Airbus may have just torpedoed Boeing’s grand plan to kill off a major competitor

Bombardier C Series 100
The Bombardier Series. Bombardier
  • Airbus acquired 50.01% of the Bombardier C Series program.
  • Zero upfront cash investment from Airbus.
  • US-bound C Series jet to be built in Mobile, Alabama.
  • A response to the Boeing’s trade complaint and 299.45% tariff from US government.
  • Airbus will own 100% of the C Series program within 5 years.

On Monday, Airbus and Bombardier announced that the two aeroplane makers will join forces on the next generation C Series airliners.

The deal sees Airbus acquire a 50.01% equity stake in the Bombardier C Series program with the production of US-bound Bombardier C Series jets produced at the Airbus plant in Mobile, Alabama.

Production of all other C Series jets will remain in Canada.

Mechanisms within the deal will see Airbus take 100% ownership of the C Series program within five years.

It’s a move that looks to be in direct response to the US Department of Commerce’s proposed 299.45% tariff on Delta Air Lines’ order for 75 C Series jets. The tariffs are a result of a complaint Boeing filed in April.

Both Airbus and Bombardier believe that shifting production to Alabama will get around any proposed tariffs.

“This looks like a questionable deal between two heavily state-subsidized competitors to skirt the recent findings of the U.S. government,” Boeing said in a statement. “Our position remains that everyone should play by the same rules for free and fair trade to work.”

The deal will see Airbus make no upfront financial investment but will provide procurement, marketing, sales, and customer-support expertise.

In other words, Airbus just took ownership of one of the most advanced jetliner programs in the world for zero upfront cash.

“This is a win-win for everybody!” Airbus CEO Tom Enders said in a statement. “The C Series, with its state-of-the-art design and great economics, is a great fit with our existing single-aisle aircraft family and rapidly extends our product offering into a fast-growing market sector.”

“Not only will this partnership secure the C Series and its industrial operations in Canada, the U.K., and China, but we also bring new jobs to the U.S. Airbus will benefit from strengthening its product portfolio in the high-volume single-aisle market, offering superior value to our airline customers worldwide,” Enders said.

Airbus and Bombardier held talks in 2015 over a potential equity sale of the C Series, however, the two parties could not come to a deal.

Bombardier C Series

But, with no upfront cash required and the proven operational capabilities of the production aircraft, the C Series became much more enticing for Enders this time around.

Today’s deal is expected to close in the second half of 2018.

Boeing’s complaint

On September 26, the US Department of Commerce’s International Trade Administration called for a tariff of 219.63% on Bombardier’s C Series jet. A week later, the ITA called for another 79.82% tariff. In total, all C Series jets entering the US could be subject to tariffs of 299.45%.

The action was taken in response to a complaint filed by Boeing in April regarding Delta Air Lines’ order for 75 of the Canadian jets.

Boeing believes that its business was harmed by Bombardier using Canadian government subsidies to give Delta a price substantially below the cost of building the planes.

According to its complaint, Boeing claims Bombardier sold the CS100 for just $US19.6 million. That’s far less than the $US33.2 million the Chicago-based aviation giant alleges it cost Bombardier to make the plane and a mere fraction of the CS100’s $US79.5 million sticker price. As a result, Boeing claims the Montreal-based company is dumping its product on the US market to the detriment of the US aviation workers.

In response, Bombardier and Delta have called the ITA’s preliminary decision “absurd.” Last week, on the airline’s earnings call, Delta CEO Ed Bastian said that his company will not pay the proposed tariffs.

Bombardier and Delta argue that the Boeing complaint is baseless because neither it nor any other US aeroplane maker currently offers a product comparable to the CS100’s size and performance. (The C Series comes in the 110-seat CS100 and 130-seat CS300 variants.)

