Richard Aboulafia: October 2017 Letter

Dear Fellow Franco-Quebecois Alliance Observers,

Right. We all value time, and this is a time-sensitive moment. Let’s keep this simple – winners and losers in the sudden new Airbus C Series Aircraft Limited Partnership (CSALP) deal:

Biggest Winner: the CSeries. This was always a very fine jet; it just needed help, and there was always the feeling that Bombardier had bitten off way more than it could chew. Actually, the CSeries needed a Deus Ex Machina. Specifically, it needed a company with all the resources to bring it to market, an elaborate sales and product support infrastructure, and a manufacturing base and supply chain that allowed it to be built in line with Airbus and Boeing single aisle jet production costs. Airbus gives it all of that. Most of all, customers needed to feel they weren’t buying a possible orphan jet; Airbus provides that security too. Teal Group is raising our CSeries forecast by 50%; it may go higher.

Big Winner: Airbus. They get to co-opt the CSeries, which John Leahy had spent the last ten years loathing. The CSeries is the reason Airbus had to re-engine their single aisles (see my June 2013 letter). And now, Airbus is the majority owner of the thorn in their side, and they got it for very little cost. They now have a better 130-seat jet than the 737MAX7, along with a better 180/200-seater than the MAX9/10. On the single aisle front, Boeing is being boxed into the 150-seat niche with the MAX8 as their only big seller. Oh, and Airbus now has improved prospects in the Canadian defense market. They can thank Boeing for much of this.

Winner: Bombardier. They no longer own a majority share of the CSeries. But 31% of a likely big winner sure beats majority ownership of an ulcer. They no longer have a mountain of risk weighing on them, and they can manage themselves like a normal aerospace company that doesn’t spend every moment wondering if it will be able to survive in one piece to see the break of dawn. They can focus on large business jets, revive the Dash8Q, and reap the rewards as Airbus sells hundreds of CSeries. They may even be able to update the CRJ with new engines.

Winner (maybe): Embraer. The world has two top-tier airframers, and two second-tier airframers. Airbus and Bombardier are now allies. This greatly increases the likelihood of a stronger Boeing-Embraer alliance as a response.

Big Winner: Defensive Globalization. This subject deserves its own letter. Globalization is not dead. It merely needs workarounds to deal with protectionism. The Airbus/Bombardier deal includes building Delta’s CSeries at Airbus’s Mobile, Alabama factory, a perfect example of this kind of workaround. As a superb Wall Street Journal article about General Electric put it in June (here, with paywall), “This is GE in the age of localization—the company’s survival strategy for an era of slowing global trade, rising protectionism, and increasingly powerful foreign customers, all of which is forcing manufacturers to put down deeper local roots to win business.”

Boeing should learn from this. They’ve been playing checkers with their ill-advised and self-destructive resort to protectionism, while companies like GE (and now Airbus and Bombardier)

learned to play three-dimensional chess. Fascinating, as that great three-dimensional chess player Mr. Spock would say. That brings us to our Losers List.

Biggest Loser: Boeing. The new deal destroys Boeing’s trade case. They (and Commerce) can try to persist, but the new Alabama CSeries line makes that futile. As I’ve written in my previous columns, Boeing pandered to the protectionist wing of the Republican party. The epicenter of that wing is in Alabama, which loves factory jobs, even from foreign companies. Most likely, Commerce will rule that it has no authority on jetliners exported from Alabama to Georgia. Since this whole trade complaint thing has been absurdly politicized from the start, it is dulce et decorum that Boeing will be undercut by the very politicians to whom they most appealed.

Oh, and remember when Boeing dominated Canada’s defense market, with F/A-18s, C-17s, CH-47s, and F/A-18E/Fs and CH-47Fs and P-8s to come? Those days might be over, whether the Canadians go with Lockheed Martin, Airbus, or both. And there’s no guarantee that Canada and the UK don’t start anti-dumping trade action against the 737. As I pointed out last month, the MAX7 has three customers, and two are Canadian. The UK Labor party has already demanded action against 737s sold to now-dead Monarch.

Losers: Two overlap victims. The CS300 was always better than the A319neo; now that Airbus is in charge, I expect the latter plane will follow the A350-800 into the great hall of feeble and dead shrunken jets. Meanwhile, the long-rumored 150-seat CS500 will be buried under a rock, since Airbus is now in charge and really doesn’t want to help create an A320neo competitor.

Loser: China Aerospace. Over the past ten years, China had signed several cooperation deals with Bombardier, and were widely rumored to be looking at an acquisition (of the CSeries, or of the company). China was going to be the original Deus Ex Machina that the CSeries so badly needed. My pal Kevin Michaels coined the term “Combardier” for what looked like a natural alliance or merger between Comac and Bombardier. At several times China could have swooped in to rescue what looked like a doomed program, paying just pennies on the dollar, and scooping up tons of intellectual property that would have been incredibly valuable in their own jetliner development efforts. Yet China did nothing, even when they would have been the only bidder. This reinforces my conviction that all this talk of China becoming the next great aerospace power is 98% talk. The Airbus-Boeing duopoly is alive and well.

Loser: Government support for industry. I may have been appalled by Boeing and the Commerce Department’s complaint, but ironically, they had a point. Canada, Quebec, and the UK may have set a new record for market distortion with all their CSeries support (see my June 2005 letter). And what did it get these governments get in return? A new Airbus jet.

Last, one final Winner: Donald Trump. Once again, his administration has helped create a problem (a politicized trade complaint) and then took credit for solving it. I predict an Official Trump Tweet taking credit for bringing Airbus factory jobs to Alabama. If Boeing leadership expected loyalty from Trump, they were mistaken.

Yours, ‘Til They Start Speaking Quebecois French in Mobile,

Richard Aboulafia