The Little Plane War

The Little Plane War


This video was made possible by Squarespace. Build your website for 10% off by going to
squarespace.com/Wendover. The commercial airline industry is the classic
duopoly. In the US there’s Boeing—the long successful
manufacturer most known for its iconic 747—and in Europe there’s Airbus—the more recent
entrant formed as a consortium of various European manufacturers—and that’s pretty
much it. 2/3 of all airplanes currently flying commercially
are made by one of these two manufacturers. But there’s something these manufacturers
don’t do—they don’t make small planes, but that’s not for lack of trying. Airbus tried when they made the a318—a variant
of their successful a320—but only sold 80 of them. Boeing did as well with their 717 but it too
was a commercial failure with only 156 sales. But that doesn’t mean that there’s no
place for small planes. In fact, it’s a significant market that
the giants of the aviation industry have not been able to touch. If you step on a plane to a small airport
nowadays, there’s a good chance that it’s either made by Embraer or Bombardier. Embraer, the Brazilian manufacturer, launched
their E-Jet family just over 15 years ago and to date have sold nearly 1,500 of them. By all accounts its a fantastic airplane and
there are whole airports that rely on them. Nearly 70% of the more than a hundred daily
flights out of the small London City Airport operate using an Embraer E-Jet. Due to the noise restrictions, steep approach
angle, and short runway this is one of the few planes that can operate there and some
airlines, such as British Airways, own the E-Jet exclusively for use at this airport. The US, with its nearly 400 commercial airports
and vast size, has service to many more smaller airports than Europe or Asia thanks to government
subsidies so hundreds of airports in the US are served by non-Boeing or Airbus jets. There’s a serious place for small planes,
and Bombardier knows this. Bombardier, while still one of Canada’s
largest companies, is a small player in the commercial airplane market only making about
6% of the world’s commercial planes. The company has long made the successful CRJ
regional jets, but ten years ago Bombardier had an idea for something else. They were going to make a larger, more efficient
airplane to fit between the size of small regional jets and the larger planes of Boeing
and Airbus—the C Series. This plane was going to take advantage of
all the modern advancements in aircraft design—composite construction, advanced aerodynamics, and high-bypass
engines—to make one of the most efficient small airplanes on the market. From 2007 onwards the parts were selected,
the plane was developed, and sales were booked. Then, on September 16th, 2013, it took flight
for the first time. At this point the company was adamant that
the aircraft would enter into commercial service just one year later in 2014. But then the problems began. While doing routing testing on the ground
at the Mirabel airport manufacturing base, one of the test aircraft suffered an uncontained
engine failure. Not only did this strike a serious blow to
the aircraft development timeline, it also prevented the manufacturer from exhibiting
their new plane at the Farnborough Airshow—the largest and most important trade-show in the
industry where the company expected to secure crucial aircraft orders. The show only happens every two years so this
was a significant setback. Some questioned whether the program could
survive this blow, and it only barely did. The program was nearly out of money in 2015. Without the significant financial support
of the governments of Canada and Quebec, the program and company likely would not have
survived, but it did, and on June 15th, 2016, the aircraft entered service with Swiss Airlines
on its first ever commercial flight from Zurich to Paris. By all accounts the C Series is a fantastic
airplane. For airlines it’s efficient and versatile
while passengers praise its rare level of passenger comfort for a small plane. It even has a range of up to 3,800 miles meaning
it could hypothetically fly transatlantic into small airports like London and Belfast
City Airports. As of October 2017 there are 14 C series planes
currently flying—9 for Swiss Airlines and 5 for Air Baltic—but they have nearly 350
orders—enough to make the program profitable—but until recently, they lacked the most valuable
kind of order—American ones. With its tendency to use smaller planes, the
American market will make or break the program, and Bombardier knew this. They were desperate for an order from one
of the main three US airlines to prove its viability, so much so that they allegedly
sold 75 of them to Delta for only $20 million dollars each—a quarter of the $80 million
list price. That was an amazing price for Delta, but it
was low enough that it might have been illegal. This is a practice known as dumping. The cost for Bombardier to make a C Series
plane is about $30 million so it was selling these planes that they hadn’t even made
yet at a loss because they wanted to gain prevalence in the US market. Predatory pricing techniques like this are
against the law in the US and many other countries, so Boeing took action and filed a dumping
petition with the US department of commerce. But here’s the problem—Boeing doesn’t
make an equivalent airplane to the C Series. They say that the dumping will curtail the
sale of its smaller 737-700 planes, but Delta themselves has said that they didn’t want
the 737. Boeing couldn’t offer them a delivery slot
before 2020 and, the 737 is a fundamentally different plane. The C Series has better range, can take-off
from a shorter runway, is more efficient, and is empirically a smaller airplane. Boeing claims that Bombardier received subsidies
that allowed for the below-market pricing, but the money Bombardier received from the
governments of Quebec and Canada came in either exchange for ownership of the program or in
the form of interest-free loans that will be paid back. Boeing, on the other hand, has received over
$14 billion in subsidies in the last 20 years through tax breaks from US state and federal
governments. Nonetheless, Boeing asked the US Department
of Commerce to impose an 80% tariff on the plane to bring the price above the manufacturing
cost. The US Department of Commerce responded by
placing a 300% tariff on the plane. At this point it seemed like the end of the
line for the Bombardier plane. With a tariff that high, it could never be
both competitive and profitable in the crucial US market. But then Airbus stepped in. On October 16th, 2017 the two companies announced
that Airbus would be acquiring a 50.01% stake in the C Series program. Bombardier is just giving away this stake
for free, but the reason this is so great for them is, for one, Airbus is a marketing
and sales powerhouse. Their resources far outstrip those of Bombardier
and they will be able to sell more planes than Bombardier could ever have dreamt of. On the other side, since the C Series doesn’t
really overlap in size with any Airbus plane, Airbus gains a new, modern airplane in their
line up that will allow airlines to have truly all-Airbus fleets. But the real reason Bombardier partnered up
with Airbus is because of this—Airbus’ final assembly line in Mobile, Alabama. By assembling the C Series aircraft in the
US, they’ll essentially be American planes which means that they won’t be subject to
US import tariffs, at least according to Bombardier. Boeing believes that that they will still
be subject to the tariff since they’re still the same planes that received subsidies, while
some external observers have suggested that only the 48% of the plane manufactured outside
of the US will be subject to the 300% tariff. What will actually happen is up to the US
Department of Commerce. Independent analysts have estimated that over
the next 20 years, there will be demand for about 5,500 aircraft of the C Series’ size. Before the Airbus takeover, Bombardier was
expected to fulfill 40% of that demand—just over 2,000 planes. After the takeover, the C Series is expected
to capture up to 60% of that market—well over 3,000 planes. That’s tens of billions of dollars in additional
revenue and the C Series now has real potential to become an iconic airplane. Bombardier and Airbus are the big winners
with this outcome. While it would have been hard to predict this
turn of events, this takeover, directly brought on by Boeing’s actions, proves a hard-hitting
blow to the company. Without spending a cent on development, Airbus
now has a plane in a market segment that Boeing cannot compete with. The C Series will dominate this market segment
and every cent Airbus and Bombardier makes is money lost on Boeing’s part. Just as Boeing expected, the C Series will
hurt its business in the US but now it will happen with a fully-legal, American made plane. If you have a business, a youtube channel,
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