219.63% If the decision from the Department of Commerce goes final, that’s the amount of the countervailing duty (CVD) that an American-based airline would need to pay on top of the purchase price if it wants to fly a Bombardier C-Series aircraft. That is a staggering number, and it’s protectionism at its finest. The most immediate impact is obviously on Delta which is expecting its first C-Series to be delivered next year. While I hope cooler heads will prevail, I fear we may never see a C-Series with that widget on the tail. This is bad news for just about everyone.
It was, unsurprisingly, Boeing that filed a complaint with the feds saying that the C-Series was heavily subsidized and Boeing would suffer harm because of that. This wasn’t an issue until a US airline actually ordered the airplane, but when Delta bit, Boeing flipped. Let’s forget about how much assistance Boeing gets from the US federal government and state and local governments where it has operations (Washington, South Carolina, and headquarters in Chicago) in the form of military orders, tax breaks, and other investment incentives. We need to deal with the simple fact that it is impossible for a new entrant to go into a new aircraft manufacturing segment (not to mention many other important business segments) without government aid. It’s also completely and totally common practice to sell early-model aircraft below cost, because that’s required to get early customers to take the risk which in turn makes the program viable. Manufacturers make up for it in the long run if they create an airplane that’s good enough to attract interest, as Bombardier has done with the C-Series.
Unfortunately, US trade law doesn’t seem to account for the realities of aircraft manufacturing, and Boeing has been able to exploit that fact in spades in order to have the feds eliminate potential competition. CVDs are a tool governments can use to protect domestic industries from harm when foreign competitors use their government subsidies to sell their products in the US below market value (which can significantly shift market share and lead to lost jobs or worse, company failures). CVDs are supposed to ensure that a market isn’t distorted by this government support and remains fair and competitive, but in this case, it has done the exact opposite.
Have there been subsidies? Sure looks like it. On several occasions Bombardier took more than $3 billion of aid (money and land) from the Canadian and Quebecois governments. It took from the British government despite being in such bad shape that no outside lender or investor would have touched it. ( *cough* Maybe GM can talk about what that’s like in the US. *cough*) The Department of Commerce added it up and decided this massively high CVD was required to offset the advantage. Boeing was “only” asking for around an 80 percent tariff, but nay, the feds went with nearly 220 percent.
Boeing likes to pick these fights a lot, including against Airbus in a never-ending case at the World Trade Organization that has frustrated many for years. But at least compared to Airbus, Boeing offers a competitive product. Against Bombardier, Boeing has nothing to offer, and that’s what makes it hard to believe that Boeing can prove the required competitive harm in a case like this. For Boeing, this is more about the potential for future competitive harm. If Bombardier gains traction and makes money with the CS100 and CS300, a CS500 is likely to happen, and then it would compete with Boeing. Is this sounding like a version of Minority Report to you? Let’s call it pre-competition.
To get into more detail, Delta’s order was for 75 of the CS100s. Those airplanes will hold 110 seats. That’s the same number of seats on the Boeing-built 717 that Delta is going to need to replace, since Boeing ended production on that airplane more than a decade ago. That’s also similar to what the 737-600 can hold, but that airplane never got any traction and is long dead. Boeing’s smallest airplane now is the 737-700 which holds 124 in Delta’s configuration. But Delta (like most airlines) doesn’t even like that airplane; it just ordered a few for more challenging “hot and high” routes that need special performance. It’s also an end-of-life model that’s being replaced by the 737 MAX 7, an airplane that’ll have at least a dozen more seats. Even that slightly larger version hasn’t received much love from the marketplace with only 50 orders. Twenty of those are from Canadian airlines, so it could be in even more trouble if Canada retaliates. (The other thirty are from Southwest, an airline which long ago abandoned buying new 737-700s despite them being the backbone of its fleet.) Yet the feds decided that any aircraft which could seat 100 to 150 seats in normal configuration and had a range of 2,900nm would be considered to be in the same competitive set. That ignores reality.
Even looking at those broad parameters, it’s hard to see the harm here. You may, as Boeing would, point to United’s decision to purchase 737-700s over a C-Series or any other aircraft as proof that these are competitive, but that’s not really the case. United’s old management team just bit because they already had 737s and the new ones were given to them at dirt cheap prices (probably below fully-allocated costs, but you know, if it’s done by a US manufacturer, that’s ok). As soon as United’s new team came in and realized it was a dog, they switched the order to larger aircraft. Plain and simple, the 737 doesn’t compete with the C-Series, especially the CS100. Delta has made it quite clear that Boeing wasn’t even part of the discussion because it has nothing in the size category Delta needed. So where’s the harm?
I suppose I should clarify that. Where’s the harm against Boeing or (if there was one) any other US-based aircraft manufacturer? The only harm I can see is against Embraer, the only company building true competition for the Bombardier C-Series. Way to go, feds, you may have just (preliminarily) killed competition and given Embraer (a company pushing its own dispute forward with the WTO) the ability to jack up prices since it will no longer have to compete with Bombardier. Looking beyond the manufacturers themselves, there will likely be consumer harm here. But then again, the Department of Commerce doesn’t really take that into account.
Of course, I’m getting ahead of myself here. This ruling from Commerce is just preliminary. The final determination will be December 18 with the final ruling from the International Trade Commission (run by the US and unlikely to disagree) on Feb 1 of next year with the order to follow shortly after. Presumably there are several different ways to appeal beyond that. The current administration has been puffing its chest about unfair trade, so the administration could make an example out of Canada. Just be ready for retaliation from Canada and the UK (the wings are made in Northern Ireland) on this. Boeing’s military and commercial aircraft orders in those countries are at risk, so even Boeing can end up a loser here in the war it started.
What concerns me the most is that if this all drags out, Delta may have no choice but to walk away even before the war ends. It can’t worry about having to put those massive tariffs into escrow accounts while it waits for appeals. It may have its hand forced even if the eventual outcome makes that all for naught.
I’m going to personally hold out hope that there is some kind of settlement that allows Delta to start flying those airplanes. On the other hand, protectionism seems to be in vogue right now, so I wouldn’t place any bets. Maybe Delta can take solace in the fact that this kind of behavior might be beneficial to it in some way. This is exactly the kind of rhetoric that Delta wants to hear regarding Middle East airline subsidies. You win some, you lose some, right? *sigh*