Boeing Co (NYSE:BA) might have won the battle by getting the Department of Commerce to levy duties of 220% against Bombardier Inc (OTCMKTS:BDRBF) — effectively cancelling any purchase by Delta Air Lines, Inc (NYSE:DAL) of the Canadian company’s C- Series jets — but, in the process, it’s put itself and BA stock in a position where it could actually lose the war.
Source: Phillip Capper via Flickr
Messing With a Customer
Delta currently owns or leases 481 Boeing jets, 166 of which are 737s, the plane most closely associated with Bombardier’s CS100 and CS300. I say “closely associated” because the reason Delta bought Bombardier’s planes in the first place is that Boeing got out of the small-plane business several years ago.
“We are confident the USITC will conclude that no US manufacturer is at risk because neither Boeing nor any other US manufacturer makes any 100-110 seat aircraft that competes with the CS100,” Delta said in a statement. “Boeing has no American-made product to offer because it canceled production of its only aircraft in this size range — the 717 — more than 10 years ago.”
So, here you have Boeing messing around in Delta’s business over 75 jets — less than 10% of its overall fleet. Meanwhile, in 2016, Boeing gave Delta competitor United Continental Holdings Inc (NYSE:UAL) a 70% discount on 65 737-700s. That works out to a savings of $3.8 billion for United.
Would you be happy if you were Delta?
No wonder it canceled its order for 18 787 Dreamliners last December. Sure, it played nice in the sandbox by agreeing to take delivery of 120 of Boeing’s 737-900ER through 2019; Boeing putting its nose where it doesn’t belong could spark a customer revolt and that’s never good for business.
And it’s probably not for BA stock either.
I’m No Fan of Bombardier
I do a lot of writing for Canadian finance publications and while I’ve defended Boeing’s right to look out for its best interests, I never expected the Department of Commerce to slap duties of 220% on the Bombardier sale to Delta. Never.
“We think it’s absurd,” Delta’s CEO Edward Bastian told CNBC of the ruling. “We don’t believe that will be the end of the story.”
My biggest problem with Bombardier is that it is subsidized by both the Canadian and Quebec governments, despite having a dual-class share structure that allows the founding Beaudoin/Bombardier families to control its business with just 13% of the equity.
It’s not that I’m against dual-class share structures, because Facebook Inc (NASDAQ:FB) and many others have demonstrated this share structure can deliver above-average returns for shareholders. It’s just that dual-class share structures shouldn’t be eligible for government subsidies in Canada or the U.S.
Americans Also Lose
Boeing is walking a very fine line that could ultimately end up costing it and many other Americans real dollars. Dan Hannan of the Washington Examiner hit the nail on the head in his Oct. 2 opinion piece.
“Who wins? No one. Absolutely no one. Not even Boeing,” Hannan wrote. “Indeed, Boeing will almost certainly lose in the most direct sense, as the British and Canadian governments now exclude it from their defense contracts — which in turn, of course, will hurt British and Canadian taxpayers and, in the bargain, fractionally weaken the Western alliance. There really are no winners here.”
Bottom Line on BA Stock
I’ve been relatively supportive of BA stock in 2017.
“As I said at the end of February, I see the glass half-full when it comes to Boeing stock,” I concluded April 1. “This [aircraft seating partnership with Adient PLC (NYSE:ADNT)] certainly cements those thoughts.”
That was then.
Today, I’m having major doubts about the company and its stock. Because what it’s doing to Bombardier reeks of cronyism; in fact, Boeing is acting a lot like a spoiled child wanting his or her way.
For that reason, I’m recommending that if you own BA stock you should reconsider your position and, if you don’t, I think you should stay away until the company resembles a world-class business and not a petulant child.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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