Embraer SA (IW 1000/629), the Brazilian maker of regional jets, may ask the World Trade Organization to probe whether government subsidies enabled Canada’s Bombardier Inc. (IW 1000/213) to offer its C Series aircraft to Delta Air Lines Inc. at below the production cost.
Delta agreed last month to buy at least 75 of Bombardier’s state-of-the-art jetliners, an order valued at $5.6 billion based on list prices. The Canadian planemaker has a $1 billion commitment for investment from Quebec’s government and is negotiating for federal aid as well.
“This causes too big of a distortion in the market,” Paulo Cesar de Souza e Silva, head of Embraer Commercial Aviation, said in an interview at the company’s offices in Sao Paulo. “We are analyzing the situation, looking for more information and already in talks with the Brazilian government.”
Bombardier’s second-quarter results will include an “onerous contract provision” to be recorded as a non-cash charge of $500 million in conjunction with 127 C Series purchase agreements, according to a company filing. The 127 orders include the 75 aircraft that Delta is purchasing, as well as 45 that Air Canada agreed to buy in February.
“This shows Bombardier aggressiveness and raises suspicions that Bombardier offered its CS100 for a price below cost,” Souza e Silva said. “If it too hard to compete with the government of Canada.”
Compliant with Trade Rules
Bombardier is compliant with all trade rules and its accounting provisions and cash needs are following a five-year plan announced in November, said Marianella de la Barrera, a company spokeswoman.
Similar to Boeing Co. and other planemakers, Bombardier will incur losses during the early production of the C Series because of startup costs. The factory will follow a normal learning curve and become more efficient over time and as volume increases, de la Barrera said.
Bombardier hasn’t received any funds yet from the government of Quebec and the company hasn’t even gotten a commitment from Canada’s federal government.
“Even if or when we conclude agreements with C Series investments from governments, we fully expect those to be in compliance as well,” de la Barrera said.
Bombardier’s sales to Delta and Air Canada were “likely below cost in an attempt to build momentum,” George Ferguson, senior air transport analyst at Bloomberg Intelligence, wrote in a research note last week.
By Fabiola Moura