When Government Blunders Into Business
I’m one of those guys who believes that most people in government are trying to do a good job and trying to help the country, the state, the city or the local water board. I fear what many of them don’t understand is that they hold the common sense of the nation in their collective departments, agencies, councils and legislatures and beyond outright corruption, they are vulnerable to the smooth-talking idiots who would manipulate the system for their own good.
Let’s examine, for a moment, the extremely narrow and profoundly prosaic world of 130-seat airliners and the application of trade law.
When Canada’s Bombardier announced it would build state-of-the-art airliners that would just nudge up against Boeing and Airbus’s duopoly in the single-aisle airliner market, the David and Goliath comparisons were immediate and pretty dismissive.
To make a long and fascinating story short, Bombardier built an impressive new entry to the market that has transcontinental and, on some routes, trans-Atlantic range, a roomy 2/3 cabin in economy, sips fuel and is fly-by-wire 2.0. It can also get into airports like London City Centre and fly to New York with a full load of passengers. It’s not nothing.
But nobody (well a few people) was buying. The rollout was difficult because of problems with the Pratt & Whitney geared turbofans and in general it happened the way most clean-sheet entries to service happen. Although the reviews of the airplane were overwhelmingly positive, all but a few airlines decided to watch what would happen from the side, which has been the death knell of many promising designs.
The difference was that despite common belief, Bombardier, which is a big company in Canada but would be a storefront in Tulsa for Boeing, financed the program on their own and scrimped and saved and cut other programs to bring the CSeries to market. At the end of it, they were billions over budget and needed help.
They went to Airbus and offered a sweetheart deal to partner in the program and bring it to market with the kind of horsepower that the heavily European Union-supported company could muster. Airbus called it a “nice little plane” and showed the Canadians the door.
So, with paychecks on the line and the foundation of Canada’s aerospace industry at risk, Bombardier went to government as a last resort. Faced with the rather unsavory prospect of putting tens of thousands of taxpaying citizens out of work, the Quebec government and a credit union came up with enough cash, through a perfectly legal investment program, to breathe life into the program.
Those who study these things know the World Trade Organization and all the other agencies that make sure that business is carried out in a businesslike fashion gagged a little but Bombardier certainly wasn’t the first aerospace company to benefit from a friendly government investment. Also, don’t forget that Bombardier doesn’t make military aircraft so there was no way to bury the help in fat contracts that way.
With money in the bank and much better prospects for survival, Bombardier talked to Delta, which is no particular Boeing fan and is pretty contrary in general to the business-as-usual situation in the U.S. industry and offered Bombardier a deal it could not refuse. Entry to the U.S. market is essential for any budding airliner manufacturer and Delta stole 75 CSeries from a grateful Bombardier at far below market price.
They say timing is everything and Boeing unleashed its legal team on the deal, proclaiming the great threat to American enterprise as it contemplated its own problems of trying to expand production enough to deliver airplanes to customers before the designs became obsolete. A ten-year backlog gives you some leverage but it also strokes egos. Loose-lipped executives freely admitted their goal was to destroy Bombardier to prevent it from growing into another Airbus, a laudable position in front of shareholders perhaps but a little too Goliathy for most people I would suggest.
With a gung-ho protectionist administration waiting in anticipation, Boeing took its fight to the U.S. Commerce Department, which gleefully slapped ridiculously high (300 percent) tariffs on Delta’s new Canadian jets.
Airbus suddenly revised its opinion of the CSeries, which, less than a year later, is now known as the A220. It agreed to take majority ownership of the program and build an assembly line at its protectionist-proof campus in Mobile, Alabama, where it’s already churning out A320s. CSeries/A220s built there would flow to Delta at the pennies-on-the-dollar price without the government-imposed and deal-breaking markup. Airbus is no knight in shining armor in this scenario. It saw a pretty inexpensive way to stick it to Boeing and seized it. What hurts your enemy benefits you.
Then the unthinkable happened. Some of the conscientious and responsible people in government that I was talking about at the beginning of this epistle saw the situation for what it was. The level-headed members of the U.S. International Trade Commission (USITC) ruled so thoroughly that the deal with Delta was no threat to Boeing that even Boeing’s prodigious legal department saw no mileage in appealing.
Boy, was the USITC wrong (but for all the right reasons in my opinion).
In some of the quickest and most clever business moves I’ve had the barest interest to follow, Airbus sealed the deal with Bombardier, even though Bombardier could likely have continued on its own with the Delta deal and the prospect of more U.S. orders afforded by the folks at the USITC.
With Airbus running the program, concerns about continuity and longevity, product support, continued development and long-term health evaporated. On the day Airbus changed the name, JetBlue bought 60 airplanes. With Farnborough coming up, I suspect the A220 will be the talk of the show.
Meanwhile, as a response, Boeing has dug $4.5 billion from under the couch cushions and bought Embraer’s commercial aircraft division, which is offering a reheated version of its E-series airliners introduced 20 years ago as its answer to the A220. I suspect if you’d told the top-floor guys in Chicago a year ago they’d be doing that they would have thrown things at you.
So, what’s the result?
For aviation, instead of a balancing force in the airline industry that might have been able to actually provide an alternative to Boeing and Airbus over the long term, it got an even stronger duopoly.
For the people of Quebec and Alabama, they got high-paying stable jobs for the foreseeable future.
For Airbus, it got “a nice little plane” and a cheap entry into a side business it wasn’t thinking about until a few months ago. It also got a spiffy clean-sheet design packed with technology it can use in its real business.
For Boeing, it didn’t get “another Airbus,” it just strengthened the one it was already up against and gave itself a project it neither needed nor wanted.
And for the U.S. government, it will just be business as usual.