tariff Schedule of the U.S., technical assistance to the U.S. Trade Representative and Congress, as well as all other government functions other than those directly supporting active litigation to which the USITC or the United States is a party.

      https://www.usitc.gov/documents/usitc_fy_2018_shutdown_plan.pdf

      • Some more excerpts from the USITC shutdown plan.

        “Given the current status of active litigation, we anticipate seven excepted personnel to be retained on the first day of a shutdown. We anticipate three to seven individuals on intermittent recall to preserve and protect property. Ninety individuals are designated excepted for response to extraordinary or contingency situations arising while conducting excepted activities.

        USITC’s six Commissioners are presidential appointees and exempt from furlough.”

  7. I have been skimming through the USITC final report for the 1982 case “Certain Commuter Airplanes from Brazil”. There are a number of major differences between this case and the current C-Series case.

    Among these differences is that Embraer had not drastically reduced sales prices shortly after being rescued from likely bankruptcy or program cancelation by a multi-billion dollar government bailout. In fact, the USITC notes that the prices for both the US petitioner’s Metro plane and the Brazilian respondent’s Bandeirante plane had both recently been increasing, not decreasing, and that there was a US like product, the Beechcraft C99, which was less expensive than the Bandeirante, and that this pricing data was inconsistent with price suppression by reason of imported planes. See the excerpt below from pages 10 and 11.

    “The prices for the domestic Metro have risen for each of the five new models produced since 1969. Current delivery price for Metro III is approximately $2 to $2.3 million. This price range is substantially higher than the average transaction price reported for the period of January through March 1982, the last period for which price information was supplied for the Metro III. Importantly, it appears that sales revenue has kept pace with increases for the Metro in the cost of goods sold through 1979-81. Although the price of the C99 has declined since it was first introduced in 1980, nothing on the record indicates that price decreases were in response to subsidized imports. The price for the Bandeirante has increased during the same period that the price for the C99 decreased. In fact, the price for the C99 is below the price of Bandeirante. These factors indicate that there has been no price suppression or depression by reason of imported planes.”

  8. ROFL, thanks.

    It’s all games – by governments subsidizing Boeing, Bombardier, Embraer, Airbus (I don’t know Fairchild’s situation back then).

    And it’s all ignorance of:
    – the impossibility of calculating such things
    – denial of the benefits of trade
    – evading competition

    • And Embraer went on to produce the larger Brasilia, and its ‘regional jet’ multiple series, and now an airlifter.

      Taught by Canadians and Americans, I believe.

  9. Oh, IIRC Bombardier complained about Embraer (despite having received subsidies itself for decades).’

    It’s all game playing by companies and politicians.

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