About that fighter jet—did Boeing’s trade protest really hurt Bombardier?

Patrick Host, the Americas reporter for Jane's Defence Weekly, recently asked me what I thought of the provision in the latest Canadian federal budget bill that companies doing economic harm to Canada would be penalized in upcoming military procurement competitions. Actually, he asked three experts and got three opinions. Mine was the slightly crazy notion that this was preparatory messaging for a decision to buy Saab's Gripen. As he reported, 

    Hasik said that the Gripen E, in the long run, would be the most affordable aircraft when compared with the other two offers, and that Canada would not be able to afford to buy the F-35A while it is acquiring 15 ships for its Canadian Surface Combatant (CSC) procurement. This programme, awarded to Lockheed Martin Canada, is estimated to cost CAN56–60 billion (USD44.8–48 billion). As of February, Canada has awarded five contracts totalling CAN739 million (USD591.5 million) for the CSC effort.

    “[CSC] is so much money that they are not going to have any money for anything left over,” Hasik said. “They cannot buy [CSC], and F-35A, and fit it into the budget.”

 

He subsequently asked me "did Boeing’s trade protest really hurt Bombardier?" I have not run the numbers on this, though with enough time I could and would. The short answer is almost certainly yes. What follows is the still-not-quantified but fairly convincing explanation.

 

The US is the largest market for civil aircraft. Bombardier rather bet the company on its C-series jet. At the end of 2016, Bombardier had 243 orders for the airplane, which is likely not nearly enough to break even on the program. At the end of 2017, it had 360, and 75 of those additional 117 were from Delta (in the US), ordered in April 2016. At this point, the aircraft had just entered service, and to rather rave reviews, so further orders were looking quite possible.

 

Boeing, however, really wanted to sell 737s to Delta, at a much higher price. So, Boeing complained to the Commerce Department in April 2017, and Commerce decided that Bombardier was "dumping" the aircraft—pricing them below the total cost of production, including past fixed costs. I use quotes because that's not a term that economists recognize as valid. Amongst the United States, if the pricing is not designed to remove a rival from the market (an anti-competitive move), then it's just an enterprising effort at gaining a foothold in a market. But from outside the US, it's somehow offensive? Please.

 

So Trump's Commerce Department, under the fiercely anti-competitive Wilbur Ross, gradually increases tariffs from 0 to 80 to 300 percent tariff on this one type of jet from July through October 2017, because its "analysis" showed that each was somehow the number. At hearings, Sun Country and Spirit Airlines, both from the US, speak up for Bombardier. In December 2017, it scaled that number back to 290 percent. I strongly doubt that the Commerce Department knows what Bombardier's costs were, but that didn't matter to them. A separate issue is how such an imposition of a tariff—a tax, after all—is constitutional. The executive branch isn't supposed to levy taxes all on its own. Even George III didn't have that power.

 

Ten days later, on 16 October 2017, Bombardier sold half the program to Airbus, for one Canadian dollar. So here's the event study, in a nutshell: 

 

1. (Summer 2017) Bombardier finally starts selling C-series jets, and mostly in the US.

2. (6 October 2017) Boeing get a huge tariff imposed.

3. (16 October 2017) Bombardier sells half that business for almost nothing.

 

I do not have another explanation beyond Boeing and Wilbur Ross conspired to take out Bombardier. What happened, though, was almost comical.

 

First, Airbus buys the business, and relocates production of the aircraft (now the Airbus 220) for US customers to Alabama, to avoid the tariff.

 

In any case, the tariff gets removed four months later, in January 2017, by unanimous vote of the US International Trade Commission, to which Delta and Bombardier had appealed. So either the entire ITC was in Trump's pocket (highly unlikely, as the current chairman was initially nominated by Obama), or the Commerce Department is staffed with hacks or cronies (more likely).

 

Those orders then do indeed materialize—the program is now up to 649 aircraft, more than enough to break even. That is possibly because the A220 is said to be a great airplane, and customers trust Airbus to deliver on time.

 

Fast-forward to 2021, and the Canadian federal government disqualifies Boeing from its competition for the RCAF's next tanker, and signals hard about the same regarding its fighter.

 

Net-net, the big losers were Boeing and Bombardier, and the big winner was Airbus. How's that for strategy from 100 North Riverside Plaza? What's really amazing is that no one seems to have considered the possibility that Airbus would want to enter that market segment. How, I cannot imagine. 

 

For what it's worth, I am typing all this up because I am planning to eventually write a teaching case study on the episode, for a course that I eventually want to offer on the political economy of the international aircraft market. There may just be a market for better thinking on strategy in that line of work.

 

James Hasik is a senior research fellow in the Center for Government Contracting at George Mason University, and a senior fellow in the Scowcroft Center on Strategy and Security at the Atlantic Council.

James Hasik is a senior research fellow in the Center for Government Contracting at George Mason University, and a senior fellow in the Scowcroft Center on Strategy and Security at the Atlantic Council.

Comments

[Dave Foster]

"What's really amazing is that no one seems to have considered the possibility that Airbus would want to enter that market segment."

It's that super long (not) DC memory. Airbus first went in on the KC-46 bid, what 20 years ago? And lost on price? The proof is now in the KC-46 pudding and the pudding is a poomoji. Why wouldn't Airbus make a bid - could they do worse on another tanker project than has Boeing? Weren't DC's hometown band the Bad Brains writing/singing about the Boeing tanker project office back in '83? How low could Boeing get? Those guys were always ahead of the times.

I didn't mean to rip off
I thought it was a get off in mine
I tried to make the scence off
The plan was doomed to set off on time
The time that I was wastin'
I spent on only chasin in the pits
And now I pay the price
To make the sacrifice of the fool

https://www.youtube.com/watch?v=fo0kE9Ov2-U

[John]

I am pretty surprised anyone can consider the Gripen E as the least costly of the entrants in Canada's Future Fighter Capability Project. The Gripen is more expensive to acquire on a per unit basis before considering the additional two eyes intelligence requirements that must be met and subsequent modifications made to the airframe/avionics, something the F-18E and F-35A will not have to do.

Additionally life of type costs are also not well understood. While Gripen E may have a reported lower per hour cost than the F-18E or F-35A it is also the least capable of the three in range, payload and sensor capability. You literally need more Gripen E to complete the same missions you would use an F-18 or F-35A to complete. That negates the cost per hour savings and that is before you also factor in the likely better survivability of the F-18E and especially the F-35A in contested environments. Canada would also require significantly more extensive mid life upgrades to maintain the Gripen E airframe against evolving and projected threats. Even CDIs unclassified assessments make this point.

Irrespective of the above, if you follow the competition to date the withdrawal of Airbus and Dassault was based on expected costs meeting the specific two eyes requirements. Boeing's absurd moves against Bombardier haven't improved the Gripen's chances, it has just reduced the F-18Es chances. Interestingly unlike the tanker competition the Canadian Govt hasn't rejected the Boeing fighter bid, nor for that matter the LM bid despite Trudeau's comments of six years ago. It should signal more about what the RCAF wants from a fighter jet, and a tanker for that matter, than what the Canadian Govt thinks is good defence acquisition policy.

[James Hasik]

"John"—this is a great comment. Thanks. I will follow up in a day or so with my thoughts back.