Trump Effect

The usual claque of critics could be heard jeering at Bombardier’s “sale” of 50.01 per cent of its CSeries passenger jet project to Airbus, its European aerospace rival.

Some found fault with the sale price — zero — for a majority interest in a plane that has cost US$6 billion (so far) to develop, a third of it public money. Others grumbled at the resulting dilution of the government of Quebec’s stake in the CSeries Aircraft Limited Partnership (CSALP), from 49.5 per cent when purchased for US$1 billion two years ago, to just 19 per cent today. (Bombardier holds the remaining 31 per cent.)

Still others pointed out the deal means a shift of final assembly of the planes, at least for the U.S. market, to Airbus’s new plant in Alabama. Perhaps this will allow the planes to escape the 300 per cent duties the U.S. Commerce Department was otherwise prepared to impose on them; perhaps not. Perhaps Airbus will continue making planes for other buyers at Bombardier’s plant in Mirabel, Que.; perhaps over time it will prefer to centralize production in non-union Alabama. Assuming there are other buyers.

What these naysayers overlook is how neatly the deal fits with the business strategy the company has been pursuing all along. It is, after all, a fairly straightforward step from selling planes for less than they cost to make — in effect, giving away half of every plane — to giving away half of the equity in the planes. And whatever else may have changed as a result of the deal, the basic elements of the Bombardier business model — sucking subsidies from the government — have not. The CSeries will be controlled in Europe, it will be built in Alabama, but it will still be subsidized in Canada.

Indeed, it’s not quite right to say that Airbus is getting its stake for free. In fact Bombardier is paying it to take it (much as Bombardier was effectively paid to buy De Havilland and Canadair, decades ago). Not only is Airbus paying no cash and assuming no debt, but Bombardier will remain on the hook for any future losses on the project, up to US$700 million. In addition, Airbus receives warrants to buy 100 million subordinate voting shares in Bombardier at the price they were trading at last week; those shares are already worth almost 20 per cent more than that.

Still, if the point of bailing out Bombardier so often, at so great expense, was supposed to be to save jobs in Quebec, it’s a little galling to see Canadian public dollars now being used to create jobs in Alabama. (Which raises a question: what happens if Airbus sells the planes made there to Air Canada? Would we be obliged to levy a duty on it, as a countervail to our own subsidies?) Supposedly the federal government is going to attach conditions to the transaction requiring Airbus to maintain current levels of employment in Canada, but how binding can these be, really? What leverage does it have? If the deal doesn’t go ahead, Bombardier goes under: that much is clear, weighed down as it is not only by the U.S. tariffs but its own uncertain prospects, so far as these feed perceptions it will not be able to deliver the CSeries. In which case no jobs are saved.

Even if the constraint were binding — that is, if Airbus could be cajoled into employing more Canadians than it would have done otherwise — that takes care of this year. What happens if, a year from now, Airbus decides it cannot afford to live up to its commitment? How will the government punish it then, the deal having already gone through? In reality, its only option would be to offer still more subsidy. As with the auto industry, the company’s Canadian workforce would essentially become hostages, to be ransomed in periodic installments.

Not only is Airbus paying no cash and assuming no debt for its share in the CSeries program, but Bombardier will remain on the hook for any future losses on the project, up to US$700 million.

None of which is to say the deal should not go through, or is not the best the company could have arranged under the circumstances. It is the circumstances that are outrageous. Bombardier was built with subsidy, and is vastly larger than it would have been without it. If much of the world’s aerospace industry was as well, all the more reason to stay out of a game we can’t possibly win, even if we were allowed to play it. Yet it bet the company on the CSeries, and governments in Ottawa and Quebec City bet billions it could be bailed out without inviting some form of retaliation abroad, whether countervailing duties or offsetting subsidies.

All the Airbus deal has done is crystallize past folly. It’s obviously a great deal for Airbus. And it’s better than nothing, for Bombardier. But is it for the taxpayer, or the Canadian economy? It’s true that 50 per cent of some sales is better than 100 per cent of no sales (or as Quebec Premier Philippe Couillard put it, “selling planes makes money, not selling planes makes no money”). But so far as the planes sell for less than they cost to make, the least-cost option is not to make them at all.

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