:: September 2017 Letter ::
One of the hardest tasks faced by any aerospace company’s leadership team is deciding when, exactly, they should stop shooting themselves in the foot. This kind of ill-advised behavior is rare, but with Boeing’s trade complaint against Canada, it’s apparent that the company could use a bit of advice. Here’s my free strategic consulting report for Boeing.
First, Boeing should focus solely on the right strategy for the company. Boeing and other Bombardier critics say the CSeries wouldn’t exist without subsidies. Bombardier and other Boeing critics accuse the company of hypocrisy, given its record of benefiting from government support. Neither side looks particularly innocent. But instead of these issues, and instead of misreading history and viewing Bombardier as the start of another Airbus, Boeing should focus on doing what’s best for the company. It’s hard to see how the company’s interests are served by this complaint.
Second, Boeing needs to keep the threat in perspective. Since the CSeries was originally launched in 2006 Airbus and Boeing have racked up 17,264 single aisle jetliner orders (8,104 Boeing, 9,160 Airbus). The CSeries has gotten 360 orders. Delta, the only US customer and the center of Boeing’s trade complaint, has ordered the CS100 (the CS100 accounts for 123 of those 360 orders). The CS100 competes with the ghost of the 717, a 106-seat jet that Boeing hasn’t built in 11 years. The CS300 (237 orders) competes with the 737MAX7, the company’s least popular and economically significant jet. This is not a valid reason for a Boeing freak-out.
Yet freak out they did. The Seattle Times this month quoted former BCA CEO Ray Conner’s testimony before Commerce, “it will only take one or two lost sales involving major U.S. customers before the commercial viability of the MAX 7 — and therefore the US industry’s very future – becomes highly doubtful.” I’ll assume that Conner was exaggerating for effect. Even with that assumption, this statement is ridiculous.
Third, and most of all, Boeing needs to consider the consequences of this complaint. The blowback is taking many forms, and greatly outweighs the threat. Most of the blowback comes from Canada, where the Commerce Department’s ruling this month – a 220% import tariff on the CSeries, up from a Boeing request for an 80% tariff – is not being viewed as a rational and just decision. Instead, it looks like a politicized outcome, and part of a broad pattern of protectionist measures aimed at Canada, covering things from lumber to dairy products (great NY Times coverage of this at tinyurl.com/yc9828dr and tinyurl.com/y99vtb3j).
If Commerce doesn’t show its methodology in calculating this 220% tariff – a number that appears to be bat-excrement crazy – Canada’s view will be validated. In the coming weeks, the US International Trade Commission (USITC) will determine whether Boeing was harmed by the sale of a jetliner that competes with a dead jet; if they say it was, they need to explain exactly how. If they say it wasn’t, this whole complaint vanishes, and Boeing just looks silly.
Many Canadians now view Boeing as aligned with Trump’s perceived anti-Canada trade actions. And the reaction is coming straight from the top. Prime Minister Justin Trudeau stated this month, “We won’t do business with a company that’s busy trying to sue us and put our aerospace workers out of business,” jeopardizing an imminent 18-aircraft Super Hornet order. It also puts at risk further Super Hornet orders (the RCAF fighter requirement is 65-88 fighters), plus possible Canadian orders for the P-8 and CH-47.
Then there’s the UK. Thanks to Prime Minster Theresa May’s electoral setback this summer, Northern Ireland’s Democratic Unionist Party is an essential part of her government. The DUP wants one thing: her support in this trade complaint (CSeries wings are built in Northern Ireland). May called President Trump after the tariff announcement to say that she was “bitterly disappointed.” Secretary of State for Defense Sir Michael Fallon warned Boeing that the dispute could “jeopardise our future relationship.” Boeing can be thankful that they already have signed UK contracts for AH-64Es and P-8s, but do they want to lose the future UK defense market?
Canada and the UK represent tens of billions of dollars in potential defense contracts, put at risk by Boeing to protect the perfectly marginal 737MAX7. But, an antagonized Canada could help kill the MAX7. In one of life’s great ironies, two of the three 737MAX7 customers are Canadian. As retaliation for the Commerce ruling, Ottawa could claim that Boeing was dumping the MAX7. They could also claim damage to a Canadian jet – the CS300, and impose a 220% tariff. That would leave Southwest as the sole MAX7 customer. As they say in hockey, that’s an own goal.
Ottawa can do more…now. Many Canadians outside Quebec weren’t thrilled with subsidies to Bombardier (satirical view: www.youtube.com/watch?v=h0Ss9n4fA-U). That put limits on how far Trudeau (whose family is closely associated with Quebec) could go in supporting a jet built in Quebec by a company dominated by a Quebec family. In February, Trudeau offered C$372.5 million in interest-free loans over four years, well below the US $1 billion bailout requested by Bombardier. But Boeing’s complaint puts the CSeries at the center of US-Canadian tensions. That will make it much easier for Ottawa to provide more support for the CSeries. Consider the two fundamentals of Canadian identity: (1) Keep the French in, and (2) Keep the Americans out. The CSeries is now useful for both.
The CSeries may benefit from more than just additional support from Ottawa. The aviation industry had viewed the CSeries as a marginal player with a 2% share of the single aisle market, a possible orphan product with a dubious future. Boeing’s complaint gives it credibility. It frames the CSeries as a feared underdog, worthy of attention. And Delta, Spirit, and JetBlue have come out against Boeing’s complaint. Airlines don’t like being told they can’t buy a jet.
Bombardier, in short, might be the big winner here. But whether BBD comes out ahead or not, Airbus benefits hugely from Boeing’s litigiousness. Boeing is doing their dirty work for them in battling the CSeries, and they come out of it looking pristine. Airbus is probably a shoe-in for the next Delta jetliner buy, and for the next buys from other US carriers too. Before this complaint, Eurofighter had no chance as the next RCAF fighter. But given the likely deterioration in Canada-US relations, we can’t rule it out.
There’s my advice to Boeing. But I’d much rather have the contract to supply new footwear to their executives. I suspect there’s more foot shooting to come.
Yours, ‘Til Canada Gets Its First Squadron Of Su-35s,
© Richard Aboulafia 1997-2006, All rights reserved.