- Airbus has acquired a 50.01% equity stake in the Bombardier C Series program.
- The deal could lead to future success for Airbus and Bombardier.
- Challenges include the C Series as an orphan in the Airbus lineup.
- Other potential problems are trade tariffs levied by the US Department of Commerce.
Airbus shocked the aviation world with the acquisition of Bombardier’s prized C Series airliner program. The deal, announced last Monday, saw Airbus take a 50.01% equity stake in the program with zero upfront cash investment.
(Airbus is expected to acquire the entire C Series program within five years.)
The general reaction among industry observers was that Airbus has pulled off the deal of the century.
The union certainly offers a lot of upside for both parties. Bombardier’s C Series gains access to Airbus’ procurement program, sales, and marketing expertise, as well as its customer support network. At the same time, the Airbus tie-up provided a crucial lifeline for Bombardier when the future of the C Series program seemed to be in jeopardy.
For Airbus, it just gots its hands on a multi-billion dollar jetliner program for pretty much free.
Unfortunately, a successful future for the Airbus-Bombardier union is far from certain. There are several factors that could cause big problems for the deal.
The problems of being an orphan
A major part of the deal will see the C Series included in the Airbus sales operation. For both Airbus and Boeing, it is important to be able to market a family of aircraft. Unfortunately, the C Series will be a standalone or orphan in the Airbus lineup, a hurdle it and Bombardier will have to overcome.
“We have the 737MAX 7,-8,-9, and -10. We have a family,” Dr. Dinesh Keskar, Boeing’s senior vice president of sales for the Asia Pacific and India, told Business Insider. “You talk to others and they will tell you that family has a lot of value.”
For Boeing, this means the 737 MAX comes in four distinct variants capable of efficiently carrying anywhere from 138 to 204 passengers. As a result, a family of planes allows airlines to take advantage of the synergies created by filling a wide variety of needs using the same set of pilots, mechanics, and spare parts.
In addition, it allows Boeing to incorporate clauses into sales agreements that allow customers to switch to larger or smaller models should market conditions change.
“Typically, most deals are centered around a single model like the 737MAX 8,” Dr. Keskar said. “But to have the comfort in the contract to say they can move up to the -9 or -10 or down to a -7 is a very big deal for the airline board and CEO.”
“Does this sway the deal? Maybe not, but does it make a significant impact in their thinking? Absolutely,” the Boeing executive added.
For Airbus, its A320 family of planes has been one of the most successful in aviation history. But with the C Series in the fold, the smaller end of the single-aisle Airbus lineup will consist of the 110-seat CS100 and the 130-seat CS300 while the larger end of the spectrum will be the 240-seat A321neo.
As great as the C Series and the A321neo may be as individual aircraft, they can’t deliver the same type of synergies as aircraft from the same family. After all, the C Series and the A320 series will remain aircraft designed and built by two separate companies with completely disparate design and engineering philosophies.
“The CSeries is a great complement to the current Airbus lineup,” an Airbus spokesman said in a statement to Business Insider. “Filling a market need for 100-150 passenger single-aisle jets that Bombardier estimates at 6,000 aircraft over the next 20 years.”
This is something Boeing itself dealt with some more than a decade ago.
Following a 1997 merger with McDonnell-Douglas in 1997, Boeing was left with the task of selling the defunct brand’s final product, the MD-95.
Boeing went to great lengths to incorporate it into the company’s lineup including renaming it the 717-200. Unfortunately, Boeing was forced to pull the plug on the project in 2006 after just eight in production and 156 aircraft sold. According to Keskar, one of contributing factors to the 717’s demise was the fact that it was an orphan in Boeing’s lineup. Incidentally, the people who bought aircraft remain extremely happy with it and are actively looking to acquire more of them on the second-hand market.
Boeing and tariff challenges
And then there are the potential tariffs. As part of the deal, production of US-bound C Series jets will move from Montreal, Canada to the Airbus plant in Mobile, Alabama.
Airbus and Bombardier believe this is a valid workaround to bypass any potential import tariffs levied by the US Department of Commerce. Over the past few weeks, the DOC has proposed that a 299.45% tariffs be added to every C Series jet imported into the US. This comes as a result of a Boeing complaint that alleges Bombardier used Canadian government subsidies to sell Delta 75 C Series jets at “absurdly low” prices.
During its latest earnings call, Boeing CEO Dennis Muilenburg made it clear that his company’s complaint was based on its belief that Bombardier had an unfair advantage.
“These are not actions targeted at customers or countries, these are matters of fair trade,” Muilenburg told Business Insider. “We are happy to compete, we just want everyone to play by the same rules.”
However, it is also possible the Department of Commerce could see the production shift to Mobile as a means to circumvent the tariffs. This could result in additional penalties levied on the C Series.
“We can’t speculate on the future actions of other parties,” Airbus said. “But it’s important to note that our investment in the CSeries is driven by a global market demand for this very competitive aircraft, and not related to anyone order or customer.”
Delta CEO Ed Bastian has made it clear that his airline wants the planes, but will not pay any tariffs. While they are willing to wait for the planes, it’s unclear how long they are willing to hold tight.
Since the Airbus-Bombardier C Series deal isn’t expected to close until the second half of 2018, it’s conceivable Delta may have to wait for years. In fact, even without the specter of additional import taxes, it could be 2019 or 2020 before Delta sees its first planes.
The US government will make a final decision on the tariffs early next year.
With great risk, there’s also great potential. For Airbus and Bombardier, the joining of forces on the C Series program will undoubtedly be a company-changing experience. It’s simply too early to tell if it’s for better or for worse.
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