Making Boeing Great Again should not be the goal of US trade policy. The trade action by Boeing against Bombardier appears, superficially, to fit well with President Trump’s campaign theme to Make America Great Again. President Trump campaigned against unfair trade practices that are harming U.S. workers and U.S. manufacturers. Boeing alleged that Bombardier is unfairly subsidized by Canada, which has permitted it to sell CSeries aircraft below cost in the United States, undercutting Boeing and the U.S. jobs from Boeing’s most successful aircraft, the 737.
Upon closer inspection, however, it is clear that Boeing’s actions, if successful, could harm more U.S. workers in the broader aerospace and airline industries than would potentially benefit from import tariffs designed to protect Boeing.
Moreover, because Boeing stretched the bounds of appropriate use of the trade enforcement remedies and deployed a host of arguments that are hypocritical or baseless – such as complaining about sales lost to a plane smaller than anything Boeing makes – Boeing risks igniting a trade war or other realignment in the aerospace sector, to the detriment of the US aerospace industry. If Boeing succeeds in its trade case, the only beneficiary will be Boeing itself – while everyone else loses. This strategy is not Make American Great Again — at best, it is Make Boeing Competitive Again.
Perhaps more than any other U.S. manufacturer, Boeing depends on international trade and the U.S. government’s enforcement of fair trade rules abroad. But its trade case against Bombardier now undermines Boeing’s ability to fight unfounded protectionist actions instituted in countries around the world. China, for example, could easily levy massive import duties on Boeing’s planes using the same arguments advanced in Boeing’s trade action against Bombardier. That would be a disaster for Boeing and the U.S. workers who manufacture its planes. Rather than pick on a competitor one-tenth its size, with arguments that are full of inconsistencies and contradictions, detailed below, Boeing should abandon its misguided use of the trade laws and focus on being competitive at the marketplace.
Boeing Contradicts Itself about the Relevant Market
In the trade case, Boeing claims that there is a separate and distinct market for aircraft containing 100 to 150 seats that are capable of flying 2,900 nautical miles. Unfortunately, Boeing has convinced U.S. regulators of this spurious proposition, despite widespread industry understanding that the aircraft market is a continuum, ranging from the smallest regional jets to the largest wide bodies. Airlines choose a platform of the right size for a given route to optimize their operating economics and right-sizing aircraft to avoid flying planes with empty seats.
Outside of the trade case, Boeing characterizes the market differently. In its Current Market Outlook, Boeing describes a market composed of regional aircraft, single-aisle aircraft, small to medium twin-aisle aircraft, and large twin-aisle aircraft. Reviewing Boeing’s annual forecasts in our archives back to 2005, we find that Boeing’s forecasts consistently reference the single-aisle market, not a market for aircraft with 100 to 150 seats. Indeed, it would be irrational for Boeing to describe the market that way, as its flagship 737 has grown from under 100 to about 200 seats with some models of the 737 MAX, the newest 737 variants.
On September 18, at the 18th Annual Aviation Industry Suppliers Conference (SpeedNews) in Toulouse, Drew Magill, Boeing’s Managing Director, Marketing Europe offered this slide. Boeing describes the competitive situation, when speaking to the people who know the industry, and does not include the Bombardier C Series (or the Embraer E2). Were Boeing to list the Bombardier or Embraer products, they would be laughed out of the room. Nobody from the US Department of Commerce or ITC was in the audience obviously. Boeing has two messages; one for those who know the industry and another for those who don’t.
Over the years, Boeing increased the size of its 737 to provide additional capacity and improved seat-mile economics for its airline customers. The original 737 design, which dates to 1967, had fewer than 100 seats. The 737 MAX line has been optimized around the 162-seat 737 MAX 8. The smallest model, the 737 MAX 7, had 126 seats. This model did not sell well, and last year Boeing redesigned the aircraft to add 12 additional seats – taking it to 138 seats – in an effort to make the aircraft’s economics more competitive.
Seat-mile economics are challenging for the 737 MAX 7 because it is simply too heavy for its seat capacity. The wing and fuselage were designed to accommodate the needs of the MAX 7’s larger brethren. As a result, the 737 MAX 7 is less efficient than more modern designs – such as the C Series – that are optimized around a smaller size and use the latest composite technology that is not used in the 50-year-old design of the 737. Not surprisingly with these economics, the 737 MAX 7 has not sold well. Although Boeing has 3,954 orders for 737 MAXs, only 70 are for the 737 MAX 7.
