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Analysis: Delta CEO Says That It Will Not Pay CSeries Tariffs

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Analysis: Delta CEO Says That It Will Not Pay CSeries Tariffs

Analysis: Delta CEO Says That It Will Not Pay CSeries Tariffs
October 12
18:45 2017

ATLANTA – Delta Air Lines (DAL) reported a $1.81 billion net pretax profit ($1.7 billion adjusted for special items) for the third quarter (Q3) of 2017 this morning, a drop of 9.3% year-over-year (YOY). Excluding the impact of Hurricanes Harvey and Irma, profits were down a more modest 3.3% YOY.

For the quarter, Delta saw revenue grow 5.5% YOY to $11.06 billion, while expenses grew 7.7% YOY to $9.22 billion. Still, the Atlanta-based carrier recorded a rock-solid operating margin of 16.6% for the quarter.

So all in all, it was a pretty standard quarter for Delta. That being said, we did have one major takeaway from Delta’s earnings and the quarterly earnings call.

Delta won’t pay CSeries Tariffs


On the call, Delta CEO Ed Bastian directly addressed the decision by the U.S. Commerce Department to slap a nearly 300% tariff on Delta’s order for 75 Bombardier CSeries jets:

The C Series debate or the decision from commerce is not just disappointing, it doesn’t make a whole lot of sense. We think it’s early in the discussions and we also know that is triggering a lot of discussions at political levels, not just within the aerospace field. We will not pay those tariffs and that is very clear. We intend to take the aircraft. I can’t tell you how it’s going to eventually work out.

There may be a delay, us taking the aircraft as we work through the issues with Bombardier who is 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 Delta will get it at the agreed contractual price. We’re not going to be forced to pay tariffs or do any anything of the ilk. So there should not be any concerns on our investors’ minds in that regard.

He then responded to a later question with more of the same:

I think my words are very clear, no, we will not pay the tariffs that are being discussed or debated. First of all, those tariffs are preliminary as I mentioned. In our opinion, it is very difficult for Boeing or any US manufacturer to claim arm with a product that we purchased that they did not offer and they don’t produce. In fact, they ended the production of the 717, which would be the closest akin 10 years ago. When we went through the RFP to select and selected the C Series, Boeing competed very hard for the order, except they were competing with not their own product, but it was a Brazilian product, an Embraer product. That wasn’t even new, it was used, E190s ironically from all places over at Canada. So as you looked through this and tried 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. But we’re working closely with our partners at Bombardier…

We at Airways are not as sure. While it is certainly clear that Delta wants to fight the tariff, the U.S. government does appear to have legal grounds upon which to impose the tariff.

Delta is correct that Boeing is trying to shut down a competitor when it doesn’t have an alternative, and it’s fair to say that Boeing is behaving hypocritically when it uses the same pricing and sales techniques to sell planes to other countries.

Yet the fact remains that WTO anti-dumping rules largely do not take into account the context of the global aircraft manufacturing industry, where list prices bear almost no resemblance to the end price paid by consumers. By the letter of the law, Bombardier almost certainly sold the CSeries to Delta below its production cost.

Moreover, the context of the Trump administration and its positions on trade make it far from a certainty that they will be receptive to counterarguments.

The Trump presidency in some ways was won on the basis of sharp anti-import sentiment, and while the President has not been able to succeed in tangibly altering free trade agreements like NAFTA or the one between the U.S. and China, this offers him a highly symbolic but ultimately modest-impact way of getting a “win” on trade restrictions.

So the Trump administration, with which Delta seems to have a decent relationship, is not likely to play ball.

A lot will depend on how the Canadian government responds. Retaliatory tariffs on Boeing 737s and 787s could potentially get the Commerce Department to back off.

It could also cause this administration and its leader to fly off the handle and escalate the country into a full-on trade war with China. We won’t know more until the Canadians respond.

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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