Boeing Bullies Bombardier - Hypocrisy Most Foul

Before I get started I want to say that I love Boeing and their airplanes. I fly the B717 right now and I flew the B-1 in the past (a plane now cared for by Boeing.) I aspire to fly more of their aircraft. They are a shining beacon of American technology and manufacturing. I wish them raging success in their aircraft development, production, and sales.

However, I am disappointed at their ridiculous hypocrisy in one matter.

In April 2016, Delta Air Lines announced a purchase agreement for 75 Bombardier CS100 aircraft, with options for 50 more. It was an important deal for Bombardier. The CS100 project was behind schedule and over budget. The company was in so much trouble that it had to secure government bailouts to stay in business. The deal with Delta was a strong signal to the worldwide airline industry. A major US airline had put its faith in the C-Series project.

This was also an important deal for Delta. The CS100 is a clean-sheet design that offers almost unparalleled performance, economy, noise reduction, avionics, and passenger comfort. However, there's an old aviation proverb: Never fly the A-model of anything. Delta has committed to flying an unproven aircraft from a company in a financial position that can best be described as "shaky."

Bombardier also paid dearly to send their signal to the industry. Though the purchase price of the deal wasn't disclosed at the time, it was no secret that Delta got the aircraft at a significant discount.

Now, inexplicably, over a year later, Boeing has started raising hell over the deal. They filed a complaint with the US government saying that Bombardier was guilty of "price dumping" - selling the planes to Delta at a loss in order to book some sales. Siding with Boeing, the US Department of Commerce decided to apply 220% the normal tariff to Delta's CS100 aircraft. Adding insult to injury, they then added an additional 80% to that, bringing the total tariff to 300% of what it would have been.

Why? Boeing is mad that Delta didn't buy Boeing aircraft instead. Boeing has spent a lot of money developing three different models of B737 MAX. They also have a production line running full-time to produce the B737-700...an older variant that isn't nearly as popular as its -800, -900, or MAX siblings. I can understand why Boeing isn't happy with the situation. If I were them, I'd also want a major US airline to buy planes from me, rather than from a foreign corporation.

However, Boeing's approach to this situation is wholly unrealistic. Let's look at some key points:

  1. Delta loves the B717, a 110-seat aircraft with the distinction of being the final variant of the DC-9 airframe. Delta owns 91 of the 156 B717s that were produced. Delta uses the B717 as an "upgauge" aircraft...more efficiently carrying larger numbers of passengers on routes traditionally served by regional airlines. Delta tried to get more aircraft in the 110-seat segment from Boeing. The problem was that they had nothing to offer. Boeing inherited the B717 design (formerly the MD95) when it bought McDonnell Douglass and only produced that small run of aircraft. Once that was over, they gave up on the segment and haven't looked back. (And who can blame them...why bother when you can sell B737 MAX, B787, and B777s for a lot more money?)
  2. Boeing did try to offer Delta the B737-700...a 130-seat aircraft that costs significantly more to buy and operate than the CS100. It's also louder and lacks a great number of technological upgrades available on the Canadian jet.
  3. Delta turned down the offer, but Boeing found a buyer. Last year United Air Lines agreed to buy 65 B737-700s and much ado was made of the fact that they chose this over the CS100. That deal largely happened because Boeing agreed to sell the planes for prices as low as $22M each, a whopping 78% discount off the listed purchase price!

    Yes, Delta got a huge discount on their CS100s. Delta probably paid about $20M each, instead of the $33M it costs to build them. By my math, that 33% discount is far less than the 78% discount United got. If Bombardier is guilty of price dumping for its deal with Delta, then Boeing is guilty of price dumping for its deal with United.

  4. Boeing's practice of offering discounts (or as they themselves have taken to calling it, "price dumping") may sound familiar to you. If so, it could be because they did the same thing trying to catalyze B787 sales. Forbes reported back in 2013 that Boeing was selling B787s for $116M each, $84M below what it cost to build them. Boeing lost several billion dollars doing this.

    Make no mistake: this is the exact behavior that Boeing is attacking Bombardier over right now.

  5. Boeing actually did make an effort to provide Delta with a 100-ish seat aircraft even though they didn't have any more B717s to offer. Delta had every intention of buying 20 Embraer E190s from Boeing until the C-Series came along.

    That deal was a strange one though. Boeing was willing to sell the E190s to Delta at a steep discount, or even a loss, because it had no use for them. (Selling them at a loss would probably also have fit Boeing's own, current, definition of price dumping.) Boeing didn't even produce the aircraft...the E190 is made by Embraer, a Brazilian company! Boeing reportedly acquired the E190s in trade as part of a deal to sell 61 B737 MAXs to Air Canada...an airline from Canada...the same country as Bombardier.

