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:: April 2004 Letter ::

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Dear Fellow Travelers,

Canada. The very word strikes casual interest and mild curiosity. But how different are our Northern pals? I decided to find out with an in-depth, 48-hour tour of two geographically convenient cities, Montreal and Toronto. Sure, there are the obvious comparisons—it’s colder and there’s more Neil Young and Guess Who on the radio than in the US. But the main difference I picked up was that while Americans have a myth of rugged individualism, Canadians are big believers in government. Or, as Les Quebecois call it, Gouvernment (everyone in Quebec talks in italics).

Seems that while the US was developed by lawless, backstabbing pioneers, Canada’s development was managed by government-sanctioned entities, like the Hudson Bay Company, the Mounties, and provincial maple syrup co-ops. Their culture, Canadians maintain, is rooted in an organized, communitarian spirit. America, by contrast, has its roots in Wild West gunslingers, gold panners, and claim jumpers. I’d insert a quote from the Canadian Government official who explained this to me, but since we in both countries thankfully still enjoy beer, the only coherent cocktail napkin notes I took cite Bullwinkle Moose.

This, of course, is just a theory. But the Canadians’ fondness for big government (seriously—the national motto is “peace, order, and good government”) is currently seen in the large regional jet debate involving Canada (Bombardier) and Brazil (Embraer). Both are doing fine in the 70/90-seat range, with Bombardier’s CRJ-700 and Embraer’s ERJ 170 attracting good customers, but the fight for this market depends on the market for bigger planes. That leads us to the dreaded 100-seat market.

The 100-seat market has always been a disaster. Embraer’s ERJ 190/195 is alone in the 90/110-seat range (except for the dying 717 and niche A318). Fokker died in valiant pursuit of this market. It almost killed BAe too. The ERJ 190/195 has garnered exactly one useful customer—JetBlue. Launch customer Swiss can be regarded as a likely perpetual deferrer. So all eyes are on JetBlue. The big question: is the low-cost medium size market a promising growth area, or is David Neeleman just doing this because he was brought up in Brazil and wants to do something good for the country by purchasing Brazilian jets?

If JetBlue’s ERJ 190 route experiment works, Southwest could follow, with hundreds of orders all at once. Bombardier’s problem, then, is that it has nothing in that class. Worse, as ERJ 190 and 195 demand grows, sales of the ERJ 170 and 175 will be boosted too, as airlines seek commonality with an attractive product. This would clobber Bombardier’s CRJ-700/900.

Bombardier’s obvious answer to this problem is a new 110/130-seat family, a range that wouldn’t hurt the CRJ-700/900, but would challenge, and indeed outflank, Embraer. But this hypothetical market isn’t enough of a justification to spend $2+ billion for an all-new family. Bombardier has disgruntled shareholders to think about, and spending that kind of cash is unlikely to inspire confidence.

Bombardier’s track record of new product development is also quite limited. The company spends less on new commercial products as a percentage of sales than even Boeing has at its lowest moments. Most Bombardier jets, aside from the Global Express, Lear 45, and Challenger 300 were either acquisitions or derivatives of existing models. Besides, as a railway man, Bombardier chief Paul Tellier understands commodities, and aviation is more of a commodity business than anyone wants to admit. Commodities are a low margin business, with an emphasis on low costs, and no room for fancy technology.

So Bombardier is in a bind. It won’t spend cash on speculation, yet if the 100-seat market finally grows, it might grow too fast for the company to stop Embraer from securing an impregnable position.

There’s one easy way for Bombardier to get out of this bind: government cash. In Canada, it’s fine to look to government for a solution, getting back to those planned development days of yore. Besides, after the Canadian Government cancelled the incredibly cool Avro Arrow fighter in the late 1950s, they began to fund commercial work, reasoning that if they were going to starve the military side, they could at least promote the civil segment.

Sure enough, Bombardier has started seeking a large government support package to develop a new jet family. While convincing Ottawa to spend billions would be problematic, they hope to at least avoid a “standing start” new plane development program, in case the 100-seat market grows.

A US aircraft company would typically take a much less direct approach—getting home states to cut taxes or provide infrastructure by holding jobs hostage (“cut our taxes or we axe 500 machinists”). Or they might belly up to the DoD or NASA troughs. But before we criticize our government-loving Canadian pals for subsidizing a 737 competitor, let’s cut to the bottom line: It’s not likely to happen. Canada’s Government may be willing to provide a few hundred million here and there for derivative product launch aid. But for the new Bombardier jet to actually proceed, Canada’s Government would have to change its aerospace aid policy from “Advice and Support” to “National Aircraft Development.” The concept of a national plane is closer in spirit to Jakarta, 1992 than Ottawa, 2004.

Most of all, despite the incessant talk and that JetBlue order, there’s a good chance that 100-seat market will stay quiet. Without a market, Bombardier won’t spend a beaver-clad nickel on the product.

April’s supplement includes the annual business jet overview. It also includes updates of the 737, F-15, Eurofighter, Mirage 2000, and others. Have a good month.

Yours, Until The Molson Runs Out,

Richard Aboulafia

 

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