Why Boeing Contested Delta’s 2016 Bombardier CSeries Order
April 28th, 2016 would be a big day for Canadian planemaker Bombardier and its up-and-coming narrowbody aircraft, the CSeries. This was the day that the company would land a significant order from Delta Air Lines.
The deal was critical for Bombardier and its newest aircraft program- which was hoping to make inroads in the US market. A year later, however, Boeing would file a complaint against the deal- a complaint that would cause chaos and turmoil for Bombardier and start a chain reaction that would eventually lead to the program becoming the Airbus A220.
Bombardier goes ‘out on a limb’
As is relatively common knowledge in the aviation world now, the Airbus A220 was previously known as the Bombardier CSeries. After decades of producing smaller regional aircraft in the form of the CRJ and Dash 8 series, Bombardier set its sights on producing a bigger aircraft- a next-generation short and medium-haul jet utilizing the latest technologies available.
Despite the rewards of lower operating costs and higher efficiencies, there are many risks in producing an aircraft with a clean-sheet design. It requires financial investments, including massive amounts of research and development and setting up new supply chains and production processes.
Even if the aircraft is a clear gamechanger, airlines may be hesitant to adopt a brand new type into their fleets: One that has not withstood the test of time and thousands of service hours. It doesn’t stop there, as airlines must also invest in training flight crews and maintenance personnel on this brand new type.
With all of the potential risks and required investments, Bombardier had significantly “gone out on a limb” in developing its CSeries jet. As a result, racking up orders would be critical for the company as each new customer would signal to the rest of the market confidence in the type.
A critical deal for Bombardier
Launching the program in 2008, Bombardier would need to seriously push the aircraft and rack up orders. By 2010, the first airlines to sign up for the CSeries were Germany’s Lufthansa Group (the plane would go to SWISS) as well as Ireland’s Lease Corporation International and US-based Republic Airways. Already at this point, with billions poured into the program, the media had been critical of CSeries’ lack of sales. It wouldn’t be until 2012 that airBaltic would sign on for an initial 10 CS300s (nowadays known as the A220-300).
Being one of the world’s largest aviation markets, landing sales in the US market would have been huge for Bombardier. If one airline were to take a risk and go big on the CSeries, it could have led to other operators taking note and following suit. This is why Delta’s 2016 deal with Bombardier was so critical.
In late April of 2016, the Atlanta-based carrier would commit to a firm order for 75 CS100s with options for another 50. The size of the order, a deal valued at $5.6 billion at list prices, was just what Bombardier needed to regain momentum as it worked towards ramping up production.
“This order is a resounding endorsement of the CS100 aircraft performance and its exceptionally low operating costs. In addition, its widest aisle, widest seats and largest bins in its class will be attractive features for Delta’s passengers.” -Fred Cromer, President at Bombardier Commercial Aircraft via USA Today
Bombardier would have about a year to celebrate the signing-on of its new major US customer, for it was in April 2017 that Boeing filed a complaint with the US International Trade Commission (USITC), accusing Bombardier of “dumping” the jets- or selling them at below production cost. The petition accused the Canadian planemaker of selling its CS100s to Delta Air Lines for $19.6m each, well below their $33.2m production cost.
It was also noted that these low prices were the result of Canadian government subsidies, giving Bombardier an unfair advantage. Boeing also asserted that Bombardier’s subsidized sales of its CSeries in the US was at the detriment of its 737 program, which would soon see the 737 MAX enter service.
Five months after Boeing’s petition, the US Department of Commerce issued a preliminary ruling to impose a 219.63% tariff on every Bombardier CSeries airliner brought into the country. This would have effectively tripled the cost of each aircraft for Delta.
This was a preliminary ruling, with the US International Trade Commission set to issue a final judgment on the Commerce Department’s proposed tariffs by early 2018.
“The US Department of Commerce today affirmed that Bombardier has taken massive illegal subsidies in violation of existing trade law…Subsidies enabled Bombardier to dump its product into the US market, harming aerospace workers in the United States and throughout Boeing’s global supply chain.” –Boeing via Business Insider
Threatening the 737?
