Bombardier faces big day as rail and air businesses face headwinds

Possible duties, rail merger loom

As Bombardier Inc. braces for a preliminary ruling in a countervailing duty investigation that could see duties of nearly 80 per cent slapped on U.S.-bound C Series jets, the Montreal-based company is facing another — and potentially significant — threat to its transportation business.

The U.S. Department of Commerce is expected to announce Tuesday its preliminary determination in the countervailing duty investigation launched by Chicago-based aerospace giant the Boeing Co., which some analysts and trade experts anticipate will go against Bombardier.

At the same time, the company faces a challenge on its rail front as Reuters reported Monday that Germany’s Siemens AG is going to choose rival French company Alstom for a multi-billion dollar rail merger — the latest blow for Bombardier, which is in the midst of a five-year turnaround plan.

“Buckle up for some short-term turbulence,” Desjardins Capital Markets analyst Benoit Poirier wrote in a note to clients Monday.

“Bottom line, we believe that Bombardier shares could be under pressure (Tuesday) depending on the outcome related to the countervailing duty and rail merger.”

Boeing first filed a petition in April, alleging that huge government subsidies have allowed Bombardier to embark on “an aggressive campaign to dump its C Series aircraft in the United States.”

The company is seeking a countervailing

We continue to believe that Bombardier is well positioned to win this case.

duty of 79.31 per cent, and an anti-dumping duty of 79.82 per cent. Should the Department find a positive determination in the countervailing duty investigation, U.S. companies such as Delta Air Lines, which has an order for 75 C Series jets, would have to pay import duties on those aircraft.

Bombardier has repeatedly rejected Boeing ’s claims, and earlier this month called the petition “an unfounded assault on airlines, the travelling public and further innovation on aerospace.”

Poirier said that while a positive determination in the countervailing duty investigation is likely, it should be noted that Tuesday’s decision is preliminary. A final determination is not expected until 2018.

“We continue to believe that Bombardier is well positioned to win this case, given Boeing did not even compete for Delta’s order, as it does not make an aircraft of Delta’s specified size, the high proportion of U.S. content in the C Series (around 50 per cent) and the significant number of jobs that rely on Bombardier and the C Series in the U.S,” Poirier wrote.

In the meantime, Walter Spracklin, an analyst with RBC Dominion Securities, said in a note that the Boeing complaint will remain a key risk to Bombardier’s stock.

“We believe it’s likely that orders from U.S. airlines will be delayed until the spring 2018 ruling, which in turn may be somewhat of an overhang on the stock in the meantime,” he wrote.

Bombardier is not expected to deliver its first C Series jet to Delta until next year. According to Macquarie Research analyst Konark Gupta, a worst-case scenario for Bombardier, in which Delta forgoes its C Series order, does not mean that the airline wouldn’t be able to find another way to add the aircraft to its fleet. In a note to clients, Gupta said Delta can sign an operating lease agreement with an aircraft lessor based outside of the U.S. that isn’t subject to the duty.