Executive Summary
In a laudable strategic and tactical move Airbus acquired majority ownership of Bombardier’s Series C line in a no cash deal. Additionally, Airbus management astutely recognized that Bombardier’s problems could be recast as advantages with their international footprint and supply chain.
The Deal
On October 16, 2017 Airbus announced it would acquire 50.1% of the equity of the Canadian consortium which owns Bombardier’s C Series airliner. Prior to the deal Bombardier’s market value was $2 billion. Airbus is putting up no cash for its shares and it announced it would move a significant portion of the plane’s final assembly to its plant in Alabama.
Analysis
The deal is a brilliant gamble by Airbus and a desperate attempt to survive by Bombardier. The C Series regional jet, lauded technologically by aircraft designers, has suffered from poor sales and a near empty order book. One cause has been Bombardier’s chief competitor for the lucrative US regional jet market. Boeing, manufacturer of the market adjacent 737, has been hammering Bombardier in US courts to pay a 300% tariff on Series C aircraft sold in this country. Few airlines wish to commit to a fleet with an unknown price tag so they have stayed away from the modern composite wing Series C, financially crippling Bombardier.
Boeing found a possibly unwanted ally in President Donald Trump. The President recently stressed to Canada’s Prime Minister Trudeau that the President strongly supported Boeing’s claim regarding the sale of the “foreign” aircraft (more on this later). Trudeau responded by freezing the purchase of 18 Boeing Super Hornet fighters for the Canadian Air Force valued at $5.2 billion.
In August Bombardier leadership looked for a white knight to keep the C Series alive. Airbus offered a no cash deal and ended up with its first regional jet, effectively sandwiching the Boeing 737 between the Airbus 321neo and the C Series.
What about that tariff? Surely if the Canadians have to pay, Toulouse-based Airbus will have to pay as well. Here is the real genius of the deal. Not only did Airbus pay nothing for the C Series, they announced they were moving final assembly to their Alabama facility, effectively making the C Series an American airplane.
Boeing has complained that the move of production site does not change the argument for a tariff but it is challenging to understand why a tariff applies to a plane built in Alabama for sale to US airlines. Further, over 50% of C Series content comes from US aerospace suppliers including Pratt & Whitney (engines), UTC Aerospace (landing systems, controls), Rockwell Collins (avionics), and Parker Hannifin (fluid management systems). In its new home the C Series will be more American than a Ford Taurus.
Airbus still faces its own challenges. It will have to tool up the Alabama facility with few orders for new aircraft. It will face a long fight in US courts to resolve the tariff issues. It will likely have to guarantee buyers to cover tariffs if they are charged.
What Are The Implications For The Supply Chain?
For suppliers of Airbus, Bombardier, and Pratt the news is good. Expansion of Airbus’s US operations should create additional opportunities down the road. Further, the tariff issue is likely to face political challenges as representatives count the high-paying jobs the Airbus expansion and growth of the C Series will bring to American communities.
For more information please contact Tony Freeman of A. S. Freeman Advisors, LLC at tfreeman@asfreeman.com or call (917) 868-0772.
