As Boeing, Airbus Carve up Embraer & Bombardier, Chinese Aircraft Makers Are Still Learning the Ropes

Aircraft manufacturing consolidates.

By MC01, a frequent commenter, for WOLF STREET:

After a series of legal battles and political complications, it seems Boeing will finally be allowed to take control of Embraer’s commercial aircraft division. Boeing will pay $4.2 billion for an 80% share in the division. It will also have to finance a 51/49 minority joint venture with Embraer to help market the KC390 military transport aircraft outside of Brazil.

The deal is still pending, waiting for the approval of anti-trust authorities worldwide: Chinese regulators have already announced they will issue a ruling “no sooner” than Q4 2019, most likely in retaliation for the Huawei fiasco. And given the absolute importance of the Chinese aviation market, expect a lot of diplomatic maneuvering from all parts involved.

Embraer is the worldwide leader in what were once called “regional airliners,” meaning short- or medium-range twin-engined aircraft carrying up to 130 passengers. Think of them as the smaller cousins of the Boeing 737 and Airbus A320 airliners which are the prime movers of air travel worldwide.

The Embraer E-Jet family, introduced in service in 2004, has had a phenomenal success, with 1,486 deliveries and 114 firm orders as of December 31, 2018. And the revamped E-Jet E2 family, featuring new wings, new engines and host of other improvements, already has 268 firm orders.

Boeing’s pending acquisition of the division is one of the largest deals in recent commercial aviation history. While anti-trust authorities are likely to approve the deal with the usual laundry list of recommendations and mitigations, it’s another step on the path of commercial aircraft manufacturing consolidation worldwide.

It’s widely accepted Boeing was pushed into this lengthy and costly purchase by Airbus’ decision to acquire from Canadian conglomerate Bombardier a majority stake in the C Series regional airliner after lengthy and complicated negotiations which closed with one of the minority partners (the Bombardier Group) agreeing to cover any cash shortfall up to $610 million up to 2021. The Bombardier C Series has now been commercially renamed “Airbus A220.”

As this peculiar financial arrangement attracted the attention of legislators and regulators in the US on anti-dumping grounds, Airbus “sweetened” the deal by starting a $300 million expansion plan of their existing A320 assembly plant in Mobile, Alabama, where part or all the A220 earmarked for the US market will be assembled.

This is not the first time the C Series has attracted the attentions of regulators worldwide: in 2017 the Federal Government of Brazil, at the time the main Embraer shareholder, raised a fracas at the World Trade Organization (WTO) over suspicions the C Series was being directly subsidized by the Canadian government, thus allowing the aircraft to be sold at a loss.

While such accusations are nothing out of the ordinary in most industries worldwide, there must have been some kernel of truth in it, as Airbus’ first action after becoming majority partner was to pledge a “supply chain cost reduction over 10%.” Later Airbus called for A220 suppliers to cut component prices by 20%.

The C Series has been in financial troubles from day one. In October 2015 the Government of Quebec, through its wholly controlled subsidiary Investissement Québec, injected C$1 billion directly in the C Series program after Bombardier had to take a big C$3.2 billion write-down on the program.

At the same time, Bombardier applied with the Canadian government for C$350 million “financial assistance.” Just one month later, ScotiaBank analysts revealed the C Series program would need a second bailout in “12-18 months” and that the C Series was unlikely to ever turn a profit for Bombardier and Investissement Québec.

With impeccable timing, in April 2016, talks for another C Series bailout had started and by February 2017 Bombardier had received a further C$372 billion from the Canadian Government.

Bombardier has not been faring very well in commercial aviation recently: Its long-time mainstay, the Dash 8 regional airliner, originally introduced in service in 1984 and of which over 1,200 had been delivered by the end of 2018, has become uncompetitive with its long-time rival, the French-Italian ATR family, leading to Bombardier having to find some ways to cut costs.

These cost-cutting measures were implemented in June 2017 after a deal was reached with unions, and included outsourcing the Dash 8 wings and part of the fuselage to the Shenyang Aircraft Corporation of China, which had already signed a contract to manufacture the C Series fuselage.

Not even this was enough however, and in November 2018 Bombardier agreed to sell the whole Dash 8 program to Longview Aviation Capital, which already owns many Canadian aviation programs such as the widely popular Twin Otter utility aircraft and the CL215/415 “Scooper” water bomber.

And finally, Bombardier announced the intention to sell their subdivisions in Britain and Morocco which manufacture the fuselages for the Learjet and Challenger families of business jets and engine nacelles for several aircraft, including the Pratt & Whitney-engined versions of the Airbus A320 family.

Chinese state-owned aerospace conglomerates AVIC and COMAC are rumored to be the only serious bidders for these Bombardier facilities.

AVIC (Aviation Industry Corporation) is the parent company of the aforementioned Shenyang Aircraft Corporation. Despite being a huge defense conglomerate, it’s probably better known in the West for buying engine company Continental Motors in 2010, light aircraft manufacturer Cirrus in 2011, and component manufacturer Align Aerospace in 2015.

COMAC (Commercial Aircraft Corporation) is a company established by the Chinese government in 2008 with the ambitious goal to develop new airliners to lessen China’s dependency on foreign manufacturers such as Airbus and Boeing. COMAC has gone through a painful learning curve dotted with continuous delays, all sorts of technical issues and the discovery that merely throwing billions of dollars and countless manpower hours at a problem is no guarantee of solving it.

The COMAC ARJ21 is a slightly improved version of the venerable McDonnel-Douglas MD80 which was manufactured under license in small numbers in China in the 1980s. It was developed with the help of the Antonov Design Bureau of Ukraine, while the far more ambitious COMAC C919 has run into a laundry list of technical issues, especially with the much troubled domestically-developed engines – so much it will start operations with foreign designed and manufactured engines, the same CFM LEAP that power the Boeing 737MAX and the majority of the Airbus A320neo family.

This is not to say Chinese companies such as COMAC will never be able to develop a successful airliner. But a successful foray by Chinese manufacturers into the commercial aircraft business is at very least a decade away. China is learning a valuable lesson here: merely spending money and reverse-engineering components is nowhere enough to compete in the modern aviation industry. It’s a long way to the top if you want to rock ‘n’ roll. By MC01, a frequent commenter, for WOLF STREET

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