In fact, Boeing hasn’t included the pint-sized 737-600 in its annual price list for more than half a decade. And its last true 100-seat jet, the 717-200, was discontinued in 2005. As a result, they say Boeing didn’t lose a sale because they don’t have a product in the running. According to Delta, Boeing’s only offer in response to the CS100 was for a fleet of second-hand Brazilian Embraer E190s it had taken as trade-ins from Air Canada.

Boeing counters that argument by pointing out that Delta also agreed to an option for 50 planes that includes the possibility of converting to orders for the larger CS300 that is a competitor for their 737 MAX 7.

Bombardier C Series

Even though the aircraft is currently assembled in Canada, its wings come from North Ireland and 50% of its components, including its engines, come from the US.

As a result, the dispute has entered the political realm with Canadian Prime Minister Justin Trudeau and British Prime Minister Theresa May threatening punitive actions against Boeing.

The US International Trade Commission will issue a final judgment on the Commerce Department’s proposed tariffs in early 2018.

To kill a budding rival

On the surface, Boeing’s complaint is about protecting US manufacturing jobs. But dig a little deeper and it’s clear that the end-game for Boeing is to stop Bombardier, its groundbreaking jet, and its commercial airliner business from getting off the ground.

Ironically, Boeing’s strategy to end Bombardier’s budding aspirations to become a third global aviation manufacturing powerhouse comes from its failure to keep Airbus out of the US in the 1970s.

In the 1970s, Toulouse-based Airbus was brand new to the game. Its medium-range A300B wide-body airliner survived its early days by subsisting on order from the European nations that invested in the company.

In the US, the wide-body market was dominated by Boeing’s 747, the McDonnell Douglas DC10, and the Lockheed L-1011 Tristar. Airbus was effectively frozen out of the US market.

That is until Frank Borman and Eastern Airlines took a chance on a lease for four A300Bs in 1978. Boeing didn’t shut the door on the European interloper.

Borman believed the A300B to be more efficient than its US counterparts and the four-plane deal marked the beginning of Airbus’ rise to prominence in the US.

These days, Lockheed is out of the commercial aviation business and McDonnell Douglas is now part of Boeing. At the same time, Airbus is now one-half of a global aviation duopoly.

Airbus A300
The Airbus A300B. Airbus

Boeing sees a lot of Airbus in Bombardier.

For years, the story around the Bombardier C Series program has been that of a critically acclaimed plane plagued by slow sales and development delays.

In 2015, Bombardier was forced to write down $US4.4 billion. At the same time, the company took a $US1 billion bailout from the Quebec government. In return, the provincial taxpayers took a 49.5% stake in the C Series.

At the heart of Boeing’s complaint is a deal that was widely seen as the order that saved the Bombardier C Series program from demise.

Looking for a blockbuster sale to help build traction for the plane in the US, Bombardier went all in on a pitch to United Airlines. Sensing the new competition, Boeing bit the bullet and gave United a whopping 70% discount on the 40 737-700s. While large airlines like United never pay list price, 70% off is the aviation equivalent of a Black Friday sale price.

In January 2016, United announced the sale of 40 737-700s followed by an order of another 25 of the same planes in March. (Oddly enough, United realised several months later they actually didn’t want any of these planes and converted them to four of the larger 737-800s and 61 737MAX jets.)

Bombardier CS100 Delta

Finally, in April 2016, Bombardier struck pay dirt. Delta Air Lines ordered 75 CS100 airliners in a deal worth up to $US5.6 billion. In addition, Bombardier and Delta agreed to an option for 50 additional jets.

With the Delta order, Bombardier has not only found a US launch customer for the C Series, but it had the blockbuster deal it needed to validate the attractiveness of aircraft to other prospective buyers. For Boeing, the strategy was simple. Undo the order that saved the C Series and to keep it from gaining traction in its backyard.

Unfortunately, that plan may have royally backfired on Boeing. Instead of keeping the Canadian jet grounded, Boeing all but pushed C Series into the arms of its greatest rival.

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