Boeing Bullies Bombardier, Bamboozles Bureaucrats

An illustration of a future Bombardier CS100 in Delta livery.

In April 2016 Delta announced an order to buy 75 of Canadian company Bombardier’s new CS100 commuter jets.

Bombardier was desperate to get a validating order from a US airline, and indeed, desperate to get any orders from any airlines.  Prior to the Delta order, only 53 planes had been ordered – 30 by Lufthansa subsidiary Swiss Global Airlines, and small numbers by sundry other airlines, with no new orders (just a cancellation) since January 2012.

By all accounts, Bombardier offered Delta a steal of a deal so as to secure the order.  While the details are commercially confidential, it has been suggested the planes might have been sold for about $20 million each, and it is also suggested that the cost to product the planes might be closer to $35 million each.

The CS100 is by all accounts a lovely new plane, relatively comfortable and spacious for passengers, and economic and efficient for airlines.  The eight that have been delivered to Swiss so far seem to be performing very well.

The plane typically holds 108 passengers (8 first class and 100 coach) or as many as 133 in what is politely termed a ‘high density’ configuration (with a mere 28″ of seat pitch and all coach class).

Boeing also tried to win the Delta order.  But it doesn’t have a plane that small.  Its smallest current plane is the 737-700, a largely obsolete plane that dates back almost 25 years and which has now been superseded by the 737 MAX 7, which holds 138 passengers (8F + 130Y) or up to 172 in high density configuration.  In other words, the 737 MAX 7 is about 30% larger than the CS100, and that’s enough difference as to make the two planes totally dissimilar and non-competitive.

The reality of the lack of overlap between the two planes was matched by Boeing’s response to Bombardier’s proposal to sell the CS100 to Delta.  Boeing apparently never tried to persuade Delta to buy 737-700 or 737 MAX 7 planes.  Instead, it offered to sell Delta some second-hand Embraer E-190 planes it had traded in as part of a deal with Air Canada, and/or possibly supplemented by some old used 717 planes that were also on its books.

One year after the Delta sale was announced, Boeing filed a formal complaint with the US Department of Commerce and the US International Trade Commission, in April 2017, claiming to have been unfairly harmed by Bombardier selling CS100 planes to Delta at under cost price, and pointing to unfair Canadian government subsidies being used by Bombardier to sell against Boeing at artificially/impossibly low prices.

Now this is where it all starts to get strange.  Really strange.  You might wonder, for example, how Boeing could be harmed for losing a deal in which it wasn’t trying to sell any of its own planes.

There’s also a huge uncertainty about the ‘selling below cost’ claim.  That might seem like a simple accounting exercise, but as accountants know, ‘cost accounting’ is one of the most subjective fields of accounting.  In the case of airplane manufacturing, the two main variables are ‘how do you handle the up-front development costs of a new model plane’ and ‘do you base the manufacturing costs on the first few planes that come off the assembly line while you’re still working out how to do things most efficiently, or on the 100th plane that comes off the assembly line, when everything has settled down to its most optimum productivity and efficiency’.

Depending on how you answer these questions, you can ‘prove’ that the cost of a plane might be half or twice the figure that someone else is suggesting its cost might be or should be.  One thing is clear, however.  The more planes you produce, the more you can spread the fixed costs and so the less they need to be recovered from each individual plane sold, and the more planes you produce, the lower and lower your production costs per plane keep going.

So it is far from uncommon for airplane manufacturers (hello, Boeing, this includes you – are you going to file a complaint against yourself, too?) to sometimes sell airplanes at prices that, by some measurements, could be considered to be ‘below cost’.

As well as these production/cost considerations, there are also marketing considerations.  Sometimes you want to simply get some sales happening so as to create interest in the product and to get some positive headlines.  Sometimes you want to win some deals because they then send invaluable signals that you’ve succeeded to get respected market leaders buying your product.  Or perhaps you’ve a production gap and want to keep your factories busy and your people employed.  And sometimes you’ll sell your product at a loss just to keep a competitor out of the market.  If you want an example of that, look no further than Boeing’s sale of 737-700s to United not long prior to the Delta sale – it seems likely the 737s sold to United may have been under some measures of cost price (they were at about a 70% discount off list price!) and the deep discount was apparently extended to squeeze Bombardier out of that deal.

These are universal concepts and broadly adopted, not just in the airplane manufacturing industry, but in most other fields too.

So Boeing’s claim that it was harmed by the Bombardier sale to Delta seemed specious in two respects – first, Boeing didn’t really have a dog in that fight, and second, it is hard to determine at what point selling a plane ‘below cost’ moves from being an accounting or marketing exercise and actually becomes an unfair action.

You might wonder why Boeing even decided to file a complaint.  My guess – Boeing doesn’t really care about the CS100 at all.  But it does care about the larger CS300, which with 130 – 160 seats gets closer to directly competing with its smallest 737s.  Looking further ahead, Boeing may be concerned that if these two planes models become successful, Bombardier may choose to extend the product line further with even larger capacity versions of the CS series that would pose even stronger competitive threats.  Perhaps for this reason, Boeing is trying to pre-emptively harm/destroy Bombardier any way it can; indeed, it has even hinted as much by claiming (speciously) that the rise of Airbus caused the collapse of the passenger jet divisions of Lockheed and MD.  Here’s an excellent article that destroys this claim by Boeing.

The strangenesses continue, however.  Although it took Boeing over a year to decide it had been harmed by Bombardier’s sale to Delta, and although it routinely takes other aviation related matters many years to slowly move through US government bureaucracy, Boeing’s complaint is now moving at warp speed.