    (Comparing the E190 to the CS100 shows why Delta abandoned their E190 deal with Boeing. The CS100 is a superior aircraft. Embraer is working on an E-190-E2 that will compete better against the CS100, but it still falls short in most areas. Once the CS100 became a realistic option for Delta, there was no way for Boeing to make their 20 used E190s a compelling offer.)

  6. The Canadian government has threatened to cancel a $2 Billion order for Boeing F-18s over this controversy. British Prime Minister Theresa May has sided with Canada and threatened to cancel all orders for Boeing military aircraft.

    If these threats hold, Boeing will be losing billions of dollars of revenue in an attempt to block a deal for aircraft in an air transport segment that it hasn't cared about for more than a decade. That lost revenue is money that won't go toward workers' salaries. It will threaten American jobs. It will cost the US a large chunk of tax dollars. It will certainly cause more damage than any good that could be done with the proceeds of the 300% tariff on these CS100s.

  7. Boeing claims to have a problem with Bombardier receiving government bailouts. However, Boeing seems perfectly happy to sell their aircraft to airlines like Emirates, Etihad Airways, and Qatar Airways (collectively the "ME3.") These airlines operate on completely unsustainable economics and only exist thanks to massive government subsidies...subsidies of more than $50 Billion to date. Make no mistake: the ME3 are the greatest threat to the US air line industry. American companies simply cannot compete with organizations that have tens of billions of dollars to prop them up while they operate a loss for years on end.

    Boeing's support of the ME3 jeopardizes hundreds of thousands of American jobs. (Note that US airlines aren't working to block Boeing's sales to the ME3.)

  8. Speaking of American jobs, half of the components in the CS100 reportedly come from American companies. Hurting this CS100 deal hurts Americans working in numerous industries.
  9. Boeing is also happy to sell their aircraft to so-called low-cost international airlines like Norwegian Air. These airlines are attempting to avoid responsibility for the treatment of their employees and the conduct of their operations by making the airline industry work like the maritime shipping and cruise ship industry. They flag/register their aircraft in one company and contract their employees through a series of shell companies. If an employee has a complaint they have to take it up with the shell company, based in a country that offers little if any protections for workers. The parent company also avoids liability through similar aircraft ownership schemes. It's a terrible model for workers and travelers. It has wreaked havoc on the quality of life for maritime transport and it would ultimately make air travel a similar nightmare. It is the last thing any American should want for the air travel industry...but companies like Norwegian are gaining ground in part due to their ability to purchase efficient aircraft like the B787 and B737-9 MAX.

If Boeing were concerned with competition in the 110-seat market, it could have spent the last 11 years working on something to replace the B717. The fact is that it didn't because it doesn't care to compete in that market. There is nothing wrong with other companies trying to compete there in Boeing's place. Embraer and Bombardier are doing just that. If there is truly no need for an aircraft in that market, both the E190 and C-Series will fail. If a need does exist, Boeing should compete or leave them alone.

While they're at it, the B757 is getting old. Boeing has been developing the B737-900 as a replacement for the B757. (Airbus is putting the A321 to fill the same niche.) Neither the 739 nor the 321 can fill that gap though. They've stretched those airframes further than they should ever have and they haven't given them enough power. The world needs a B757 replacement, badly. Boeing only just recently teased the idea of a B757 replacement (the industry is assuming it'll be the B797.) Instead of attacking Bombardier for this one deal, Boeing should have spent the time and legal fees furthering work on the B797.

Yes, Bombardier gave Delta a steep discount on their CS100 order. It turns out that this is an industry standard practice...used repeatedly and recently by Boeing.

Boeing's actions will cost Americans far more in lost jobs, lost income, and lost tax revenue than increased CS100 tariffs could ever generate.

Boeing is guilty several times over of any misdeeds that it's assigning to Bombardier. The truth is that most of this is just the way business is done. The rancid hypocrisy of Boeing's actions is overwhelming...

...which is bewildering because Boeing is an otherwise great company.

Boeing needs to apologize for starting this fight and back away with whatever grace it can manage at this point. It needs to drop its legal complaints and beg the US Department of Commerce to rescind the tariffs.

Delta's CEO, Ed Bastian, recently stated, "We will not pay tariffs that are being discussed and debated." This isn't him being defiant or strong-willed. It's a simple statement of fact that if Delta actually has to take this to court before Boeing drops their complaint, it will be trivially easy to demonstrate the blatant hypocrisy of this whole situation.

Either way, Mr. Bastian is correct. Delta won't pay a 300% tariff. Boeing needs to acknowledge this. Boeing needs to let Bombardier and Embraer duke it out in the 110 seat market that it doesn't care enough about to compete in. Boeing needs to go back to what it's great at: building and selling airplanes.