Embraer’s grousing over Bombardier’s deal with Delta Air Lines as the result of unfair competition continues, with threats of asking the Brazilian government to file a complaint with the World Trade Organization.
Paulo Cesar Silva, the president and CEO of the Commercial Division, called me after my recent column suggesting there may be more of a commercial element to the Bombardier (BBD) order with DAL than is generally recognized. I suggested that concessions involving fleet integration, training and maintenance costs were likely granted. These are common in new fleet-type orders.
I also speculated that BBD and Pratt & Whitney, the engine supplier, may have struck deals with Delta TechOps to be a licensed MRO (maintenance, repair and overhaul) third-party provider for the C Series and the GTF engines that power it.
Objecting to Government funding
The Embraer (EMB) complaint is that the announced deal with the Quebec provincial government to provide US$1bn in financial investment in the C Series program, and the request by BBD to the federal government for another US$1bn amounts to subsidies that are illegal under WTO rules. Brazil can file a complaint with the WTO, taking Canada to “court,” so to speak.
(The Quebec money has yet to be funded—BBD hopes it will be by the end of 2Q. The Feds and BBD remain apart on terms and conditions and there is no agreement yet.)
The trouble is, as with the European Union/Airbus and USA/Boeing WTO complaints, review and deciding the complaint can take years (a decade has already passed in the Airbus/Boeing complaints). Even when a decision is made, it can be appealed. Even if the complaint is upheld, the WTO has no enforcement power. Even if WTO blessing is given for the countries to impose penalties, these don’t have to be against the offending company’s products; penalties may be imposed against an unrelated industry’s products. Or not at all. In any case, by this time, BBD will be happily selling its airplanes and may even bought out Quebec and the Feds.
Which makes the whole question of filing a WTO complaint rather superfluous, but this is another discussion.
Aggressive pricing
Here’s what Silva had to say.
“We have a view that this support from the Canadian governments…has given Bombardier the ability to be more aggressive in these campaigns. Of course, we need more information about the structures.” (Bombardier says the investments will comply with WTO rules.) “However, it looks to us that if you look at the Delta campaign, and what we were offering and how we lost that campaign, it looks like [the C Series] was offered below production costs,” Silva told me.
“[Reports of] $20m, $22m, whatever the price, we do know what we bid and I know my economics to help Delta on the retrofit and we lost.”
Delta previously agreed to purchase 20 used Embraer E190-E1s from Boeing Capital Corp. These are being taken in on trade from Air Canada in connection with a Boeing 737 MAX order. Silva revealed that EMB was prepared to help on this retrofit from the Air Canada configuration to the Delta configuration.
EMB was also bidding new E190-E1s with GE Aviation CF34 engines, rather than the new E190-E2 with similar P&W GTF engines that are on the C Series.
“When we look at Bombardier’s first quarter reports, there is a $500m onerous contract provision, linked to [127] Air Canada, AirBaltic and Delta orders. I don’t believe this is linked to ramp up because they said this is a provision for onerous contracts,” Silva said.
Last week, I wrote that this provision was more likely associated with unit cost accounting and production ramp up than loss-making contracts with these three airlines. Bombardier provided the following statement in response to my questions after talking with Silva.
- In Canada, we don’t have unit accounting as they do in USA; we must follow IFRS standards;
- Our accounting is prudent, realizing the loss early in 2016 when the contracts are signed
- This is a non-cash item in 2016
- These losses would otherwise be accounted in the years of deliveries – Taking the provision early will convert these deliveries into breakeven sales for Bombardier at the time of delivery
- This accounting policy (IFRS) is not new for Bombardier, simply material in Q2, requiring separate disclosure
- Airbus has similar provision on its balance sheet for the A350XWB
- Boeing has a different approach, they defer $28B in losses on the 787 Program over future expected sales
Level playing field
“Speaking overall, we are no longer competing on a level playing field,” Silva said. “I don’t understand why the government of Canada is providing support to Bombardier. Commercial aviation globally is doing very well. If Bombardier is not doing well, it is not because of a sustained financial crisis that is affecting Bombardier. They needed a bailout from the government. We are competing against a government program.”
Silva hopes the federal investment doesn’t happen. He’d also like to see the Quebec investment fall through.
“I hope support will not come. Otherwise it will be a big distortion,” he said.
Other concessions
Silva freely acknowledged BBD probably offered concessions, beyond cutting the contract price, and that Delta TechOps was involved.
“For a major airline like Delta, there are always other elements,” Silva said. “In this case here, I know the engine manufacturer gave Delta the MRO rights to TechOps going forward. My engine manufacturer (GE Aviation) was also there for Delta as well.” Silva wouldn’t reveal the price offered for the E190-E1.
“In this case…it is likely part of this money was being used to fund the aircraft,” Silva said, noting that any funding from the governments will, or may, be received prior to Delta’s first delivery in 2018.
“We are in touch with our government and explaining our views. The government is quite worried about this situation.”
Given that the Canadian investments aren’t done yet, but assuming these proceed, it would likely be next year before any complaint could be prepared and filed with the WTO—if the Brazilian government believes there is a case.
