I may well have been too pessimistic too–though I have not doubted the willingness of Quebec and the feds to cough up funding. Excerpts from a piece at Aviation Week and Space Technology, note possible legal challenges:
Bombardier’s new management, arriving early last year, has proven transformational. After eight years of dismal results and an orderbook best described as “wobbly,” Bombardier has received a breakthrough endorsement from Delta, and it is almost certain to be followed by other quality customers. Clearly, the new management has committed Bombardier to the kind of commercially aggressive deals needed to sign a second strong airline (after Lufthansa, the launch customer).
But perhaps the smartest move by incoming CEO Alain Bellemare and his new team was to create an entirely new financial structure for the C Series. Last year, they spun the program off as a separate entity, writing off $3.2 billion of earlier funding in the process.
The new team then used this structure to bring in government cash, with Quebec province taking a $1 billion investment stake. The provincial government’s Caisse de Depot et Placement du Quebec (CDPQ) pension fund then took a $1.5 billion stake in the company’s Transportation division.
This was my mistake with the C Series: I underestimated the Canadian and Quebec governments’ willingness to back this program. When it began, together they had provided CA$700 million ($550 million) in launch aid; I didn’t think this would be the start of a much larger aid package. After all, this is Canada in 2016, not Indonesia in 1992. Modern industrial economies seldom provide this level of support for national champions.
Having said that, Quebec’s move was understandable, given the C Series’ technical promise…
…The company as a whole continues to lose money. And it has requested that the Canadian federal government also take a $1 billion stake in the C Series, giving all three parties (Ottawa, Quebec and Bombardier) a one-third share in the program.
Consider the implications if Ottawa makes this investment. The C Series would be vulnerable to a trade complaint brought by the U.S. or the EU (or both). After all, this wouldn’t be just a subsidized program; rather, two-thirds of the necessary investment cash would be coming from the Canadian federal and Quebec provincial governments. The majority of program risk would be borne by Canadian taxpayers.
Air Canada’s February CS300 order announcement represents another trade complaint vulnerability. When the airline announced its plan, it denied that this order was politicized, but at the same time, the Quebec government ceased its three-year legal fight over Air Canada’s efforts to move maintenance work outside the province. In December, the airline had lost a court appeal against the province, implying greater risk ahead. If the U.S. or EU could prove that the end of Quebec’s litigation was a quid pro quo associated with the C Series order, that would be a severe violation of the World Trade Organization’s Agreement on Trade in Civil Aircraft (ATCA).
It isn’t clear if the U.S. government would file a complaint if more cash is provided. The 2016 U.S. National Trade Estimate (NTE) Report on Foreign Trade Barriers, released last month, states: “The United States will continue to monitor carefully any government financing and support of the C Series aircraft.” The EU has so far said nothing.
If either party did launch a trade complaint, it would likely be quickly settled, probably to the C Series’ detriment. Unlike the fiendishly complicated U.S.-EU dispute over subsidies to Airbus and Boeing, state support of this nature would be an open-and-shut case. Also, unlike the U.S.-EU complaints, which involve two large economies, retaliating against a smaller country such as Canada would be relatively easy. A simple tariff on C Series exports to U.S. or EU airlines would suffice.
With or without a trade complaint, the C Series may be starved for cash at a crucial phase—just as production ramps up. But this is a risk, not a certainty. Teal Group’s baseline assumption is that the C Series will be a success…
Contributing columnist Richard Aboulafia is vice president of analysis at Teal Group [website here]. He is based in Washington.