The first major milestone in the trade complaint that Boeing filed against Bombardier will occur a week from today, when a preliminary determination will be revealed.  This will be an interesting test of the new administration and will certainly show whether logic or politics will prevail in international trade negotiations.

Boeing alleged two things in its claim – one, that its 737 aircraft program was threatened by the CSeries from Bombardier, and second, that Bombardier is selling the CSeries below its production cost into the market.

The facts of the matter, as many industry experts have pointed out, do not support Boeing’s claims.  An excellent piece by Darryl Jenkins yesterday highlighted the hypocrisy of Boeing’s actions. Canada’s Prime Minister is ramping up his fight with Boeing, saying his government won’t do business with a company that he’s accusing of attacking Canadian industry and trying to put aerospace employees out of work.

Does CSeries really threaten the 737?

Let’s look at some of the facts.  First, the only US sale of the aircraft was to Delta, which was looking for a 100 seat aircraft.  Boeing does not make an aircraft in this class, while Bombardier and Embraer offer the competing CS100 and E190 models, respectively.  (Boeing offered Delta ex-Air Canada E190s, which they initially accepted and subsequently sold) Delta then chose the CS100, and received launch customer pricing, which is typical for a key customer in a vital market.

The smallest Boeing 737, the MAX7, was so poorly received in the market that Boeing added additional seats to make the re-engined model of a type that first entered service in 1967 more attractive to customers, and it still isn’t selling well.  This is despite the fact that the 737 is the best selling commercial aircraft of all time, and that its larger (and more economic) models have thousands of orders in backlog and are sold out for about 7 years.  The 737 is Boeing’s cash cow, and apart from the smallest model, is doing quite well, thank you.

Why doesn’t the smallest 737 sell very well?  Because it is a shrink of a larger design.  By shrinking the baseline MAX8, the MAX7 has the wing, structural reinforcement, and heavier engines of the larger model, making it heavier and less efficient than smaller competitors.

The CSeries happens to be one of those smaller competitors, and its CS300 model is only slightly smaller than the and does compete with that aircraft.  The real threat to Boeing is the potential to stretch the aircraft into larger CS500 or CS700 models that would more directly compete with the 737-800, Boeing’s cash cow.  (We have explained why such a stretch has challenges) Boeing’s intention is to stop an innovative competitor in its tracks before it can gain market traction, and potentially develop into a future threat to their products.

In terms of the ability to price an aircraft low, Boeing is producing more than 44 737s per month, with plans to move to 60 per month.  Bombardier’s five year plan calls for moving to 10 per month, or 120 per year.  With six times the volume of aircraft over which to amortize fixed costs, Boeing is already in a much lower cost position than its competitor could hope to be, and has the market advantage of an incumbent with a massive order book and customer base.  This is the 900 pound gorilla swatting flies.

Boeing’s Motivation

The real threat to Boeing is that Bombardier has innovated with an all-new design, the first all new narrow-body since the Airbus A320 entered service in 1989.  The Boeing 737 entered service in 1967, and while much different than the original model, it retains the same fuselage and many of the constraints associated with that initial design.  After a $30 billion debacle on the 787, the 777-X program underway, and the need for a 7M7 to compete against Airbus for the middle of the market, Boeing has its hands full and can’t afford a new narrow-body aircraft at the present time.  And that is the crux of their motivation — stop the innovator so we can buy a few more years of time before investing again, and reap the benefits of an existing design.  Their motivation is fear – since the CSeries is much more technologically advanced than their 737, and has the potential for growth.

Boeing knows that Bombardier are masters at stretching aircraft — the CRJ-100 was a stretch of the Challenger business jet, and further stretched from 50 to 100 seats with three more models.  If Bombardier did the same with CSeries, it might compete directly with their 737 or its eventual repalcement.

Bombardier Selling Below Cost into the Market – aka Hypocrisy 101.

There is no question that it is, and every aircraft program ever to enter service has done the same thing.  Launch customers typically obtain massive discounts, as they will be the ones sorting out early problems with the aircraft and living with the teething pains of new technology.  Boeing itself sells under cost routinely with every new program, and likely with every 787, as it may not fully recover the $30 billion in development costs nor turn a profit with that program.  Airbus is competitively pricing its A330 and A350 to make certain they push that out as far as apossible.  This is a rough business.

The Boeing 787 was priced very low to its launch customers, well under the cost for the aircraft.  This is exactly the same practices it is complaining about in Bombardier’s deal with Delta.   Boeing even sold 16 787s to Air Canada that were likely priced under total production costs, so we have the pot calling the kettle black (to turn over an Airbus customer the deal had to be aggressive).  Complaining about a normal industry practice that Boeing itself uses is why most airline experts and analysts are shaking their heads that this has gone as far as it has.  Hypocrisy 101 as taught by Boeing’s management team.

The Realm of Politics

Anything that happens in Washington must be tempered with a political as well as logical viewpoint.  Logic dictates there is no foul.  Politicians aren’t restricted to logic or truth to determine their actions.

Further, while the Bombardier aircraft is made in Canada, more than 55% of its content is from US suppliers.  Virtually all of the major subsystems are US-based, from Pratt & Whitney engines to Rockwell avionics and thousands of smaller suppliers in the aviation supply chain.  The CSeries supports a lot of jobs across the US, as well as jobs in the UK and Canada.  So trade sanctions against the CSeries would substantively impact American jobs.

Has today’s political climate caused the facts of normal industry pricing practices to be ignored, and applied in only one direction?   Will this begin a trade war with Canada and the UK that could rapidly expand to the British Commonwealth?  Will Canada carry out its threat to retaliate and cancel Boeing military contracts?

The Bottom Line:

Boeing has stirred a hornet’s (pardon the pun) nest politically, but in the process has severely damaged its credibility, with its management team looking to government to help them proetct a 50-year-old technology to preclude market entry for a brand new design.  The real world doesn’t, and shouldn’t work that way.  Let’s hope that the International Trade Commission has some sanity, as we expect foreign antidumping complaints against the Boeing 787 coming in the near future.  Many countries would line up to “stick it” to Boeing and the USA.   Has Pandora’s box been opened?  We will soon find out.

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