Professor KEITH HAYWARD FRAeS assesses the historic news of partnership between Airbus ansd Bombardier as the European airframer takes a stake in the CSeries regional airliner. With the CSeries the target of punitive US tariffs action, how will this reshape the global aerospace industry?
In attacking the Bombardier CSeries, the Boeing anti-subsidy warriors are trying to hit a new target. The Canadians do have some form here – WTO rulings in the 1990s found that both Bombardier and Embraer had transgressed the organisation’s subsidy code and forced changes in Canadian Government aerospace support policy. Subsequently, Federal and Provincial investment in Bombardier and specifically the CSeries has been extensive and vital to its survival. This has amounted to over $1.5 billion Canadian dollars.
This time the US is threatening unilateral action through the Department of Commerce International Trade Commission. The ITC action proposes a 300% import levy to penalise what officials describe as price dumping of the CSeries to win a vital order of 75 aircraft from Delta Airlines. But the underlying theme is the same as Boeing’s long-term attack on Airbus as a state-sponsored enterprise distorting the market with soft loans for aircraft development and publically-funded infrastructure.
Deep discounting is hardly a new phenomenon in the airliner business, and not unknown in sales campaigns run out of Seattle. Much depends upon where exactly on the learning curve you determine the costs of your product. Boeing claims that in this case Bombardier was far too generous and relied on its public subsidies to make the offer to Delta. The ITC is set finally to rule on the claim in February 2018, but few were prepared to bet on a change to the ITC outcome given the winds blowing out of Washington DC.
Attacking an aircraft in a class in which Boeing has no contender, smacks of ulterior motives and an opportunist riding of the Washington protectionist wave. The real aim may well have been to poison pill any direct Chinese investment in a financially stretched company. While Boeing could suffer some damage from Canadian retaliation, the loss of F/A-18 Super Hornet orders for the RCAF might have been worth the paying a penalty to head off Chinese competition to the north. However, Boeing’s action may have precipitated a classic example of the law of unanticipated consequences: opening an Airbus second front inside the US market.
The Airbus-Bombardier deal
The entry of Airbus into the fray would certainly mark a significant move. Airbus has once already considered investing in Bombardier, but this time the deal is limited to a 50.01% share in the CSeries (the CSeries Aircraft Limited Partnership (CSALP), offering assembly at its plant in Alabama and access to the Airbus sales, marketing and product support network. Bombardier and the Quebec government will hold the remainder. For a cash-free deal, Airbus gets a state-of-the-art fit at the lower end of the airliner market, effectively replacing the moribund A319. With Airbus backing (and an end to any active market spoiling), the CSeries may now be better position to boost an existing order book of 360 aircraft. Airbus has also obtained a significant degree of control over future developments of the CSeries, including a threatened entry into the lucrative 150-seat plus market.
But more to the point, Airbus has stuck it to Boeing in its backyard, ensuring at least some political support in the US Congress from Southern-based politicians. Boeing once held a stake in half of Bombardier’s aircraft operation – it owned de Havilland Canada for a while until selling it to the Quebec-based based Bombardier. Boeing’s response to the Airbus intervention is to state that nothing has changed: the issue is still about state-subsidised market distortions and it will still press the ITC to deliver its sanctions.
Aerospace in Northern Ireland – a special case
The UK also has a dog in this fight – Bombardier Belfast, aka Shorts, with long term commitments to Northern Ireland’s largest manufacturing employer, and located in the heartland of Mrs May’s DUP Parliamentary partners. A thousand of Bombardier Belfast’s 4,000 jobs depend on the success of the CSeries, and the UK Government has a direct commercial stake through a Repayable Launch Investment of £180m to develop and manufacture the CSeries wing.
The history of aircraft manufacturing in Northern Ireland is no stranger to politics. Nationalised in 1943 following internal problems, Shorts’ location and the jobs it supported has been a continual theme in its post-war history and survival as an independent company. Although it did have a design capability – and was a pioneer in VTOL research - mainland firms were encouraged by London to sub contract work in order to maintain employment in Belfast.
In the late 1950s, Shorts faced a crisis: dependent on Canberra and Britannia subcontracts and with only limited orders for the Belfast military transport, it was then unceremoniously dumped from the TSR-2 competition. The government did look for a link with a mainland company (Bristol already had a shareholding) but public ownership was a problem; during the rationalisation of 1959/60, it stymied incorporation into either the BAC or HSA group as a possible conflict of interest for the government. Isolated from the rest of the domestic aircraft industry, with higher costs and labour problems, as one official noted, “Shorts is something of an embarrassment”.
In the 1960s, employment fell by a half and the Government came close to closing Shorts and developing the site as a trading estate. However, there was a chance that the firm “might stay in business in a small way as an engineering concern with perhaps some interest in missiles”. In a case of deploying the Macawber strategy, the Cabinet concluded that there was “nothing to be lost by waiting a while”. The Belfast design team was also working on a small transport aircraft, the Skyvan, which combined with a range of successful guided weapons, proved to be its salvation, especially when the USAF chose the Sherpa follow-on.
The Bombardier sale in 1989 provided the basis for Shorts emergence as a first-rate aero-structures centre (the missile operation was acquired by Thales). Helped by some regional and national support, the company refurbished plant and invested in advanced manufacturing processes, including composite materials. As a result it assumed a key role as wing-maker in the CSeries programme.
Still a politically sensitive company
Bombardier Belfast is now the largest manufacturing employer in Northern Ireland; and while now free of its sectarian employment heritage, Bombardier Belfast remains a key factor in Unionist politics. With the London Government dependent on DUP votes, Mrs May and others in the British Government have joined Canadian protests and have threatened to retaliate. However, even if future Boeing military orders might suffer, Boeing investment in the Sheffield Advanced Manufacturing Research Centre (AMRC) and the key role of Boeing aircraft in current UK defence plans may generate a lot of noise signifying nothing. The post Brexit environment and ambitions to win wider trade deals with the US could also serve to mute criticism of the Trump White House. London could still face being caught between several rocks and a hard place.
Airbus plays the globalist card
With integrated factories across Europe and also in China and the US, for an aerospace company Airbus has achieved a rare state of genuine multi-nationalisation of operations. This affords it a powerful element flexibility and strategic market access. Boeing also has international risk-sharing partners and 'offset' obligations in several markets, including the UK. However, this does not provide the same leverage as direct employment in a country, however welcome and valuable other forms of investment may be.
From a British perspective, the Airbus intervention might help strategically to save a large part of the Bombardier Belfast operation, down the line Airbus might yet look for synergies across all of the CSeries operations that might lose British companies business further down the supply chain. This too is an inevitable consequence of globalisation.
Airbus action to assemble CSeries in the US may sill not entirely block the ITC from applying sanctions – that will depend on some largely unpredictable Washington politics – but it has certainly thrown a spanner in the Boeing anti-subsidy campaign by complicating the legal and political context.