Bombardier takes hits on U.S. Department of Commerce decision, merger of European rivals

Bombardier CS100

Bombardier's hopes for breaking into the U.S. commercial aviation market took a massive blow on Tuesday, as the U.S. Department of Commerce proposed a hefty 219 per cent duty on its CSeries jets.

The department ruled in a preliminary decision that Bombardier benefited from improper government subsidies, which gave the Montreal-based company an unfair advantage when selling south of the border.

The investigation was sparked by a complaint from U.S. aerospace giant Boeing, after Bombardier secured a deal for up to 125 of its CS100s with Delta Air Lines in April 2016.

The list price for the planes is around $6 billion, but the actual amount of money involved in the deal has not been made public and Boeing alleges Bombardier offered them for much less.

The financial penalties aren't officially due until Bombardier delivers the first CS100 to Delta, which is expected in the spring. They could also still be dropped or refunded.

The key will be whether the U.S. International Trade Commission finds that Bombardier-Delta deal actually hurt Boeing's business, a decision that's not expected until the spring.

But the ruling gives Boeing momentum as the dispute drags on, and more leverage in any future talks between the Trudeau government and the Chicago-based company to reach a negotiated settlement.

Boeing wasted no time in declaring victory on Tuesday.

"Subsidies enabled Bombardier to dump its product into the U.S. market, harming aerospace workers in the United States and throughout Boeing's global supply chain," the company said in a statement.

The dispute is not about limiting innovation or competition, it continued. "Rather, it has everything to do with maintaining a level playing field and ensuring that aerospace companies abide by trade agreements."

U.S. Secretary of Commerce Wilbur Ross said in his own statement that while the United States values its relationship with Canada, "even our closest allies must play by the rules."

Meanwhile, Bombardier and the Trudeau government appeared to be reeling. Most had expected the Commerce Department to rule against Bombardier, but the size of the proposed duty was surprising.

Boeing had been asking for an 80 per cent duty.

"The magnitude of the proposed duty is absurd and divorced from the reality about the financing of multibillion-dollar aircraft programs," Bombardier said in a statement.

"Boeing is seeking to use a skewed process to stifle competition and prevent U.S. airlines and their passengers from benefiting from the CSeries."

Speaking before the ruling, Prime Minister Justin Trudeau promised to continue to stand with Bombardier and Canada's aerospace industry. He also once again threatened to cut government ties with Boeing.

"Certainly we won't deal with a company that's attacking us and attacking thousands of Canadian jobs," Trudeau said outside the House of Commons.

But Foreign Affairs Minister Chrystia Freeland made no mention of retaliatory action in a statement released after the ruling, promising instead to continue raising the dispute with U.S. officials at all levels.

Tuesday's finding was actually the first of two that the Commerce Department is scheduled to release on Bombardier. Attention now turns to whether it "dumped" CS100s into the U.S. by selling them below cost.

That finding is scheduled on Oct. 4, but could be delayed.

But the real question, which is being tackled by the U.S. International Trade Commission, is whether the deal between Bombardier and Delta hurt Boeing.

That ruling, which is expected in the spring, will be the key to whether any duties slapped on the CS100s become permanent or whether the case is dismissed and all duties are lifted.

Boeing contends that by breaking U.S. and global trade laws, Bombardier created an unfair playing field in the aerospace industry that poses a risk to its long-term business.

But Bombardier and its supporters are clearly banking on the trade commission siding with them, now that the Commerce Department has come out with its preliminary findings against the Canadian company.

Even if that is the case, however, either side can appeal the entire case to the U.S. Court of International Trade, bring it before NAFTA dispute bodies, or even take the matter to the World Trade Organization.

Quebec Finance Minister Carlos Leitao, whose government invested US$1 billion for a 49.5 per cent stake in the CSeries program last year, said he was confident that Bombardier would beat Boeing.

But he tempered his optimism by noting that it could take a long time to resolve the case, which Leitao said could hurt Bombardier – and which is why Quebec will continue to support the company.

"At the end of the day, as often happens in this type of dispute, the Canadian side will win," he told The Canadian Press in New York. "Now that day could be a very long day, so that's where the risks come from."

But there was also a glimmer of good news, after a senior Bombardier official said the firm was hoping to close several deals with Chinese airlines.

European rail manufacturers announce deal

European railway manufacturers Siemens Mobility and Alstom announced a merger Tuesday that leaves Bombardier facing a new "European champion" and a substantially larger rival.

The memorandum of understanding announced Tuesday is described as a merger of equals with each owning half the shares of the new company to be headquartered in Paris. The Mobility Solutions business will be run out of Berlin.

The combined company to be called Siemens Alstom will have US$18 billion in revenues – about double that of Bombardier Transportation – and US$1.4 billion in adjusted EBIT. Annual cost savings of US$554.2 million are expected four years after closing.

The new European company with 62,300 employees in more than 60 countries will have an order backlog of US$72 billion and an adjusted margin of eight per cent.

"We put the European idea to work and together with our friends at Alstom, we are creating a new European champion in the rail industry for the long-term," Siemens CEO Joe Kaeser said in a news release.

He added that the global market has changed with the creation of a dominant competitor in China and digitalization.

Bombardier didn't immediately respond to the merger of its rivals. It is also believed to have talked to Siemens.

Mergers in China and Europe leave Bombardier "still looking for a dance partner," said David Tyerman of Cormark Securities.

"They lost out this time but there's presumably going to be more consolidation," he said, noting competitors of varying sizes remain around the world.

Bombardier's shares closed up more than six per cent to C$2.27 in Tuesday trading even though the transportation giant was expected to face bad news affecting both its commercial aircraft and railway businesses.

The shares surged more than 13 per cent after a report out of China said Bombardier is close to signing orders for commercial aircraft.

Walter Spracklin of RBC Capital Markets said he expects Bombardier will remain a key player in a growing transit market.

"An overall modernization of infrastructure in developed countries, and a rapid urbanization coupled with environmental concerns in developing countries will prop up rail demand for decades to come in our view," he wrote in a report.

Analyst Cameron Doerksen of National Bank Financial said Bombardier Transportation can still succeed as a standalone company.

Bombardier Transportation would be the world's third-largest railway company with a strong presence in France, Germany and Britain. It has a four-year backlog of orders and is moving towards an eight per cent EBIT margin.

Under a proposed merger with Siemens, Bombardier would have reportedly ceded control of signalling and maintained only marginal control over a separate rolling stock joint venture.

"Given the cyclicality of Bombardier's Aerospace operations, in our view, it was important that Bombardier maintained control of Bombardier Transportation," he wrote in a note before the Siemens-Alstom merger was announced.

The industry is undergoing consolidation to compete with the state-backed rival Chinese railway manufacturer CRRC that is growing its global reach.

Doerksen added that the near-to-medium-term threat from the state-owned CRRC Chinese railway is exaggerated since only about 8.5 per cent of its revenues last year were outside of China and it has little presence in Western Europe.

China's cost advantage may also be limited since most buyers require significant local content, forcing CRRC to build new manufacturing facilities in major markets.