Although Boeing’s Market Outlook considers the single-aisle market to be a continuum of sizes, it has conveniently based the trade case solely around the least efficient and most unpopular model in its 737 fleet, ignoring the other 3,884 aircraft in its backlog.
Boeing Complains About a Lost Sale but Doesn’t Make a Competing Product
The trade case centers on Bombardier’s sale of CS100 that has a typical configuration of just over 100 seats. Delta is the largest operator of aircraft in this class, operating 91 of the last aircraft Boeing produced of comparable size, the 717-200, which is a rebranded version of the MD-95. Boeing last produced the 717-200 in 2006, and today offers no aircraft in the 100-seat category. As a result, Boeing did not participate in the Delta competition that led to the C Series order.
What does Boeing think Delta should do to serve routes that require 100 to 110 seats? Should Delta have been required to fly an aircraft that is too large to be profitable, simply so that it can fly Boeing? Should Delta charge consumers a higher ticket price to pay for the empty seats on these segments? Other than the C Series, only Embraer makes an aircraft – the E195 – that can serve a 110-seat route. If Delta could not buy the C Series, they would almost certainly have chosen Embraer, further highlighting that Boeing’s alleged harm from a lost sale is entirely fictitious.
Boeing’s Claims of Economic Loss is Baseless
Boeing’s claim that it is suffering an economic harm from the sale of 75 C Series aircraft to Delta is dubious, at best. As noted above, Boeing’s backlog of orders for the 737 is about 4,000 aircraft deep, and it stretches years into the future. Even if Delta decided to fly less efficient 737s with dozens of empty seats on 100-seat routes, Delta would not be able to receive delivery of these aircraft without a lenghtly wait, long after Bombardier could deliver the C Series.
On a recent call with investors, Boeing CEO Dennis Muilenburg was asked whether the company would consider entering the 100-seat market with a new aircraft or joint venture with another manufacturer. Muilenburg dismissed the idea and said, “with 4,400 aircraft in backlog, we’re very confident in the position we have and the fact that we’re oversold on our production line capacity.” Muilenburg concedes that Boeing has sold more aircraft than it can possibly produce and deliver, yet it has the gall to go before the U.S. government and claim that it is experiencing economic harm from a 75-aircraft order from Bombardier.
Boeing Practices the Same Pricing Strategy that it Denegrates
Creating an entirely new aircraft design takes a tremendous amount of upfront investment, and that investment is recouped over decades, as the aircraft is produced and sold. The first plane produced in a program, therefore, is sold dramatically below the cost of producing it. Moreover, production costs drop quickly, as the manufacturer moves down the learning curve associated with repeated production of the aircraft.
Even beyond these economic realities, new aircraft programs face additional barriers. Airlines are hesitant to be the “guinea pig” to help debug early faults. New aircraft platforms also bring greater costs to the airlines in terms of flight crew training, new ground handling equipment and procedures, the distribution of maintenance supplies throughout the airline’s network, training of technicians, and uncertainty about the long-term availability of affordable parts.
These additional costs and uncertainties for airlines limit demand for new aircraft platforms, and the reduced demand causes aircraft manufacturers to offer significant discounts to the first airlines to purchase a new platform. This practice, which is deployed by every aircraft manufacturer, is so common and well established that it is named: launch customer pricing.
Boeing’s launch of the 787 is a perfect example of this practice. The first several hundred 787s sold by Boeing were reportedly sold below the cost to make them. Analysts wonder whether Boeing will ever break even on the 787 program on a cash flow basis, and recoup its $30 billion investment.
Bombardier only recently started delivering its first C Series planes, and it is far from moving down the learning curve to a mature cost position for the aircraft. Ironically, Bombardier could not even respond to the U.S. government’s questions about the cost of producing the C Series aircraft for Delta. It has not yet built enough aircraft to know what its final cost will be. How can a manufacturer be dumping product into the United States below cost when the manufacture does not yet know the final cost of production?