Boeing asked for duty of 160% to be imposed on CS100 planes imported to the US.  This week saw the US Commerce Department decide that a fair duty rate would be 220% – even more than Boeing’s outrageous request.

No Winners – Only Losers

The unfairness of every part of this action beggars belief.  But wait, there’s more.  If this is all implemented as the Commerce Dept proposes, guess who stands to suffer the worst of the consequences?  Clearly this will be harmful to Canada and to Bombardier.  But over half the total value of these planes is produced in the US – the Pratt & Whitney engines and other component parts.  Bombardier claims 20,000 US jobs are dependent on is CS series programs.  So we’ll be scoring a happy ‘own goal’ as part of our response.

That’s not all.  Guess who else will suffer a major consequence?  The UK – Northern Ireland in particular, because the wings are made in Bombardier’s Belfast plant in Northern Ireland, and 4,500 jobs there are at risk – a huge impact on Belfast (population just under 300,000).  That impact also flows through to the UK government, where the Conservative party is struggling to maintain a majority, relying on the support of Northern Ireland’s Democratic Unionist Party, which is now demanding extreme responses to the Commerce Department’s astonishing finding.

But that’s not as easy as it may be, because Boeing has pointed out that while Bombardier has 4,500 people employed in the UK, it in turn employs 16,500 people and so any retaliatory actions by Britain may create more harm than good.

Canada in turn is threatening to cancel a $5 billion order of Boeing’s F/A 18 fighter jets, and my guess is that populist PM Trudeau would love any credible excuse for doing so.

Lastly, what about Delta.  If what Boeing alleges is true, the airline was about to benefit from a steal of a deal, buying planes for an amazingly low price.  If that truly is so, surely that is a good thing for Delta – a US company with US shareholders and employees?  If its cost of airplane ownership drops, doesn’t that mean maybe it will either be able to offer lower fares to us as passengers, or distribute more dividends – again, to some of us as investors.

Isn’t buying goods at below cost price, when the company that is selling them is outside the US, a sort of subsidy, not just from the Canadian government to Bombardier, but also directly to Delta and the US economy, too?

The next step in this dispute is for first the Commerce Department and then the International Trade Commission to determine if Boeing was actually harmed by Bombardier’s sale to Delta.

But what has clearly been harmed, already, is the relationship between the US and Canada, and between the US and UK.  Two of our very closest allies are now united against us in outrage at a decision that seems to defy any attempt at rational justification.

One also has to wonder just how positively Delta is feeling towards Boeing at present.  It isn’t as though Delta is not a potentially huge ongoing customer for Boeing.

Talking about upsetting airlines and governments, one wonders why Boeing is totally silent on the rise of China’s C919 airplane, which has now picked up 730 orders.  The C919 is by all accounts a lackluster plane which owes its success to Chinese government support, and more directly competes with smaller 737 planes.

But bullies always like to pick on people smaller than themselves.

2 thoughts on “Boeing Bullies Bombardier, Bamboozles Bureaucrats”

  1. All the manufacturers are subsidized one way or another, Boeing included. See for instance: . So this is hypocrisy writ large. On the other hand, there’s no denying that Bombardier’s CSeries wouldn’t have happened without substantial Canadian and Quebec government assistance. So what to do? International trade litigation has now been built into the costs of aviation worldwide. The subsidies are a waste. The litigation is a waste. And there appears to be no sensible way to stop either.

    1. Apparently there are, however, ‘good subsidies’ alongside ‘bad subsidies’.

      Boeing has received over $8 billion in what have been deemed ‘good’ subsidies in WA state alone; I don’t know how much they received in subsidies to open a new plant in SC, and there are cogent reasons for believing that every one of their many multi-billion dollar defense contracts have, in the past, present, and almost surely future, involved an element of cross-subsidization of their commercial airline programs too.

      One could even argue that being awarded the Air Force tanker contract was a massive/enormous subsidy too, because the commercial justifications for that award seemed difficult to clearly identify.

      Which is not to say that Airbus is any better. As you say, everyone is subsidized, but the trick seems to be in getting the subsidy described in the most conforming way.

      Whether Bombardier was subsidized or not, and whether it was a ‘good’ or ‘bad’ subsidy, the fact remains that the US, should it proceed to impose these penalties, will be the largest loser of all, because over 50% of the airplanes’ content is American. Oh, that and, of course, the fact that Bombardier is not competing with Boeing.

Leave a Reply

Scroll to Top
Scroll to Top

Free Weekly Emailed Newsletter

Usually weekly, since 2001, we publish a roundup of travel and travel related technology developments, and often a feature article too.

You’ll stay up to date with the latest and greatest (and cautioned about the worst) developments.  You’ll get information to help you choose and become a better informed traveler and consumer, how to best use new technologies, and at times, will learn of things that might entertain, amuse, annoy or even outrage you.

We’re very politically incorrect and love to point out the unrebutted hypocrisies and unfairnesses out there.

This is all entirely free (but you’re welcome to voluntarily contribute!), and should you wish to, easy to cancel.

We’re not about to spam you any which way and as you can see, we don’t ask for any information except your email address and how often you want to receive our newsletters.

Newsletter Signup - Welcome!

Thanks for choosing to receive our newsletters.  We hope you’ll enjoy them and become a long-term reader, and maybe on occasion, add comments and thoughts of your own to the newsletters and articles we publish.

We’ll send you a confirmation email some time in the next few days to confirm your email address, and when you reply to that, you’ll then be on the list.

All the very best for now, and welcome to the growing “Travel Insider family”.