RichardAboulafia.com 

:: June 2005 Letter ::

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Dear Fellow Nostalgicians,

Launching a plane today is tough. You have to carefully explain your business case to shareholders, debt-raters, and industry partners. But before privatization, de-regulation, and liberalization, launching a plane was charming and fun. The Minister for Aero-Industry Affairs would meet the Minister for the Airways, agree on the size and shape of a new national plane, shake hands, pose for the flashing cameras, and sign the necessary contracts. They’d get in their sleek art deco sedans, confident their decisions were for the good of the country. These were men of compassionate vision, who didn’t give a damn what the money guys said. Sadly, to see this kind of scene, you need to travel back in time.

Or you can go to Canada. This delightful image of a bygone world was stunningly re-created in May when Bombardier received promises of $700 million in launch aid for its CSeries of 110/135-seat jetliners. Ottawa kicked in $320 million, Quebec $280 million, while the UK, hoping to replicate the DeLorean car experience in Northern Ireland, committed $100 million. I was disappointed to read this on the wires; I was hoping to see this nostalgic moment in a theater on a grainy black and white newsreel, with smiling, trench-coated ministers standing in front of DC-2s and De Havilland Dragon Rapides.

The real issue with aircraft launch aid isn’t legality or the WTO; it’s embarrassment. It implies that the business case can’t get by with private sector cash; it needs a hand from the obligingly generous taxpayer. That’s certainly the case here. There are many bad aspects of the CSeries market, but let’s focus on one. This plane won’t merely compete with the unit price of a 737-700 or an A319. Rather, it will compete with Airbus and Boeing’s marginal cost to sell additional A319s or 737-700s, on top of the hundreds of A320/321s and 737-800/900s they’re building. Most CSeries target customers also need the larger planes anyway; what kind of deals can the two primes cut them for additional smaller versions of the same aircraft? When the primes are each building 15-20 planes a month, the cost of also building 5-10 smaller planes is minimal.

What the heck. Let’s look at another horror. While Airbus and Boeing are under-pricing the top end of the CSeries range, Embraer will devour the bottom. The ERJ-190/195 will be less expensive to buy and operate, if only for reasons of size. The CSeries will have no advantage at either end of its range.

The 110/135-seat CSeries market is better than the 100-seat BRJ-X market, in the same way that death by hanging is way better than death by disembowelment. A revolutionary 110/135-seat design might just be competitive here. But the CSeries is stunningly non-revolutionary. So, this project would never happen without John Q. Mountie.

Even with this help, it still probably won’t happen. Government aid can help a marginal business case go ahead, as with the A380 or Japan’s aerostructure work. But no amount of sweetening — and the Canadian/UK offering is so sweet it’s saccharine — can make the CSeries go. The two major engine players in this class (CFM and IAE) responded to this sweet, yummy maple-flavored aid by just walking away.

If the CSeries was just a bad idea, it wouldn’t be a big deal. Bad ideas happen in this industry. If they didn’t, critics like me would be out of a job. What elevates the CSeries from “bad” to “carnivorously destructive” is what it means for the rest of Canada’s aerospace industry. It will suck up hundreds of millions of dollars, money that will be siphoned off from everything else.

Worse, the Canadian Government wants a vertically Canadian plane. David Emerson, Canada’s Minister of Industry, said “Canadian firms play key roles in many existing global aerospace projects, and the Government of Canada will work with companies across the aerospace industry to promote their capabilities to participate with Bombardier in the CSeries.” This means risk would be kept in country. If the CSeries fails, most of Canada’s aerospace suppliers will be dragged down with it.

Meanwhile, the CSeries would hurt new business jet models, which would be starved for corporate and government development money. Since new models are the life’s blood of the industry, Bombardier’s business jet unit would continue its post-2001 tumble, probably going to the Number Three spot by the end of the decade.

While the Canadians were keeping reality at bay, Embraer unveiled plans for two new business jets, one light and one very light, and clearly the start of some serious troublemaking in the market. “Faz Favor,” they seem to be saying, “This isn’t hard to understand. Take money from the low-margin jetliner side and give it to the high-margin bizjet side, not the other way around.” Canada would do well to listen.

Even more serious is the likelihood of new competitors to the CSeries. In a few years Airbus and Boeing will develop composite-skinned versions of their current narrowbody families. If Canada puts all its product development money into the metal-based CSeries (and Canadian subcontractors follow suit), then the arrival of new composite competitors will be the equivalent of sprinkling salt over the once-green fields of Canada’s aerospace industry. Nothing will ever grow again.

Speaking of state aid, last month I wrote: “If Airbus cancels the current A350 and asks for launch aid for an all-new A350, it would be a deeply embarrassing moment for Europe.” Europe called. Turns out they aren’t embarrassed at all. I regret the error.

However, the A350 people say they’ve gotten it right this time, and I’m off to Le Bourget to watch the orders pour in (and they just might). When I return, July’s aircraft reports will include the 747, CH-47, Learjet, Hawker, MD 500/600, Dash 8, and G.222/C-27J. Have a great month.

Yours, Waiting For A State Handout,

Richard Aboulafia

 

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