Bailouts from above
Much has been made this week of events surrounding Bombardier, Air Canada and the possibility of federal government bailouts. Conspiracy theorists are having a field day. But they miss the point. Plain and simple, this is a government bailout and a very bad idea.
Bombardier has planes to sell: its new CSeries jets have had difficulty finding customers. It has already received a pledge of $1 billion from the Quebec government, in return for 49.5 per cent of the jet program, and is seeking at least as much from Prime Minister Justin Trudeau’s Liberals in Ottawa. Until Wednesday, it had no major CSeries customers, its stock was trading for pennies and its most recent financial report revealed a $5.34 billion loss in 2015. The plane was two years behind schedule and $2 billion over budget. Its one solid prospect — a conditional order from Porter Airlines of Toronto for 30 of the jets for its hub at Billy Bishop airport — fell through when the Liberals blocked a request to extend the runway to accommodate the planes.
But things changed quickly this week. First, Air Canada announced its intent to purchase as many as 75 CS300 aircraft and committed to servicing them in Quebec. Presumably as a result of that decision, the Quebec government agreed to drop a lawsuit against Air Canada over a plan to move maintenance work to the U. S. At the same time, thanks to the Air Canada decision, Bombardier was able to commit to retaining jobs associated with its CS300 program, somewhat mitigating its announcement of 7,000 job cuts worldwide.
Air Canada CEO Calin Rovinescu has stated clearly that there was no political pressure to order the aircraft and that there was no government financial support associated with the decision. We have no reason to disbelieve him.
Nonetheless, bailing out Bombardier would still be a bad idea and a worse investment.
Bombardier is a private company. Although its shares trade publicly, it is structured so that control remains in the hands of its founding family. Its current precarious position results from decisions made by its owners and management — not the federal government. While manufacturing aircraft may involve valuable technological expertise, there are any number of high- tech firms in Canada that do not expect taxpayers to prop up their activities and would probably not get billion- dollar deals, even if they asked for them. There is considerable technological expertise required to build an energy pipeline able to cross the country, with all its geographical and environmental challenges, yet proposals to do just that have been vociferously opposed, not least by political leaders in Quebec. The pipeline builders aren’t asking for financial support, just approval to go ahead. What makes Bombardier so special?
The company may have a particular allure to Quebec, where many of its activities are concentrated and where it is viewed as a FrenchCanadian success story. The line between public and private interests is particularly blurred in Quebec, where taxpayers picked up almost the entire tab for Quebec City’s $ 400 million hockey arena, which still sits empty of the NHL team it was meant to attract. Bombardier received a $1.5 billion infusion from the Quebec pension fund for its transport division just three months ago.
No such special status exists outside the province. As the Financial Post’s Terrence Corcoran noted, should Ottawa agree to take an equity position, as urged by Bombardier, it would effectively become the owner of the CSeries project along with the Quebec government. Ottawa got out of the airline business almost 30 years ago when it privatized Air Canada and would be foolish to return now. As owner, future cash calls would be all but impossible to refuse, putting Canadians further on the hook in a highrisk industry facing stiff competition from governments happy to approve ongoing subsidies. The $1 billion Bombardier now seeks could well be just the first of regular emergency bailouts down the road.
The Trudeau government is under enormous pressure to ignore the risks and join the rescue plan. It should refuse, despite the damage that might do to Liberal support in Quebec. Liberal ministers have emphasized repeatedly that spending decisions will be dependent on a sound business case, which Bombardier spectacularly lacks. It has an unpopular plane that is behind schedule and over budget. If prospects were bright, it would not need billion-dollar rescues from two governments in order to survive. It’s not only a bad idea but a bad investment. The only argument on its behalf is a political one: the reluctance of a government with 40 seats in Quebec to endanger its support. That’s not good enough for a government faced with a struggling economy and far more worthy needs to be met.