Monday, December 11, 2017
Boeing's Pyrrhic Victory Over Bombardier
Boeing filed a complaint with the United States International Trade Commission (ITC) alleging Bombardier, the Canadian aircraft manufacturer, received unfair subsidies from the Canadian government to build 100 seat CSeries jets. Bombardier and the Brazilian Embraer build the smaller size passenger jets usually flown by commuter airlines. Airbus and Boeing concentrate on the larger passenger jets. Boeing claimed Bombardier's new CS100 jets would unfairly compete with its 737 series, in essence dumping the CS100 on the U.S. market with a sales price of $19.6 million each, a substantial discount from the estimated manufacturing cost of $33.2 million/plane. Delta has a contract to purchase 125 CS100 planes from Bombardier. The ITC agreed with Boeing on September 26, 2017, assessed a preliminary 220% tariff on CS100 jets, and added a 80% preliminary anti-dumping duty to it, creating a 300% tariff on CS100 jets. The 300% tariff would quadruple the cost of the plane. These penalties are preliminary, subject to review. Boeing, which no longer manufactures a 100 seat jet, claims the CS100 would unfairly compete with its 737 Max 7’s and 737-700. McDonnell Douglas in its last years of independence marketed the MD-95, a 100 seated. Orders were received from ValuJet and Scandinavian Airlines System (SAS) before Boeing acquired McDonnel Douglas. Boeing rebadged the plane as the Boeing 717, but could not make it financially viable. The last of 156 717’s rolled off the Long beach assembly in 2006. Most of the 717’s are flown by Delta today. The original Boeing 737 could be configured to 100 seats, but the newer models all have a larger seating capacity. Boeing savored the ITC decision, but may not have anticipated the backlash. Ed Bastian’s, Delta’s CEO, made it clear that it will take the planes, but will not pay the added tariff. Justin Trudeau, Canada’s Prime Minister, said “we won’t do business with a company that’s busy trying to sue us and put our aerospace workers out of business.” Canada cancelled a prospective deal to acquire 18 new Super Hornet F/A-18 fighter jets from Boeing, a $5.2 billion deal. Canada will instead purchase used F-18’s from Australia. Boeing will still make some money on spare parts, but not what it would have reaped from new sales. Canada intends to cannibalize some of the Australian planes for spare parts for its existing fleet of F-18’s. Canada will open a competition in 2019 for new fighters. Boeing should not expect a favorable bid under current circumstances. The Boeing/ITC decision against Bombardier has impacts not only in Canada, but also in the United Kingdom. Bombardier, the largest manufacturer in Northern Ireland, employs 4,000 workers at a plant in Northern Ireland, where it builds wings for the CSeries plane. British Prime Minister Theresa May has said that any future contracts with Boeing are at risk. The Prime Minister needs the 10 votes of Northern Ireland’s Democratic Unionist Party for her fragile coalition government. The U.K. has been a major purchaser of Boeing’s defense products. The question remains open as to British Air’s plans for future plane purchases. Boeing is a font of hypocrisy. Its hands are not clear in the subsidy battle. Both Boeing and Airbus have received large government subsidies. The United States Export-Import Bank was created during the Great Depression in 1934 to facilitate the export of United States products. The Ex-Im Bank provides loans, guarantees, and insurance to borrowers. Its renewal is very controversial. It’s been nicknamed the “Bank of Boeing” because 40% of its financing subsidizes Boeing sales. $40.5 billion was approved for guarantees to airline from 2007-2014 to purchase Boeing jets. 48% was for government owned airlines. Delta, United and American are very upset with the Ex-Im subsidies to the Persian Gulf airlines of Emirates, Etihad and Qatar, which combined with government subsidies makes it difficult for the American carriers to compete on flights to the Mideast and beyond. Boeing has been receiving since 2003 an estimated $160 million/year for 20 years from the state of Washington. It got another $8.7 billion tax incentive from Washington State in 2013 to assembly the 777 in the state. South Carolina has thrown in another $900 million in subsidies to build an assembly plant in North Charleston for its B-787 Dreamliners. Boeing received another $56 million in property tax subsidies from Illinois in 2001 to entice the company to move its headquarters from Seattle to Chicago, which otherwise made no sense. Chicago outbid Denver and Dallas-Fort Worth to attract Boeing. Barry Gardiner, trade spokesman for the U.K. Labor Party labeled Boeing a “Subsidy Junkie.” Boeing should also take note that Delta, one of its largest customers, is very upset with the company. What about Bombardier? It has entered into a partnership with Airbus as the largest partner (50.1%) to further develop, manufacture, sell and service the fuel efficient CSeries of jets globally. The CSeries will be built in Mobile, Alabama, if necessary. Boeing professes not to be worried. It said the same thing when Airbus entered the passenger jet market. Is Boeing acting like an Ostrich with its head in the sand as it savors its Pyrrhic victory?