Bombardier, Delta lose in Boeing subsidy claims case

Earlier this morning I was happily considering the new entertainment system Delta is planning to install on its Bombardier CSeries CS100 aircraft set for delivery starting in early 2018. This afternoon that order appears significantly challenged. The US International Trade Commission, a part of the Department of Commerce, sided with Boeing on a case filed in April 2017. The ITC mandated a 220% tariff be applied to any deliveries of a CSeries in the United States. Based on Boeing’s claim of a $20mm/aircraft price tag (Delta says it paid more than that) a $44mm surcharge would be added, payable to the US Government, for any new CSeries planes that come in to the US market.

Also, the ruling is not final yet so expect things will change.

Read More: Gogo Vision Touch IFE to launch on Delta’s CSeries in 2018

The Boeing case argues that Bombardier violated price dumping rules in pricing the CSeries when securing its 75-aircraft deal with Delta. Specifically, Boeing claims that government investment in Bombardier (Quebec now owns nearly half of the company) is an illegal subsidy. The price dumping allowed Bombardier to harm aerospace workers in the United States and throughout the global supply chain. Which, of course, ignores just how many of the components Bombardier uses in the CSeries are built in the US.

In many ways the case hinges on whether the 737-700 or 737 MAX 7, Boeing’s smallest jets, compete with the CSeries. The Boeing version flies with ~116-120 seats in a typical 2-cabin configuration (United has a 116 and a 118 seat version) while Swiss operates its CSeries CS100 with 125 seats on board. The newer MAX7 was redesigned and stretched in July 2016, adding 12 extra seats to bring it to a 140-seat layout. That move came a couple months after Delta’s CSeries order was announced.

Read More: On board the AirBaltic CS300

Delta claims what it really wants is a 100-110 seat plane, something that the CS100 fits nicely with a 2-class configuration and some rows of extra legroom seats. The 737 MAX 7 is simply too large for that to work reasonably. But it didn’t stop Boeing from filing suit nor did it stop the ITC from finding in its favor.

The truth of the matter is that I don’t really know the Commerce rules nor how subsidies and tariffs are calculated. Some quick back-of-the-napkin math suggests that the 220% puts the real total price to Delta ABOVE the list price Bombardier sells the CS100 at (~$72mm). And that’s before one considers that large aircraft orders typically get significant discounts, often 40-50%, from list price. So even if the $20mm price is illegal the “true up” to full price would probably be closer to 75%, not 220%.

Read More: Friday Flyday: Taking the CS100 for a spin

Also, I’ve spent a few hours inside the CSeries, both on the ground and in the air (the latter courtesy of Bombardier, a necessity given it was not yet in service). It is way more comfortable to sit in than the many Boeing 737s I’ve been in. I know that doesn’t really matter when it comes to deciding trade sanctions, but it is a spectacular aircraft on the versions I’ve been inside.

Read More: A Few Thoughts on the Bombardier CSeries CS300 First Flight

Losing the Delta order could be a death blow to the product line and potentially to the company. No doubt that’s Boeing’s goal here.

The reality is that if the tariffs stick, the deal doesn’t. The deal is at significant risk here. Delta will be fine. Bombardier won’t.

— Jon Ostrower (@jonostrower) September 27, 2017

Ironically, the biggest winner is probably a Boeing competitor. Brazilian manufacturer Embraer makes a 100 seat aircraft in the E2-190 family. Those are also a nice ride (well, the original E-190s are; the E2 is still working through certification), but hard to know where the market ends up in the end.