Quick conclusion to C Series probe is unlikely, trade experts say

Boeing’s petition against Bombardier will likely lead to trade challenges

The United States International Trade Commission is expected to vote Friday to press on with an investigation of Bombardier Inc.’s trade practices following a complaint from the Boeing Company, a probe that could complicate Bombardier’s ability to sell its C Series jets in the U.S. market.

Boeing filed a petition in April with the USITC and the U.S. Department of Commerce seeking an anti-dumping, countervailing duty order against the sale of the C Series, alleging that massive government subsidies have allowed Bombardier to embark “on an aggressive campaign to dump its C Series aircraft in the United States.”

On Friday the USITC is slated to vote, based on a preliminary investigation, on whether there is reasonable indication that Boeing was materially injured or threatened with material injury as a result of Bombardier’s alleged sale of subsidized jets for less than fair value.

The vote will take place at 11 a.m. in Washington, D.C. The USITC is expected to file its preliminary determination by Monday, and a public version of the report will be available in July.

If the USITC determination is negative, then both the USITC and the Department of Commerce investigations would end.

However, trade experts say this is highly unlikely. Lawrence Herman, international trade counsel at Herman and Associates, said “it’s a virtual certainty” that the USITC will find there is enough evidence to continue its investigation.

“This is the first in a long series of steps that will almost certainly lead to trade challenges by Bombardier itself,” Herman said.

Bombardier said in a statement released after staff testified at a USITC hearing last month that the company will continue to engage with industry leaders, government officials and the public to demonstrate that it honoured all international trade law obligations.

“This was the first step in a long process to demonstrate that Boeing’s petition is unfounded and would harm the airlines, the travelling public and innovation in the aerospace industry,” said Mike Nadolski, vice-president of communications at Bombardier.

Karl Moore, a professor at the Desautels Faculty of Management at McGill University, said the petition is likely part of Boeing’s strategy to prevent Bombardier from becoming a major player in the U.S. market.

“This is some sabre-rattling to make airlines in the U.S. nervous about the C Series and think, ‘maybe it’s a risk.’ It could potentially hurt Bombardier’s sale efforts in the U.S. That’s probably the main thing Boeing is looking for,” Moore said.

At the crux of Boeing’s petition are two order bids Bombardier participated in: A United Airlines order for 65 737-700 jets that Boeing said it was forced to offer at discounted prices because of Bombardier and, most significantly, Delta Air Lines’ order for 75 C Series Jets.

In a post-conference brief filed on May 23, Delta sided with Bombardier, saying there has been “no reasonable indication of threat of material injury” to Boeing.

“By its own admission, Boeing never tried to sell new aircraft to Delta in the transaction at issue. The firm order placed with Bombardier cannot be the reason for any alleged threat of injury when Boeing does not make an aircraft the size Delta needed,” the airline said.

The preliminary investigation, which included briefs filed by lawyers representing Boeing, Bombardier, Delta Air Lines and the Canadian government, has offered a glimpse at the negotiations behind major aircraft orders.

Delta’s road to the C Series began when it says it decided to seek aircraft with a capacity of 100 to 110 seats as part of its strategy to shift from flying regional jets to larger narrow-body aircraft.

The airline initially placed an order for 19 used Brazilian Embraer E-190s from Boeing, which had obtained them from a trade-in with Air Canada.

However, according to the brief, Delta found out the global supply for the E-190s was limited and pricing was as much as 40 per cent higher for the remaining jets it required, so it reconsidered its options. It was at this point that Bombardier’s C Series jets became a leading contender.

Delta said that while Bombardier had secured other customers for the C Series, “it still needed the market validation of a high-profile and well-respected marquee airline making a large purchase.” The airline said it saw this as an opportunity to secure a “customary marquee purchase price” — a widely recognized feature where customers receive favourable pricing that reflects the risk associated with purchasing new aircraft.

That price, Boeing has argued, was below the cost to manufacture a C Series aircraft, something both Delta and Bombardier have disputed.

Jesse Goldman, partner of international trade and investment at Bennett Jones LLP in Toronto, said a positive determination is likely, and that the ensuing investigation will be both complicated and lengthy.

“I think Boeing has a difficult case in some respects,” he said. “They are complaining about an injury into a segment of the aircraft market which they haven’t sold any aircraft for a number of years in that seat and size range.”

Boeing alleges that Bombardier is using highly distortive pricing to eliminate the 737 MAX 7 from the 100 to 150-seat single aisle market, which will allow the Quebec company to bring in a CS500 — a medium single-aisle jet that would compete with Boeing’s 737-800 and MAX 8.

“The U.S. industry has been the victim of this exact strategy before, as subsidies to Airbus enabled it to push McDonell Douglas and Lockheed from the market, capture 50 per cent of the global market share, destroying countless high-paying, skilled U.S. jobs in the process,” Boeing said.

Bombardier disputes Boeing’s assertion that the C Series jet competes with the smaller 737 and MAX aircraft, and argues that the material injury that could be inflicted on the U.S. market is “speculative and far in the future.”

“By focusing only on its smallest and least successful 737 models, Boeing has created an artificially narrow like product,” Bombardier said in its post-conference brief.

“Boeing’s petition in this case is unprecedented in its overreach.”

This was the first step in a long process to demonstrate that Boeing’s petition is unfounded ...

DARIO AYALA Boeing’s petition is considered likely part of its strategy to prevent Bombardier from becoming a major player in the U.S. market. “This is some sabre-rattling to make airlines in the U.S. nervous about the C Series and think, ‘maybe it’s a risk,’”...