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ANALYSIS: Bombardier faces latest setback with trade ruling

The US government's preliminary decision to impose hefty import duties on Bombardier's CSeries could mark a notable setback for the Canadian manufacturer, which had framed a CSeries order from Delta Air Lines as a major win and door-opener to deals with other major US carriers.

Though several important steps remain before duties become reality, the initial decision raises questions about additional US sales and has furthered an already fiery trade dispute between the US and top allies.

“The US values its relationships with Canada, but even our closest allies must play by the rules,” US Commerce secretary Wilbur Ross said in a media release announcing the agency's decision.

The US Department of Commerce on 26 September determined that Bombardier received government subsidies equal to 219.63% of the value of CS100s imported into the USA. The agency recommends that US customs charge Bombardier cash duties equal to that amount.

"Subsidies enabled Bombardier to dump its product into the US market, harming aerospace workers in the United States and throughout Boeing’s global supply chain," Boeing says. “Global trade works only if everyone plays by the rules."

In a statement to FlightGlobal, Bombardier notes that the decision is preliminary and says it will continue fighting against import duties. A final determination is expected on 18 December, followed by a possible import duty order next year.

"This is one step in a multi-step process, so we remain focused on continuing to defend ourselves in the process. We believe the facts [are] on our side, so once the ultimate decision is rendered next year, we are confident we’ll come out on top," Bombardier tells FlightGlobal.

Delta, likewise, stands behind Bombardier, predicting US regulators will eventually conclude that the CS100 poses no threat to US industry.

The Commerce Department does not specify a dollar amount for the duties, but notes that Bombardier in a 2016 media release pegged the value of Delta's 2016 purchase of 75 CS100s at more than $5 billion.

Bombardier specifically said the Delta sale had a list price value of $5.6 billion; at that amount, the deal's total import duties would total $12.3 billion, or about $164 million per aircraft.

"I believe if you add 220% to the current list price of the aircraft it will give you an idea of what this means," says a Bombardier spokesperson.

However, it is possible the duties could be less. A Commerce Department spokesperson says the tariffs will be based on the sales price. Bombardier has not disclosed that price, but Boeing estimated in its petition that Bombardier actually sold the aircraft to Delta at $23.3 million each, which would equate to a duty of $51.2 million per aircraft.

The proposed duties are also subject to findings of a concurrent investigation by the US International Trade Commission into whether Bombardier's sale to Delta harmed Boeing and the broader US industry.

The Trade Commission issued a preliminary ruling in Boeing's favour, and will release its final decision on 1 February 2018.

If both agencies uphold those rulings, the Commerce Department will issue a duty order on 8 February. However, no duties will be imposed if either agency reverses course, says the Commerce Department.

"The real decision will come in 2018," says Delta in response to queries from FlightGlobal. "We are confident the [Trade Commission] will conclude that no US manufacturer is at risk because neither Boeing nor any other US manufacturer makes any 100-110 seat aircraft that competes with the CS100."

BOMBARDIER FIRES BACK

“We strongly disagree with the Commerce Department’s preliminary decision. The magnitude of the proposed duty is absurd and divorced from the reality about the financing of multibillion-dollar aircraft programs," the Montreal-based company said in a 26 September statement.

"Boeing is seeking to use a skewed process to stifle competition and prevent US airlines and their passengers from benefiting from the CSeries," it added. "The US government should reject Boeing’s attempt to unfairly tilt the playing field… and to impose an indirect tax on the flying public."

The ruling marks another milestone in an effort Boeing launched in April, when it alleged in a petition to US trade officials that a heavily-subsidised Bombardier dumped CS100s in the US market with the Delta sale.

Boeing estimated in its petition that Bombardier benefitted from more than $4.5 billion in equity infusions, launch aid and other subsidies.

According to Boeing's math, CS100s cost more than $30 million each to produce, and Bombardier sold them to Delta at a loss of about $10 million each.

Boeing alleged that the roughly 108-seat CS100 competes with its 737-700s and 737 Max 7s, which carry at least 130 passengers.

Bombardier has long denied the allegations, claiming the practice of offering discount prices to large customers buying new aircraft is common. The company also insists the CS100 does not compete with any 737s, and says Boeing exited the 100-seat market years ago when it stopped producing the 717.

Delta has supported Bombardier on the same grounds, and other airlines like Spirit Airlines, JetBlue Airways and Sun Country Airlines have rallied in Bombardier's defense.

"Boeing had the chance to compete with Bombardier for Delta’s purchase of aircraft in this size range, but Boeing’s only proposed alternative to the CS100 was to offer Delta used Brazilian-made regional jets," says Delta.

"Boeing has no American-made product to offer because it cancelled production of its only aircraft in this size range – the 717 – more than 10 years ago," Delta adds.

Though far from final, a 220% import tariff would certainly raise significant problems for Bombardier, which has not landed a large new CSeries customer since the deal with Delta last year.

Bombardier designed the CSeries from scratch on the belief that demand existed for a technologically-advanced and fuel-efficient aircraft to occupy the segment between 76-seat regional jets and 130-seat narrowbodies.

But Bombardier faced fierce competition from Airbus and Boeing, which have responded by promoting the smallest versions of their narrowbody aircraft.

To date, Bombardier has received firm orders for 342 CSeries, enough to keep the production line humming until around 2020, according to executives and Flight Fleets Analyzer.

Meanwhile, Bombardier has suffered several programme setbacks, including a delay in deliveries due partly to problems suffered by engine maker Pratt & Whitney.

Bombardier seemed to gain sales momentum last year when it landed the 75-aircraft Delta deal and an order from Air Canada for 45 larger CS300s.

Executives described those deals as "marquee" sales that would likely spur interest from other major US airlines.

It remains unclear, however, what impact the trade ruling might have on such interest, though Bombardier strikes a confident note.

"We are very encouraged by the discussions we are having on the CSeries with potential customers around the world including in the US," the company says.

BROADER TRADE DISPUTE

The Commerce Department investigation had drawn in the governments of Canada and the United Kingdom.

On 27 September, the office of UK prime minister Theresa May said it was "bitterly disappointed" at the ruling.

"The government will continue to work with the company to protect vital jobs for Northern Ireland," it says.

Bombardier makes CSeries wings in Northern Ireland.

Canada prime minister Justin Trudeau also said he is "disappointed", and transport minister Marc Garneau said Boeing feels threatened, according to reports.

Trudeau's comments came days after he outright threatened to cancel Canada's plans to purchase Boeing F/A-18 Super Hornet fighter jets should Boeing continue its campaign against Bombardier.

"We have obviously been looking at the Super Hornet aircraft from Boeing as a potential significant procurement of… new fighter jets, but we won't do business with a company that is trying to sue us and put our aerospace workers out of business," Trudeau said during a press conference.

But neither May's or Trudeau's comments appeared to sway the US administration, which has taken a more-protectionist stance under Trump.

"The subsidisation of goods by foreign governments is something that the Trump administration takes very seriously, and we will continue to evaluate and verify the accuracy of this preliminary determination,” said the Commerce Department in its 26 September release. "Enforcement of US trade law is a prime focus of the Trump administration."

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