Boeing Ironically Complains about Government Subsidies
Boeing states that it does not receive government subsidies. But its military division develops new technologies at government expense, and then shares those technologies with its commercial operations. Boeing also receives tax breaks and aid from the states in which it operates, and it has requested even more aid from the State of Washington to keep manufacturing jobs near Puget Sound.
Given the massive costs associated with developing new aircraft programs and the long time horizon for recouping any investment, it is impossible today for any company to develop a new aircraft program without some government support. The governments of all major aircraft manufacturers recognize this and all of them provide some form of support. Indeed, international law recognizes this reality. International trade rules do not outlaw all government subsidies – just those that are unfair. Boeing acts as if the Quebec and Canadian investments in Bombardier are de facto a violation of international law, but that is just not the case.
What Really Scares Boeing and Motivated the Trade Action
Boeing’s filings do not mention it, but we believe that Boeing’s greatest fear is that Bombardier might stretch the C Series into a larger aircraft that really does compete with Boeing’s bread and butter 737 MAX 8. Given its more modern design and advanced composite components, a stretched CSeries might actually compete against the 737 MAX 8 and take market share from Boeing’s massive backlog. In other words, the trade case is a preemptive action designed to kill the C Series program in its infancy before it has a chance to mature.
Boeing already has two aircraft under development, the 777X and 797, and it cannot afford to launch a clean-sheet design of a new aircraft in the 737’s size category. It could perhaps undertake such an initiative in the 2025 to 2030 timeframe. In that regard, Boeing may be perfectly happy with any outcome in the trade action, provided that it distracts Bombardier, discourages near-term customers to buy the C Series because of its future uncertainty, and pushes C Series deliveries a few more years into the future.
Boeing may have had a greater fear that Bombardier would join with an aerospace manufacturer in China that could use the C Series technology as a platform to build a competitor to the 737. A significant portion of Boeing’s projected revenue growth comes from sales to China. A competitor to the 737, manufactured in China, would be a significant threat to the company. That process, however, would have taken a number of years to unfold, and in trying to forestall it, Boeing miscalculated miserably. In attempting to block a long-term threat from China, Boeing drove Bombardier to a formidable competitor with the ability to unleash the C Series threat immediately.
Airbus’ decision to join with Bombardier provided the C Series a massive boost in credibility and eliminated any doubt about the programs continuing viability. The Airbus partnership came with an added benefit – Bombardier and Airbus can manufacture the C Series in Alabama, putting the C Series beyond the reach of the import tariffs that Boeing sought in the trade action.
Boeing’s Statements about Airbus’s Alabama Assembly Facility Boomerang
The Airbus-Bombardier deal on the C Series, which will close around mid-2018, effectively eliminates the effect of any import tariffs that Boeing manages to convince the U.S. government to impose on the C Series. C Series planes built in Mobile, Alabama, are U.S. products and thus not subject to import duties.
Rather than accepting that the trade laws worked as intended and promoted U.S. manufacturing and U.S. jobs – the threat to which was the premise of Boeing’s original complaint – Boeing is now suggesting that import tariffs should be applied to planes that are made in the United States.
The only problem is that Boeing has already argued the opposite and the company again faces a contradiction of its own making. In its initial complaint in the trade action, Boeing stated that Airbus aircraft built in Mobile qualify as domestic manufacturing. Discussing the Airbus A319, the only Airbus aircraft that fits in Boeing’s artificial 100- to 150-seat market category, Boeing said, “the Airbus A319 would also be included in the domestic [production category] if Airbus were to produce it at its facility in Alabama.” If building an A319 in Mobile is domestic manufacturing, it’s hard to understand why a C Series built there would not be.
The Bottom Line
Somebody in Boeing’s Chicago office apparently determined that the complaint against Bombardier would be effective in thwarting a competitor. Instead, it has backfired, resulting in Boeing being roundly criticized around the world, and creating a black eye for the United States with respect to free trade. It’s not too late for Boeing to acknowledge the complaint was ill founded and seek to regain its reputation for fair play. If it does not, AirInsight hopes that the ITC will see through Boeing’s hypocritical, contradictory, and absurd claims when it renders a final decision.
© 2017, Ernest S. Arvai. All rights reserved.