Why the Delta CSeries order is worth all the trouble for Bombardier

Delta Air Lines’ order for 75 firm CSeries aircraft placed in April 2016 was probably the most significant commercial aircraft order ever won by Montreal-based Bombardier. Both Boeing and Embraer took notice; the US and Brazilian aircraft manufacturers have made the Delta order the cause celebre in two brewing international trade disputes over alleged CSeries subsidies—one between the US and Canada and another between Brazil and Canada.

The US Commerce Department’s preliminary ruling announced Sept. 26, which sets the stage for a staggering 219.3% duty to be placed on each CSeries delivery to the US, certainly jeopardizes Bombardier’s ability to sell the CSeries to US carriers. The US market is viewed by Bombardier as ripe for the CSeries. The Canadian manufacturer, for example, has been eyeing American Airlines’ fleet of more than 120 Airbus A319s, for which it believes the CSeries would be an ideal replacement. But a nearly 220% duty would probably make future sales in the US market unviable.

And what about the Delta order? Technically, the US government would collect the stiff duty from Delta, but there is no doubt Bombardier would pick up the tab. So is it worth it?

In a word, yes. Bombardier believes Delta operating the CSeries will be the tipping point that puts the aircraft in high demand all over the world.

Bombardier won breakthrough orders for the CSeries from Delta and Air Canada (45 firm CS300s) last year, but has not announced any new orders since—despite CS100s and CS300s in service with Swiss International Air Lines (SWISS) and Latvia’s airBaltic performing quite well. Delta’s first CSeries delivery is scheduled for the spring of 2018.

“Once Delta and Air Canada start flying those birds in the US and Canada, [airlines will see] the CASM is phenomenal,” Bombardier VP-regional aircraft Kevin Smith told reporters this week at the Regional Airline Association convention in West Palm Beach, Florida. “When Delta starts operating the aircraft out of New York and Los Angeles and then Seattle, and Air Canada takes delivery in the spring of 2019, the aircraft will be ubiquitous. It will be everywhere.”

At that point, US passengers (and in turn the US consumer media) are sure to take notice of the aircraft’s comfort, Bombardier believes. The growing buzz about the aircraft’s comfort combined with its cost performance in service in both North America and Europe will convince airlines in the US and globally that it is a must-have. At least, that is the theory, which largely hinges on Delta operating the CS100 out of major US markets (with an assist from Air Canada, which is expected to operate CS300s from US cities to Canadian hubs to connect passengers to the airline’s Boeing 787 network).

Given this, Bombardier is sure to plow forward undaunted with CSeries deliveries to Delta.

As for the duty actually going into place? It remains to be seen how this will play out now that the Commerce Department has raised the specter of a 219.3% duty. The CSeries is a globally manufactured aircraft. Its geared turbofan (GTF) engine, one of the aircraft’s big calling cards in terms of fuel efficiency and low noise levels, is made in the US by Pratt & Whitney. Its wings are produced in Northern Ireland. So the duty won’t just be a penalty on Bombardier and Canada.

Pratt parent United Technologies Corp. (UTC), based in Connecticut, employs more than 200,000 people and generates more than $57 billion in annual revenue. A duty on the CSeries, particularly one that makes sales to US airlines less likely, inevitably will hurt UTC. Is the Trump administration prepared for collateral damage to US companies and workers? And UK Prime Minister Theresa May has already expressed her disappointment with the potential CSeries duty given its implications on wing production in Northern Ireland. Does the Trump administration want a trade tiff with the UK as it tries to negotiate a post-Brexit trade deal with the UK?

[NOTE (9/28): A reader correctly points out that Pratt's final assembly line for the PW1500G, the variant of the GTF powering the CSeries, is located in Mirabel, Quebec. But the GTF is undeniably a US product, as are about half of the components on the CSeries. And many of the PW1500G's parts are manufactured in the US before being shipped to Mirabel for final assembly. The larger point is that any measure that diminishes CSeries sales prospects will inevitably hurt Pratt and its parent UTC, a major US corporation, as well.]