On Friday, the U.S. International Trade Commission handed down its decision in a long-running trade dispute between Boeing (NYSE:BA) and Bombardier (OTC:BDRBF). Most observers had been expecting Boeing to prevail over its Canadian rival. Not only does the ITC tends to be biased toward U.S. companies, but Bombardier also had refused to answer some of the Department of Commerce's questions in the ongoing case.
Instead, the ITC delivered a shocking 4-0 decision in favor of Bombardier. This ruling nullifies a Department of Commerce finding that would have slapped tariffs of as much as 300% on CSeries sales in the United States. It also paves the way for Bombardier to start delivering CS100 jets to the program's largest customer: Delta Air Lines (NYSE:DAL).
Boeing's big gambit
Bombardier's CS100 and CS300 jets are the only 100- to 150-seat jets to be designed from scratch in more than a decade. By combining significant use of advanced materials with state-of-the-art engines, Bombardier was able to deliver dramatic fuel and maintenance cost savings.
Airbus (OTC:EADSY) and Boeing responded by putting new engines on their existing single-aisle jets. Nevertheless, the A319neo and 737 MAX 7 are no match for the similar-sized CS300 in terms of fuel efficiency. The CSeries jets also have a comfort advantage, with five-abreast seating (meaning only one middle seat per row) and wider seats.
Thus, it's not surprising that Airbus and Boeing have viewed Bombardier's project as a big threat -- especially because the CS300 could potentially be stretched to encroach even further into their territory. Fortunately for them, the CSeries development program was riddled with execution errors. This situation drove up development costs and delayed the type's entry into service from 2013 to 2016. In addition, the sales team was initially reluctant to offer big discounts. As a result, order activity was minimal for many years.
However, Bombardier changed its tune on discounts a few years ago. This change allowed it to land a big order from Delta Air Lines for 75 CS100 jets and 50 more options in 2016.
Last year, Boeing filed a petition with the U.S. Department of Commerce, accusing Bombardier of dumping. (Dumping refers to the practice of selling a product at a lower price in foreign markets than in the domestic market.) Delta's effective price for the CS100 order was just $20 million per aircraft, according to Boeing, far below the cost of production.
Boeing argues that Bombardier's deal with Delta represents unfair competition, particularly because the CSeries aircraft program has received billions of dollars of government support. The company was willing to sacrifice its relationship with the Canadian government -- thereby losing a deal to sell fighter jets to Canada -- to keep the CSeries grounded in the United States.
Boeing loses big-time
From day one, it's been pretty clear that Boeing's trade complaint was more about preventing the CSeries program from gaining any sales momentum than about the Delta deal specifically. Boeing believes that its 737 MAX 7 is good enough to compete as long as it can use its scale advantage to underprice Bombardier's CSeries jets.
The problem for Boeing is that the 737 MAX 7 is significantly larger than the CS100 that Delta Air Lines ordered. It also isn't available yet, whereas Delta wanted deliveries to start in 2018. This situation appears to be why the ITC ruled for Bombardier. Boeing had to show that it was harmed by Bombardier's actions -- not just that the Delta order constituted dumping.
While Boeing may appeal the decision, it isn't likely to succeed. To make matters worse, the company's aggressive litigation strategy encouraged Bombardier to hand over a majority stake in the CSeries program to Airbus in return for in-kind support. When that deal closes, the CSeries program will be controlled by a more formidable sales team and a much better-funded company.
The ongoing trade case forced Bombardier to postpone CSeries deliveries to Delta. The first jets were supposed to be handed over this spring, but that timeline is no longer feasible. Depending on whether Bombardier already has parts available for the Delta order, it will probably begin deliveries in late 2018 or in 2019.
Bombardier's victory at the ITC may also pave the way for additional orders in the United States. Boeing's petition had effectively stopped Bombardier from selling CSeries jets in the U.S., as tariffs would have made them too costly.
Lastly, when Airbus takes control of the CSeries program, it will be able to start marketing the CS100 and CS300 to its large existing U.S. customer base. That could lead to further order momentum later this year or in 2019.