Canada is reportedly planning to cancel a plan to buy 18 Boeing (NYSE:BA) fighter jets, following through on threats to escalate a cross-border trade dispute with the U.S. aerospace giant. Boeing can survive the financial hit of one lost order, but needs to tread carefully to avoid things spiraling out of control.
The Canadian government intends to announce it will acquire a used fleet of older F-18 Hornet jets from Australia instead of buying new Super Hornet planes from Boeing, according to Reuters. The move is a response to Boeing launching a trade challenge accusing Montreal-based Bombardier (OTC:BDRBF) of selling its CSeries passenger jet in the U.S. market at a drastically discounted price.
The U.S. Department of Commerce in September issued an initial recommendation agreeing with Boeing's claims, and proposing tariffs totaling 300% on the CSeries planes. That decision -- which would effectively bar the CSeries from the U.S. market -- was met with howls not just in Canada, where federal and local governments have invested billions to keep the CSeries program afloat, but in the United Kingdom as well. Bombardier is one of the largest manufacturing employers in Northern Ireland.
The impact is manageable -- for now
Canada's F-18 decision is more of a symbolic blow to Boeing than a financial hit, but it will cause turbulence on both sides of the border. Boeing has marketed the Super Hornet as a lower-cost alternative to Lockheed Martin's next-generation F-35 fighter, and Canada was one of that campaign's initial success stories, with Prime Minister Justin Trudeau last November putting off plans to buy the F-35 in favor of acquiring an "interim fleet" of Super Hornets and eventually holding a new competition to select a long-term replacement.
Following that decision, the Super Hornet was viewed as one of the favorites to win the eventual competition. But if Boeing and Canada are not able to resolve their differences, the odds that the F-35 -- as well as European alternatives including the Eurofighter Typhoon -- could be selected improve.
Even without the Canadian order, the outlook for the Super Hornet program today is much healthier than it was just 18 months ago. In early 2016 Boeing was reportedly considering self-funding F-18 production just to keep the lines running while awaiting the finalization of some key sales. But the U.S. Navy has since said it intends to buy at least 80 F-18s over the next five years at a cost of $7.1 billion to address its fighter shortfall, and is expected to retrofit jets already in its fleet to extend their lifespan.
Boeing has said it expects F-18 production to continue at least into the early 2020s.
Time for peace talks
There are reasons for both sides to mend ties. While Canadian politicians are flexing their muscle by scrapping the Boeing purchase, the long-term alternatives to the F-18 all have issues of their own. The F-35 -- as Trudeau discovered -- is more expensive, even if the price is coming down as mass production ramps up. And the Canadian military has a strong preference for using the same equipment as its U.S. counterparts, instead of European-made jets, because it simplifies operations between the two closely aligned countries.
Boeing, meanwhile, must be careful not to anger additional U.S. allies, including the United Kingdom, as it could have a long-term impact on trans-Atlantic sales. The F-18 could be a factor in future competitions planned in Finland, Spain, and Denmark, but its chances for further sales could diminish if the company's relationship with a key NATO ally sours.
At the end of the day, the Trudeau government is most interested in preserving Bombardier's Canadian jobs and the company's industrial base. Should the International Trade Commission, which is expected to issue a final ruling on the tariffs in February, significantly soften the blow and allow for the CSeries to be sold in the U.S., tensions could calm quickly. Trade officials could also determine that a deal reached between Bombardier and Airbus in October to do final assembly on the CSeries in Alabama is enough to circumvent the tariffs.
Otherwise, Boeing execs have some tricky diplomacy ahead of them if they are to mend fences and keep its defense backlog growing.