Bombardier under fire: How the U.S. targeted the C Series

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When the U.S. Commerce Department slapped a nearly 220-per-cent countervailing duty on Bombardier Inc.'s C Series airliner this week, lawmakers in Canada and Britain moved to trade-war footing with the United States and vowed to retaliate. The Canadian plane maker, meanwhile, called the magnitude of the penalty "absurd and divorced from the reality about the financing of multibillion-dollar aircraft programs."

An examination of the documents disclosed by Commerce and background conversations with people familiar with the case sheds some light on the rationale behind the preliminary decision. It raises questions about whether the department used information selectively to achieve a predesired conclusion against the Canadians. And it suggests the hard line taken by the department so far does not bode well for a separate ruling on dumping expected next week.

U.S. plane giant Boeing Co. asked the U.S. government to impose countervailing duties of 80 per cent on imports of Bombardier's C Series planes to offset what it says were unfair subsidies given to the Canadian company by the Quebec, Canadian and British governments that allowed it to win a key sale to Delta Air Lines. Such duties are meant to level the playing field between domestic manufacturers and foreign manufacturers who are able to sell their goods at a lower price because of the subsidies.

In assessing whether to impose a duty on Bombardier and how big that duty should be, Commerce concluded that the Canadian company benefited from 16 separate buckets of public aid over a 10-year period to the end of 2016 that helped it develop its flagship C Series plane.

The biggest of these buckets by far was Quebec's $1-billion (U.S.) equity investment in the C Series program last year, which translates to a duty of 147 per cent, Commerce said.

The other major elements Commerce ruled to be subsidies were: the federal government's $350-million (Canadian) launch aid for the plane, set up in 2008, that the department said was a contingent liability, interest-free loan; and the British government's separate launch aid for the C Series program.

Bombardier is also benefiting from the use of land and production facilities in Mirabel, Que., for the C Series at below fair market value, Commerce concluded. The $1.5-billion (U.S.) investment by the Caisse de dépôt et placement du Québec in Bombardier's train business was ruled legitimate, according to Commerce filings.

To determine whether Quebec's billion-dollar investment in the C Series was legal under U.S. law, Commerce weighed whether the airplane program was equity-worthy based on the usual practice of private investors. Both Quebec and Boeing submitted opinions on the issue and Commerce sided with Boeing, saying in a memo: "Because record evidence suggests that private equity investors typically target a gross rate of return of between 25 to 30 per cent on their investments, they would find that an investment in [the C Series program] would not generate what they would consider to be a reasonable rate of return."

Commerce therefore considered Quebec's entire investment to be a grant. It then applied a risk premium to it of about 20 per cent and amortized that percentage over a 10-year-period, front-loading it to exaggerate the high level of the subsidy benefit in the first years of the investment, sources say.

That number was then divided by Bombardier's revenue from C Series sales. But there too, Commerce did something unusual, sources say. Instead of taking into account all the C Series planes that Bombardier would potentially build and sell over a decade, it took only the planes that had been delivered in 2016. That year, the C Series' first year of production, Bombardier shipped only seven units.

Further, none of those planes Bombardier shipped were destined for Delta or any other U.S. carrier. That is despite the fact Delta's order for 75 C Series planes is the basis for this trade complaint.

There are grounds to contest much of the methodology and provisions used by Commerce in its calculations, said a person familiar with the case, who spoke on condition he not be identified.

William Reinert, a spokesman for Commerce, did not respond to a request for comment.

Tuesday's ruling is a blow to Bombardier and to Quebec and threatens to complicate the C Series's sales prospects, not only in the United States but globally. But it is only a preliminary ruling. After more arguments by Quebec and other parties, Commerce has to issue final rulings on both countervailing duties and dumping.

The pivotal moment will come during final determinations by the U.S. International Trade Commission that are expected early next year. Boeing will have to show it suffered material injury from Bombardier's C Series sale to Delta. The burden of proof is much higher at that stage and many analysts say it will be difficult for Boeing to meet it because it offered no planes of its own in the Delta sales campaign.

"It is not clear that this very high preliminary duty is any indicator of the ultimate outcome of the case," said National Bank analyst Cameron Doerksen. Said AltaCorp Capital analyst Chris Murray: "We believe the tariff has little basis in fact, however this is a political process which can take on its own dynamics."

Boeing's stance against the C Series does not enjoy unanimity in the United States. There is considerable support for Bombardier as a viable third competitor to Boeing and Airbus in the category of 100 to 150-seat single-aisle airplanes and U.S. airlines including JetBlue and Spirit have voiced their backing for Bombardier in the dispute. Local lawmakers have also expressed their concern, noting Bombardier employs thousands of workers in several states in both its aerospace and rail businesses.

Now, Bombardier also won a significant endorsement from U.S. Senators John McCain and Jeff Flake. In a letter to the Trade Commission dated Sept. 28 and made public Friday, the senators say Bombardier has shown "an enduring commitment" to the United States and that its operations have had "unquestioned positive impact" on the U.S. economy.

"U.S. trade laws should be dutifully enforced. In doing so, we urge the ITC to avoid levying unnecessary or politically-motivated penalties that could have negative impacts on aerospace employees , U.S. air carriers and airline consumers," the senators write. "We are hopeful the ITC will deliberate thoughtfully on any final ruling."

Brazil has filed a separate trade complaint against Bombardier that is playing out at the World Trade Organization. The WTO on Friday approved Brazil's request to investigate the alleged use of more than $3-billion (U.S.) in government subsidies to build Bombardier aircraft, which Brazil says allowed Bombardier to sell its planes at artificially low prices. The development came the same day Bombardier announced it firmed up a previously preliminary deal to sell up to 50 Q400 turboprop planes to India's SpiceJet Ltd., an order worth as much as $1.7-billion at list prices.

Bombardier maintains that the financing in question in Brazil's petition comply with WTO and international trade rules. The Canadian and Quebec governments insist their investments in Bombardier do as well. Insiders say Quebec did significant legwork to make sure its $1-billion injection was compliant and was blindsided by the Boeing challenge.

"There was no subsidy," Quebec Premier Philippe Couillard said. "There is no basis for Boeing's complaint."

Joseph Pickerill, spokesman for Canada's international trade ministry, said the government will defend the interests of Bombardier and the Canadian aerospace industry more broadly, adding Friday's WTO decision was expected. "All aircraft-producing countries provide some form of support to their aircraft industry," he said via e-mail. "Brazil is no exception."