The winds are blowing against Bombardier Inc. in its trade war with Boeing Co. as some analysts expect a preliminary ruling from the U.S. Department of Commerce early next week to go against the Canadian plane maker.
But in what is shaping up to be a prolonged legal battle, Bombardier's moves behind the scenes in coming weeks and months to carry out contingency plans could be crucial to demonstrate the continued viability of its $6-billion C Series program and prevent momentum it has achieved with the flagship airliner from stalling.
Commerce is scheduled to make an initial determination Tuesday on whether to impose countervailing duties on C Series aircraft. JPMorgan analyst Seth Seifman is among analysts who believe duties will be levied. Final rulings on whether those duties will actually take effect likely won't come until some time next year, after Boeing tries to prove it was harmed by Bombardier.
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Boeing alleges that the Canadian company sold 75 C Series planes to U.S.-based Delta Air Lines Inc. at "absurdly low prices" while benefiting from unfair subsidies from the Canadian, Quebec and British governments. It has asked the U.S. government to impose anti-dumping and countervailing duties on C Series planes imported into the United States. Bombardier denies it did anything wrong, saying Boeing is trying to stifle the technological innovation the C Series brings.
Bombardier is looking past the preliminary rulings toward the final decisions, saying U.S. trade laws were not designed to deal with complex products such as aircraft, so early-stage rulings are hard to predict. But even an initial ruling against the Canadian plane maker could hurt.
"An unfavourable preliminary ruling could dampen the company's ability to secure orders as the largest addressable market [the United States] becomes potentially inaccessible," Bank of Montreal analyst Fadi Chamoun said. "This development could also limit the company's ability to achieve success outside the U.S., especially at improved prices."
What its contingency plans might be, Bombardier won't say. But there are some possibilities, both short and longer term.
The first is striking a deal to sell C Series aircraft with a top-tier carrier outside the United States to show customers and investors that there is interest in the aircraft from big-name airlines beside Delta. British Airways parent IAG is a possible buyer, and not only because it has kicked the tires on the C Series in the past.
Willie Walsh, IAG's chief executive officer, has praised Bombardier for taking on Boeing and Airbus Group SE more squarely in the market for single-aisle aircraft. He's also said the C Series could be particularly well suited to replace BA's existing planes at London City Airport. City is a steep-approach airfield where Bombardier's C Series are seen as a potentially game-changing tool for airlines there because of their range. British Airways' involvement would also dovetail with a recent move by British Prime Minister Theresa May to join Canada in its effort to get Boeing to drop its complaint.
Another potential course of action is selling to a non-U.S. aircraft leasing company, which would buy the C Series free of any U.S. duties and lease them to U.S. airlines. This option has been evoked by analysts Dan Fong of Veritas Investment Research and Konark Gupta of Macquarie Research. Delta, which ordered 75 C Series planes in a transaction that breathed life into the once-troubled jet program, could use this scheme to take delivery of the aircraft through an operating lease agreement if duties are implemented against Bombardier, Mr. Gupta says.
"The bottom line is that Bombardier could find alternative ways to place C Series in the U.S., potentially at better cash flows, if Boeing comes out as a winner this time," Mr. Gupta said in a Sept. 18 note. "Such alternative ways may not be ideal for Bombardier or airlines but Boeing's win could also be potentially overturned in the future" through appeal.
Finally, a strategy that could take longer to play out is penetrating deeper into Asia as a way to offset any business lost in the United States. Bombardier has yet to unlock China as a market for the C Series. But the potential is there to speed up that effort.
China is already a key supplier on the C Series. The aircraft's fuselage is built by Shenyang Aircraft Corp. Chinese state-owned manufacturer Commercial Aircraft Corp. of China Ltd. (Comac) is working with at least one bank on a tie-up with Bombardier that could see it make an investment in Bombardier aerospace or take a stake in the C Series program, the Financial Times reported in May.
Pent-up demand and an aging global fleet of planes with 100 to 130 seats means airlines will be buying hundreds of new aircraft of C Series size in the years ahead, consultancy AirInsight said. The biggest pool of buyers for aircraft that size is located in the Asia-Pacific region, the consultancy said. And they won't pick Airbus and Boeing planes to reshape their fleets.
"The road ahead for Bombardier and Embraer is open," AirInsight said. "The Department of Commerce's findings won't stop the inevitable growth in the segment outside the U.S. Bombardier and Embaer should do just fine regardless of any trade dust-up."