As reported by Bloomberg, Delta issued a statement saying that there was no risk to Boeing’s market- as it wasn’t actively producing aircraft in a similar size category.
“We are confident the USITC will conclude that no US manufacturer is at risk because neither Boeing nor any other US manufacturer makes any 100-110 seat aircraft that competes with the CS100…Boeing has no American-made product to offer because it canceled production of its only aircraft in this size range — the 717 — more than 10 years ago.”
According to the US carrier, Boeing’s only proposed alternative to the CS100 at the time was to offer Delta a batch of second-hand Brazilian Embraer E190 regional jets.
The proposed tariffs drew attention at the highest levels of government. Then the Minister of Foreign Affairs, Chrystia Freeland, called the situation and Boeing’s “protectionist nature” deeply troubling. “It is beyond all reason that Boeing could be threatened with injury in a market segment it exited over a decade ago,” the Financial Post reports Freeland saying in December of 2017.
Freeland’s comments came at an even worse point for Bombardier. In October, the US Department of Commerce had hit it with a 79.82% anti-dumping duty while “generously” adjusting its 219.63% tariff down to 212.39%. Despite legal challenges launched, the Financial Post reports that the United States Department of Commerce would uphold the earlier decision and hit Bombardier with a total 292.31% tariff.
A win for Bombardier- at a cost
This turmoil over tariffs would see European planemaker Airbus swoop in to throw the CSeries program a lifeline. With Airbus already having a production facility in Mobile, Alabama, the jets meant for Delta would be manufactured within the US, thus avoiding the hefty tariffs proposed.
With the cards seemingly stacked against Bombardier, it looked like the Delta deal was in real jeopardy. However, January 2018 would see a huge twist, with the US International Trade Commission ruling that “100- to 150-seat large civil aircraft from Canada do not injure U.S. industry,” as reported by the CBC.
This ruling would see the 292% tariffs overturned. Of course, by this point, Bombardier had already agreed to sell the majority of the program to Airbus. This would see the planemaker have a controlling share of 50.01% in the program. The CSeries transition to the A220 has its own lengthy story. However, in this article, let’s focus on Boeing’s challenge to Delta’s order.
Although the US International Trade Commission would finally rule against Boeing’s petitions, did the US planemaker have a point? Well, it could be argued that it did- at least a little bit.
Retrospect: Was Boeing on to something?
In the case of Delta and its purchase of CS100s, the risk to Boeing’s market did indeed appear to be non-existent.
However, looking at the CS300 (now A220-300), Boeing’s smallest commercial aircraft, yet to enter service, does have a little bit of overlap: The 737 MAX 7 has a maximum capacity of 172 seats while the A220-300 can squeeze in a maximum of 160.
Thus, perhaps it could be argued that Boeing was looking at the threat that the CSeries could have become rather than the threat that it was at that precise moment. Since that court battle over tariffs in 2017, the market has constantly shown that airlines have evaluated the two types against each other (albeit not as common as the A320 family versus the 737).
We know that Allegiant was assessing the A220 but instead went with the 737 MAX for various reasons.
airBaltic went ‘all-in’ on the Airbus A220-300 to replace its aging fleet of 737-300s and -500s.
And Air France was reportedly evaluating the 737 MAX should an A220 stretch not materialize.
Going forward, examples like these aren’t likely to stop. And it’s conceivable that airlines may indeed choose the Airbus A220 over smaller 737 MAX jets as they modernize or expand their fleets. All of these evaluations somewhat add credibility to Boeing’s big fuss in 2017- from a position of hindsight at least. Boeing’s battle will be further validated if Airbus can ramp up A220 production, and also offer another stretch of the jet.
It’s difficult to say what could have happened had Boeing not filed its claim and allowed Bombardier to conclude its deal with Delta. Would the CSeries have become as popular as the A220 is today? We know that Airbus and its huge cache of resources have brought a lot to the table in terms of service and support, as well as the ability to ramp up production. All of this has been a significant boost to the program’s credibility.
Ultimately, what’s done is done, and from the looks of it, Delta has done well with its early adoption of the A220.
What do you think? Is the A220 now a legitimate threat to the Boeing 737?
S: Simple Flying
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