Sound the alarm! Let the word go forth, and send Paul Revere to warn the populace -- the Canadians are coming! The Canadians are coming!
And Boeing (NYSE:BA) is scared.
Scary ... Canadians?
I know, I know. It may sound far-fetched, but the Canadian threat has Boeing's tail feathers all in a bunch, making strange bedfellows of the Seattle stalwart and its archrival Airbus. Up north of the border, the friendly Canucks at Bombardier are arguing that their newest plane -- a 100-plus seater tentatively titled the "CSeries" -- should be exempt from international agreements on how much government support a nation can give its airplane builders.
The dispute is a bit difficult to untangle, but basically boils down to this: Once upon a time, there were two big commercial airplane builders in the world: Boeing and Airbus. Other companies built planes, of course -- Textron (NYSE:TXT) had Cessna. General Dynamics (NYSE:GD) built Gulfstreams, and Raytheon (NYSE:RTN) rolled out Hawker Beechcraft by the dozen (before selling the operation to Goldman Sachs (NYSE:GS) and Onex.) But those were all "small" airplanes. Along with regional jet players like Embraer (NYSE:ERJ) in Brazil, and Bombardier in Canada, they played in a sort of minor leagues, and the big boys didn't bother with 'em.
The threat from the north
What Boeing and Airbus did bother with was each other, and the subsidies each alleged the other was receiving from their respective governments. So back in 1986, everyone sat down at a table and hammered out an agreement, delimiting how much support "home" governments could give to their "national champions." Loans of such and such amount, and interest rates of so and so, lasting no longer than "X". No one bothered to impose these conditions on the builders of regional and smaller jets, however, because as previously mentioned, they didn't play in the same league. And even after the agreement was revised and updated in 2007, it applied one set of strictures to Boeing and Airbus, while the "minor league players" were left essentially unfettered.
The more things change, the more they... change
Problem is, the leagues in question are starting to get a whole lot more complicated. Expansion teams from Sukhoi in Russia, Mitsubishi Heavy in Japan, and SAIC in China are all vying to build new regional (and larger) jets. Bombardier's CSeries promises to break the 100-seat barrier and haul as many as 150 paying passengers across the sky -- and directly into Boeing and Airbus's collective flight path.
In furtherance of this effort, and in hopes of helping Bombardier break into a new market, the Canadian government wants to offer export financing to international purchasers of the new Bombardier jet. (In essence, this means the government promises that if the foreign buyer defaults on its purchase, Canadian taxpayers will pick up the tab.)
What's at stake
The Canadians' claim threatens to steal a small slice of Boeing's and Airbus's international market share -- but with said market being valued at some $3 trillion in expected sales over the next 20 years, even a small slice could mean billions for Bombardier. So it's no wonder Boeing and Airbus are upset at the gambit -- and no wonder either, that Canada is trying it.
As for how the dispute will play out, well, all the relevant players will be negotiating their respective positions at an OECD sitdown in Paris next month. Brazil and China, Russia and Canada will be haggling hard to win concessions for their aerospace industries. But if it's a simple matter of votes, I'd expect that an alliance between the U.S. and the 27-nation European Union should book a win for Boeing and Airbus pretty handily.
Foolish takeaway
Even if the twin titans lose this round, however, and wind up facing stiffer competition from smaller, better-subsidized players, all is not lost.
History shows us that government subsidies can do wonders for some industries, in some cases (see dictionary entry for China, subcategory solar power). But it also shows us that subsidies can fail (see entries for ethanol, subcategory Archer-Daniels-Midland (NYSE:ADM), Iran, subcat gasoline, and Venezuela -- all entries).
Moral of the story: Don't count Boeing out of this fight just yet.
