When Government Blunders Into Business

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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.

Comments (11)

Just another demonstration that:
(A) When faced with an opportunity to get into business decisions, governments should default to "don't do it", and,
(B) The trade war game is akin to playing basketball with a porcupine for a ball.

Posted by: John Wilson | July 12, 2018 3:29 PM    Report this comment

Ahh, the law of unintended effects. I'm no Airbus fan (I don't care much for their FBW design, and the only planes I've regularly had maintenance issues derail my plans have been Airbuses), but even I can admit they made a smart business decision. And conversely, Boeing made a big mistake in raising such a big deal over the CSeries, with the end result being something worse for them than if the CSeries entered the market on its own.

Posted by: Gary Baluha | July 12, 2018 3:57 PM    Report this comment

I've been saying this since Airbus swooped in: picking on Bombardier has been a strategic disaster for Boeing - someone at the C-level (the people IN CHARGE OF STRATEGY) needs to be fired over this. It was their job to foresee this, and they made the worst possible move.

Posted by: JEFFREY SMITH | July 12, 2018 4:53 PM    Report this comment

Holy cow, 300 percent tariffs? Would have been simpler just to outlaw the darn things.

If you want to really muck things up, go get the Government involved; Boeing should have known that.
Playing with fire can get you burned...

Posted by: A Richie | July 13, 2018 9:01 AM    Report this comment

Somehow absent from the discussion is this inconvenient fact:
Bombardier - aided and abetted by its Canadian-government investor - sold its aircraft to Delta at FAR LESS than its cost of production. It was an icebreaker sale that bought them market share. But it was the classic definition of Dumping. And dumping is unlawful.

At 300%, the math was just about right, in adjusting the net sale price to reflect production costs plus nominal return on investment.

But the USITC created law out of thin air, by ruling that lawless conduct doesn't matter, as long as - in ITS opinion - no one is harmed by it. That's an interesting legal concept, akin to so-called "victimless crimes." Each amounts to an excuse not to enforce some law - never a desirable tactic.

IMWO, Boeing's biggest mistake in all of this was not buying the Nice Little Airplane for themselves. It would have made a nice stablemate for Boeing's long-rumored Middle-of-the-Market vehicle; the two would nicely straddle the aging 737 product line. 20/20 hindsight...

Posted by: YARS (Tom Yarsley) | July 13, 2018 11:54 AM    Report this comment

I'm disappointed in this piece Russ - it reads like you have been drinking Bombardier cool aid. You state that Bombardier scrimped and saved to pay for the program on their own. That is incorrect. There was a number of launch assistance payments from suppliers and government aide from both Canada and UK. You state that Quebec monies were "perfectly legal". Did you even look to see where the WTO sits on this issue - last I saw Brazil still has a case pending - how about we let the court decide not Russ. You state Bombardier doesn't make military aircraft so they can't bury the fat in contracts that way. You got to be kidding me which US military contract are you working on that allows that to occur. Have you ever been involved in a military contract, do you have any inkling on the amount of financial discipline that takes place with these contracts. And Bombardier does deliver product to a number of military and government agencies. Your comment that Delta is no Boeing fan is in direct conflict with the CEO's statement that the C-series issue is business and not personal and further expressed their interest in being Boeing's NMA launch customer. You fail to mention that Airbus did not buy the C-series program rather BBD has committed close to a billion dollars in future investment even though they won't recognize any profits from the program. Think about this the majority shareholders agreed to not sell, not give, but pay someone to take the project from them. This gets even uglier - Airbus has the option to buy BBD out, BBD has no option to buy Airbus out. What corporation does this and allows the same individuals continue to run the company? And how do you know that Boeing wasn't offered the program? Remember they used to own the deHavilland division - maybe they were and maybe the lessons are still too raw. It is evident the Chinese were interested but I would guess the Canadian politicians couldn't stomache that. What will allow Airbus to succeed in this program is they got a nice little airplane and a billion dollars to spend on it - it is questionable that without that advantage whether anyone - even Airbus could succeed. This whole thing is bad for Canadain aerospace, bad for the BBD class B investors, bad for the Canadian taxpayers. At least the employees received some job protection. Airbus of course got a free airplane and the intellectual property behind it. And of course Alabama Airbus gains another product line - which is good for the US. Disappointing Russ, lets do our homework.

Posted by: Rob "daSlob" Schaffer | July 14, 2018 1:10 PM    Report this comment

As I understand the actual case Boeing brought to the tribunal was the cost of building the first 7 C series was 3 times what Delta were paying for it therefore all C series should have a 300 % tariff.

