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Bombardier is a lightweight when it comes to taxpayer support

Beyond national pride, there are compelling reasons for using taxpayer funds to prop up aerospace firms like Bombardier, which is why so many countries do


 

Bombardier workers look at the CS300 aircraft after it was unveiled at a news conference at its assembly facility in Mirabel, QuebecIf there’s one thing Canadians dislike more than the country’s sky-high airfares, it’s the nosebleed-inducing cost of supporting the country’s pre-eminent civilian aircraft manufacturer: Bombardier Inc.

Ever since Quebec said last week it would invest $1.3 billion in Bombardier’s troubled CSeries jet, and then called on Ottawa for matching funds, critics have bemoaned spineless politicians’ willingness to shovel money at a firm that’s forever lumbering from one crisis to the next. They point to the estimated $2.2 billion Bombardier has received in corporate subsidies over the past half-century, and the more than $11 billion worth of loans Export Development Canada has provided to Bombardier’s customers. Enough is enough, they say.

But while corporate subsidies are nothing to be celebrated, government assistance is hardly unusual in the plane-making business. In fact, it’s pretty much par for the course. Boeing, for example, has received some US$13.5 billion in state and local subsidies in the last 15 years—mostly in the form of special tax breaks and other incentives, according to calculations by Good Jobs First, a group that tracks U.S. corporate subsidies. Airbus has similarly received as much as $18 billion in “launch aid” from European governments. “When you look at Bombardier’s competitors, they’ve all received a lot of government help—Boeing, Airbus, Embraer, the Russians, Chinese and Japanese,” says Karl Moore, a professor at McGill University’s Desautels Faculty of Management. “If you want to play in the big leagues in this industry, you’re going to need government support.”

Beyond national pride, there’s a certain rationale for using taxpayer funds to prop up aerospace firms. In many countries, the sector is closely tied to the defence industry, and therefore plays a quasi-public interest role. The same is sometimes also argued of the civilian aircraft-makers since jet travel has become a key part of countries’ core transportation infrastructure. Indeed, one of the reasons European governments created Airbus was a desire to free the region’s airlines from a reliance on U.S. aircraft manufacturers.

More relevant to Canada is the fact that aerospace firms also tend to be a major source of coveted high-tech engineering and manufacturing jobs, which have spin-off benefits throughout the broader economy. Bombardier, for example, employs 18,000 workers in Quebec and is viewed as the anchor of the province’s entire aerospace sector, which employs some 40,000 workers.

But the most straightforward argument for supporting commercial aircraft-makers is because few private companies can afford to build planes on their own. Boeing nearly bankrupted itself during the development of its iconic 747 “jumbo” jet in the early 1960s, spending nearly three times what the company was worth on the project. The DC-10 also cost about triple the value of the Douglas company, while Boeing’s 757 and 767 aircraft programs in the 1970s again exceeded Boeing’s net worth, according to a 1991 U.S. congressional report. By comparison, Bombardier is currently valued at about $3.4 billion while the total cost of the CSeries is inching above $5.4 billion.

There’s no shortage of things that can go wrong when developing a sophisticated commercial jet that’s supposed to be safe, reliable and economically attractive for airlines to fly. Boeing’s 787 program ended up three years behind schedule and billions over budget as the plane suffered from a wide range of maladies that included cracked wings and windshields and spontaneous fires that erupted from the plane’s lithium-ion battery packs. Airbus, too, ran into embarrassing snags with its Airbus A380 “super jumbo” program—notably when engineers realized the plane’s hundreds of kilometres of wiring couldn’t be properly connected during final assembly. “The lengthy product life cycles and time that it takes to develop, manufacture and deliver new aircraft set aerospace apart from other manufacturing sectors,” Jim Quick, the president of the Aerospace Industries Association of Canada, said in a statement. “Industry and governments around the world work closely together to develop policies and programs that mitigate some of these risks.”

There’s also the very real possibility the plane won’t sell—indeed, historically, most designs don’t. The first CSeries plane, designed to be a fuel-efficient competitor to the smallest planes made by Boeing and Airbus, is scheduled to roll off the final assembly line in Mirabel next year just as jet fuel prices are falling and airlines around the world are moving toward larger aircraft. To make matters worse, both Boeing and Airbus have so far managed to defend their turf by equipping their existing small jets—the aging 737 and A320, respectively— with new engines that partially offset the CSeries’ promised fuel savings. The competitive landscape has contributed to a relative lack of orders for the CSeries—just 243—with 97 per cent of the necessary flight testing already completed. Bombardier needs to sell about 300 planes just to break even.

Of course, Bombardier’s executives could hardly be expected to foresee the collapse in oil prices any more than could Alberta’s oil sands operators (they should have, however, anticipated that Boeing and Airbus would jealously protect their market share). And just because the CSeries isn’t on airlines’ radar today, doesn’t mean it won’t be a year from now. Indeed, many analysts believe orders will pick up now that Bombardier’s cash position has been temporarily bolstered. “While CSeries sales’ risk remains elevated, we believe the Quebec government backing will help to reignite the sales cycle,” wrote RBC analyst Walter Spracklin in a recent note to clients.

All that, plus purely political calculations, point to Ottawa offering Bombardier some kind of financial assistance. At a time when Canada is supposed to be supporting advanced manufacturing after being kicked in the stomach by falling oil prices, it doesn’t make sense for Prime Minister Justin Trudeau’s investment-oriented government to abandon Bombardier when it’s on the cusp of launching a next-generation plane that, by all accounts, meets or exceeds performance expectations. Unlike Quebec, however, the federal government is likely to demand more than a mere stake in the project—possibly a seat on the board, the sale of other assets (perhaps part of the company’s train division), or the dismantling of Bombardier’s controversial dual-class share structure. Trudeau, for his part, has said only that he’s waiting for input from his new innovation minister, and is neither opening nor shutting the door on Bombardier.

Longer term, Canada will need to think carefully about whether it wants to continue supporting Bombardier and the aerospace industry more broadly. There’s plenty of academic researchthat shows taxpayers rarely recoup the money governments hand to private corporations, and nowhere is it written that Canada needs to be home to the world’s third-largest civilian aircraft maker. “The question is: do we want to be in this industry,” Moore says, noting that Bombardier, for all its ups and downs, remains one of the country’s pre-eminent manufacturers and a rare Canadian global success story. “You’ve got to have a little bit of respect for that,” he says.

If not, there’s there’s easily a half-dozen other countries happy to take our place.

 

 

 


 

Bombardier is a lightweight when it comes to taxpayer support

  1. If the federal government decides to throw money at Bombardier a non-negotiable condition should be the elimination of dual class shares (which keep control of the company firmly in the hands of a family that apparently doesn’t know how to properly run it). One can possibly make an argument for propping up Canada’s aerospace industry, one cannot possibly make an argument for continually propping up the Bombardier family.

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