Tuesday, June 20, 2017

BOEING, BOMBARDIER, BLUFFS AND BLUSTER

Almost had it...

In late 2016, Canada's fighter jet saga seemed to finally be reaching a resolution (at least in the short-term) after Defence Minister Harjit Sajjan announced that Canada would be purchasing 18 Boeing F/A-18E/F Super Hornets as an "interim" fighter.  These fighters would fill a "capability gap" whilst Canada pursued a permanent CF-18 replacement.

The move made sense.  The Super Hornet is readily available, affordable, and similar to our current fleet.  Some questioned that the move would give Boeing an unfair advantage going in to a full competition, but whomever said defence acquisitions were fair?  At the very least, the RCAF would finally have some new fighters.

Of course, this being a story of Canadian military procurement, a plot twist was inevitable.  That plot twist came from Canada's own Bombardier.

All this over a little airliner...
To say Bombardier has a controversial history is an understatement.  At any given time it simultaneously a both the worst of crony-capitalism and best of Canadian innovation.  Bombardier is a two-sided coin with corporate welfare marking one side and innovation marking the other.

Case-in-point:  The Bombardier C-Series airliner.

At first glance, the C-Series looks like any other airliner.  The generic tube-with-wings design could be mistaken by the layperson as any sort of Boeing, Airbus, or even Embraer design.  It is certainly no Concorde , nor does it stand out as a "airliner of the future".

So what is the fuss?

The C-Series real innovation comes in its size and layout.  Its size bridges the gap between smaller regional jets (like the Embraer E-Jet and Bombardier's own CRJ) and larger airliners like the Boeing 737 and Airbus A320.  It does this by implementing an asymetric seating arrangement.  Instead of three seats on either side of the aisle (like the A320 and 737) or two seats (E-Jet and CRJ), the C-series splits the difference with three seats on one side and two on the other.

Along with its novel seating arrangement, the C-Series utilizes the first use of geared turbofans on an airliner.  These, combined with lighter construction materials, helps keep operating costs down. The C-Series could very well steal routes (and sales) away from Boeing's 737 and Embraer's E-Jet.

3+2 seating.
Neither Boeing or Bombardier are willing to take this laying down, of course.  Unfortunately, this is the business world:  So if you can't beat 'em...  Sue 'em.

Both Embraer and Boeing have launched legal action against Bombardier on the basis that the C-Series is unfairly subsidized by the Canadian government, allowing Bombardier to sell the C-Series below its actual cost ("dumping").

Both are absolutely correct.  The C-Series would undoubtedly not exist were it not for Bombardier taking advantage of Federal and Provincial financial assistance.  Without a seemingly never-ending supply of government bailouts, the C-Series likely never would have left the drawing board...  In fact, Bombardier itself likely would no longer exist.

Boeing 737 MAX

Embraer E-190
Boeing and Embraer's case against Bombardier share a tragic flaw, however.  Both seem to forget that they are living in glass houses whilst they throw their stones.

Embraer enjoys a subsidy given to Brazilian airlines that favor its smaller aircraft to larger airliners made by Boeing and Airbus.  Embraer also enjoys government subsidies, much like Bombardier.

Boeing, on the other hand, is in an entirely different league.  In 2015, Boeing received an $8.7 billion corporate tax break from the state of Washington.  This made for a total of $13.2 billion worth of subsides.  To put that in perspective, Bombardier's entire revenue for that year was $11.2 billion.

Keep in mind that these subsidies are for commercial operations.  Both Boeing and Embraer's defense divisions enjoy lucrative military contracts as well.   Notable examples include Embraer's KC-390 and Boeing's P-8 Poseidon, both of which are being marketed on a global scale.

This, of course, brings us back to the Super Hornet.

So close?
The Trudeau government found themselves in a tight spot once Boeing implement legal action against C-Series sales.  It had no choice but to take Bombardier's side.  Politically, it would be seen as abhorrent to be propping up Bombardier whilst a the same time purchasing billions of dollars of fighters from the same corporation blocking Bombardier's attempt to gain a market foothold.

Trudeau and company used the most effective leverage they could think of: Threatening to cancel the Super Hornet purchase.

Boeing may regret calling Canada's bluff.  Plans to purchase the Super Hornet are now "On hold" with Defence Minister Hajjan stating that Boeing's actions were “not the behavior we expect of a trusted partner.”

Ouch.

Canadian officials are now meeting with various fighter manufacturers at the Paris Air Show this week, albeit after some confusion.

The winner in all this may in fact be one of the "Eurocanards".  Airbus (part of the consortium behind the Eurofighter) has been strangely silent regarding the C-Series, other than politely declining a partnership.  Saab is hot off the first flight of its Gripen E, and will be promoting it alongside its Swordfish and GlobalEye (both based on Bombardier airframes).  Dassault will undoubtedly have home court advantage in Paris as it awaits Canada's RFP.

Then again, perhaps this entire kerfuffle plays in the Liberal government hands.

The "interim" Super Hornet buy was not exactly met with universal acclaim.  The so-called "capability gap" did not seem to be an issue until the government said it was.  Perhaps the most glaring question was:  "Why bother with an interim fighter in the first place?'  The Canadian government should have more than enough information at this point that it should proceed directly to RFPs (requests for proposals) and let the bidding commence.

Perhaps the Liberal government was beginning to get cold feet?  Boeing's trade action against Bombardier may have been all the excuse needed to back out of the deal while at the same time saving face by appearing tough towards an American aerospace giant.  A sort of "soft reset", if you will.

Full circle?
Despite an election promise to cancel any F-35 purchase, the Trudeau government has not yet closed the door on the JSF.  It has continued to pay its membership dues in order to remain an industrial partner.  It has also been made clear that the F-35 will remain "on the table" as an option to replace Canada's aging F-35s.

Whether this entire process was brought about by happenstance or design is anyone's guess.  If the Liberals truly wanted to back out of the Super Hornet for another aircraft, it would not need the Boeing/Bombardier dispute to do so.  All they would need to do is proclaim "new information has come to light" or some such.

More than likely, this is all nothing more than a negotiation where all the parties have called each other's bluff...  But nobody wants to show all their cards yet.

One year ago, the Boeing Super Hornet was the odds-on winner to become Canada's next fighter aircraft.  Six months ago it was almost a sure thing.  As it stands now, it almost seems to have no chance at all...  Unless Boeing drops its beef with Bombardier and then it will be the frontrunner again.

Confused yet?

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