Considering the break even for the 787 series is approximately sn 1400, this is a stunning level of hypocrisy.

The damage to Boeing doesn't stop with gifting Airbus the sub 135 seat airplane market, Boeing was the front runner for the RCAF replacement, an order worth 65 + airplanes. Well you can kiss that one goodbye not to mention Britain has said that the P 8 buy is off the table as a big part of the C series is made there.

A pretty good example do what happens when fact free ideologies collide with reality.......

Posted by: DAVID GAGLIARDI | July 14, 2018 11:06 PM    Report this comment

David:
"Break-even" is about recouping development costs; not about pricing a product to cover production costs.

Posted by: YARS (Tom Yarsley) | July 15, 2018 3:36 AM    Report this comment

Aside from the subsequent specific discussion of the C-series fiasco, I wholeheartedly concur with the first paragraph of this blog as being an overarching issue with well meaning yet often misguided Government intervention. Whether being derailed by external OR internal "idiots," the end result is often the same. Good people are often worn down trying to do the 'right thing.' They ultimately get tired, roll over and go with the flow. Getting from being hired, not getting fired and making it to retirement often becomes individual goals. THAT has to stop! Common sense HAS to begin to prevail. Proactivity has to become the mission statement of every Government entity and employee.

When ya think about it, this is just another example of what happens when an omnipotent bureaucratic entity sticks its proverbial nose into business. One only has to view what the FAA's incessant preoccupation with "safety" -- to the exclusion of common sense -- has done to GA. The 1958 Act directed both but somehow safety transcends all else.

Off topic but same idea ... we're still flying 1946 airplanes or designs because 'common man' can't afford anything new. Certainly the economy plays a part in it but MORE importantly, idiotic rules -- sometimes for the sake of promulgating more rules -- become so entrenched that changing them becomes nearly impossible. And enforcing some while ignoring others is just as dangerous.

As another example, one need look no further than the need to "reform" FAR Part 23. WHY was that necessary? For myself, I see no big gain in what evolved from that endeavor. It's still messed up ... only now it has a different flavor. The idea that going from prescriptive based design to "performance based" will fix everything is nonsense. The Government needs to get out of the business of regulating everything for Class I airplanes. AEA is patting themselves on the back for finding a way around the rules by using the rules. Again, why is that necessary?

So the Government meant well and NOW look what happened on THIS subject. SIGH !!

Posted by: Larry Stencel | July 15, 2018 8:53 AM    Report this comment

Tom

My understanding was the complaint against Bombardier was that the aircraft was sold for less than it cost to make. This is exactly the case for the 787 sold to the initial customers and is the case for the early serial numbers of every airliner made by every manufacturer.

Boeing figured they could use a compliant protectionist administration to help them bully Bombardier into submission. The irony is the case was not dismissed on its merits it was dismissed because Boeing doesn't make any aircraft in the same size range as the C Series and therefore could not be harmed. They were forced to admit that their bid to Delta had to include used Embraer 190's to meet the customer requirements.

It hard to envision a better example of a trade dispute that is so lacking in a factual grounding

Posted by: DAVID GAGLIARDI | July 15, 2018 10:46 AM    Report this comment

In any other industry, an item sold below production cost in order to bring in some cash and attract customers is called a loss leader. Heck, there are entire industries where products are sold below production costs with the intent of making a profit on maintenance and support.

Early customers on any commercial aircraft program are going to be buying well below production cost for those airframes. Those production costs decline as the program goes on--or do you really think the first customer shoulders billions in costs for that first airplane?

Boeing got what it deserved. I'm certainly not a fan of the direct government subsidy that Bombardier received, but everyone in aerospace is so mired in subsidies, direct or otherwise (e.g. tax breaks and special tax treatment, land grants, etc.) that Boeing whining about subsidies smacks of hypocrisy.


As for why the "good guys" in government keep getting ground down... it's called the Iron Law of Bureaucracy (thanks to Jerry Pournelle):

"In any bureaucratic organization there will be two kinds of people: those who work to further the actual goals of the organization, and those who work for the organization itself. Examples in education would be teachers who work and sacrifice to teach children, vs. union representatives who work to protect any teacher including the most incompetent. The Iron Law states that in all cases, the second type of person will always gain control of the organization, and will always write the rules under which the organization functions."

Posted by: Robert Gatlin-Martin | July 15, 2018 2:57 PM    Report this comment

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