Demystifying the Airbus – Bombardier Deal: Masterclass or Malevolence?

Disclaimer: The views represented here are solely that of the author and does not in any way represent the views of his employer, clients or business associates. The author does not hold any investments in any of the three companies (Boeing, Airbus and Bombardier) mentioned in this article.

I am no expert in the airlines industry, but the recent deal between Airbus and Bombardier caught my attention and fuelled my curiosity. Some industry experts have called it a ‘Genius of a deal’ and others have called it ‘Artful malevolence’ that has thrust a big stick up Boeing’s tail pipe (Refer to FT UK edition dated 18th October). Let me help demystify the deal to a regular business enthusiast.

Commercial passenger aircraft manufacturing industry is a duopoly with Boeing and Airbus being the dominant players. Bombardier and Embraer play along the fringes in the smaller jets space. The deal concerns C-Series, the single aisle aircraft with 100 to 150 seats, designed and manufactured by Bombardier in Canada. The C-Series program was launched by Bombardier in 2008 and has seen massive budget overruns in an already financially troubled company, bringing it close to going bust a few times. The Canadian government has allegedly provided subsidies from tax payer’s money to keep the program and company afloat. The wings for the aircraft are made in Belfast, Northern Ireland and the UK government has also allegedly provided subsidies to Bombardier to keep this program and factory in Northern Ireland alive.

Enter Boeing, the American giant which has over the past decade actively used trade wars to attack and cripple competition. But why did the Bombardier C-Series even bother Boeing? Boeing currently does not make aircrafts that are as small as the C-Series. Boeing’s 737Max is a larger aircraft/regional jet with capacity of ~140 to 230 passengers compared to the 100 to 150 seats in a C-Series. Bombardier, therefore is not even a direct competitor to Boeing’s aircraft range. Unfortunately it does not work like that in monopolies and duopolies where the incumbents do everything they can to crush any signs of potential future competition. According to sources that monitor the industry, over 50 percent (probably even more) of all future aircraft demand over next 20 to 30 years is likely to come from the single aisle planes. The C-Series is considered to be a very efficient plane for its price tag of $75 to 85 million and has the potential to be successful. And it goes without saying the US market is one of the biggest markets for commercial aircraft in the world, therefore Boeing is keen to protect its home turf.

Boeing had gone on an all-out trade war with C-Series and complained to the US government that the C-Series was funded through illegal subsidies from Canadian and UK government and therefore its sale in the US amounted to dumping planes at a much lower price. Boeing probably had a point there, but it is funny that it was using ‘Free Competition’ as the reason to eliminate guess what - ‘Free Competition’. Its rent seeking behaviour however convinced the US Department of Commerce which threatened to impose a 300 percent import duty to sell C-Series in the US, which virtually kills commercial viability of the C-Series in the US and potentially sinks Bombardier. This sure got the Canadian employees of Bombardier and the Canadian tax payers worried. With Northern Ireland, such an important part of keeping the UK coalition government in power, potential loss of 4000 jobs in the wing making factory in Belfast had the UK government worried as well.

Enter Airbus, who already has the highest share of the global single aisle aircraft market, but not so much in Boeing’s home, the US. Airbus plays in the single aisle market through the Airbus 320Neo range and comes close to directly competing with C-Series through its 319 Neo range. The problem is that it has not sold a single order on 319 Neo range in the last 3 to 4 years. C-Series therefore is a potential acquisition target, but Airbus had shown little interest in the past years. So what changed now? Why did Airbus cut a deal with Bombardier and its investors to get majority 50.01% stake in the C-Series project? And that too without paying a penny?? Too good to be true but yes - Airbus did not pay a penny for this deal!!!

The threat by US Department of Commerce to impose 300% duties on C-Series was clearly the trigger. Airbus now proposes to use its assembly plant in Alabama, US to import parts from Canada, Northern Ireland and source locally in US as well to build the C-Series plane. This brings manufacturing jobs to the US, pleases the Trump regime and also allows them to show value added manufacturing content, resulting in potential evaporation of the 300% duties. C-Series then stays viable, Bombardier buys itself more time to survive by investing in free shares to Airbus, the governments of UK and US stay happy as jobs are protected and/or created. Canadian tax payers might worry as this could move jobs out of Canada, but the deal largely protects the company, so will grudgingly accept this outcome. Airbus potentially gets a stronger foothold of the US market, the holy grail of passenger aircraft business and that too without having to shell a penny (May be not quite – They may end up scraping the Airbus Neo319 program and that is the price they pay). This also gets Airbus in the good books of UK and Canadian governments, potentially strengthening its ability to garner military aircraft deals.

As a business strategist, I have a healthy scepticism of acquisitions as a strategy to win. Large deals are often being used to expand empires and massage egos at all costs or divert attention from a problem elsewhere. Many employees are often worse off after deals. And consumers are deprived of choices. There is very less evidence to suggest deals create real value for all the parties involved. Yet, this deal appears to have potential to be value accretive for all stakeholders (including the consumer who might have otherwise not flown the C-Series). No one knows if this deal will clear the regulatory hurdles, if the 300% duties will be waived and what the potential long term trade repercussions are, but the battle won’t stop here. Only time will tell if this deal does or does not give Airbus a real edge in winning in the single aisle market. But one thing is for sure. Boeing has been given a taste of its own medicine. Boeing’s trade war strategy has come around to bite its own back.