Delta Air Lines Inc. is moving ahead with an order for 75 Bombardier Inc. C Series airliners despite U.S. government duties of nearly 300 per cent, providing crucial backing to the Canadian plane maker as it fights off a trade challenge by rival Boeing Co.
Atlanta-based Delta, Bombardier's biggest C Series customer, said on Wednesday it will take delivery of the aircraft but that it won't pay the two duties imposed by the U.S. Department of Commerce in preliminary rulings in September and October. The carrier said it could postpone delivery of the planes.
"We are not going to pay a tariff and we do expect to still take the airplane," Delta chief executive Ed Bastian told analysts and investors on a call to discuss third-quarter results. "I can't tell you how it's going to eventually work out. There may be a delay in us taking the aircraft as we work through the issues with Bombardier, who's being a great partner in this. We think that the aircraft needs to come to market. We believe it will come to market and we believe that Delta will get it at the agreed contractual price."
The comments helped calm Bombardier investors fretting about Delta's intentions as the manufacturer's shares gained 4 per cent in Wednesday afternoon trading. But they raise questions about how Delta will get the aircraft and how things will play out in the event the U.S. International Trade Commission (ITC) upholds Commerce's preliminary rulings.
"Nobody, and I mean nobody, has the bandwidth or the inclination to pay these duties," said Richard Aboulafia, an airline analyst with the Teal Group. He estimated the penalties on Delta's C Series purchase alone at $4.5-billion (U.S.).
Delta struck a deal with Bombardier last year to buy 75 CS100 models at list price of $5.6-billion before an undisclosed discount typical in the industry for such large purchases. For Bombardier, the order was a key one that cemented the aircraft's viability after a two-year delay to market and significant cost overruns. Quebec helped secure the deal by providing Bombardier with a $1-billion investment lifeline that shored up its cash position.
Boeing sued Bombardier earlier this year, alleging the Canadian plane maker benefited from unfair government subsidies to sell the C Series to Delta at "absurdly low" prices and asking for duties on the airliner to level the playing field. Bombardier counters that its government investments meet international trade rules.
Delta is scheduled to take delivery of the first C Series in spring, 2018, and to put the aircraft into service shortly after. Analysts say the plane, which offers passengers a roomier cabin than regional jets, should help Delta serve mid-size cities at an attractive operating cost.
The ITC is expected to deliver final rulings on whether Commerce's initial decisions to impose duties will stand by the end of February, 2018. Boeing will have to prove it was harmed by the C Series sale to Delta for the ITC to rule in its favour. That's a high bar for Boeing to meet, given it did not compete in the Delta sales campaign with its own aircraft, Mr. Bastian said.
"It is very difficult for Boeing or any U.S. manufacturer to claim harm with a product that we purchased that they did not offer and they don't produce," Mr. Bastian said. "As you look through this and try to see how exactly a 'harm case' is going to be developed, particularly to justify the type of tariffs that are being contemplated, to us it's unrealistic, a bit nonsensical."
The lawsuit has fuelled trade tensions between Canada and the United States, emerging as a flashpoint as the two countries try to hammer out a new continental trade pact.
Canada has called on Boeing to drop its complaint and has threatened to scrap plans to buy new fighter jets made by the plane maker. The United States has vowed to uphold its laws. Britain, home to a major Bombardier factory working on C Series wings, has also warned it would retaliate against Boeing if the manufacturer doesn't abandon its complaint.
Boeing this week launched a multimedia campaign in Canada to try to boost public understanding of its footprint in the country. The goal is to reframe its reputation as a positive contributor to the economy, instead of the unprincipled bully it is being cast as by politicians in Quebec and Ottawa. The company says it employs 2,000 people directly in Canada and works with suppliers employing another 17,500 people.