Sunday, 22 May 2016

Why Bombardier turning a profit makes for a bad business model

Profit ? Who needs it

I once heard an article the radio that struck me. It stated very matter of factly way that no national aircraft manufacturer made a profit. I sort of chuckled and wondered what convoluted numbers the had used to demonstrate this. Once the article was over and they had presented their evidence I realized this was not the case. in almost all examples aircraft companies were not making money. Well that’s not totally true, on paper they appeared to generate profit. Behind closed doors however there was a complex system that artificially generated said profits. This was as simple as government subsidies when it started in the 60’s, but throughout the neoliberal privatization of the 80’s and 90’s it evolved into a system of soft power bargaining between the state manufacturing aircraft and the state buying it where treaties, trade, aid etc. all became bargaining chips in an aircraft sale. One common method used by Brazil’s government was to offer low interest loans to purchasers to in order finance the aircraft they were buying, giving them 10 years to repay. 
Image result for confused accountant
(Brazil's frustrated chief accountant)

This was essentially Brazil paying for the aircraft themselves, but not actually having the money from it, where the only profit generated was the interest on the loan’s principal. 

After Brazil privatized its aerospace industry thankfully for their primary manufacturer, Embraer, they had flooded the market enough that there was legitimate demand to not only purchase aircraft, but to pay for them as well. Don't be fooled though, any purchaser would likely still receive incentives from the questionably ethical Brazilian government. 

Thank goodness we live in a better country where we wouldn’t do such things! Free market all the way! Yay Canada! Wait... what’s this, Embraer is filling grievances against Canada with the World Trade Organization. Maybe that’s because of the literal billions that the Quebec and federal governments have pumped into Bombardier. Or maybe its the fact that in its heavily publicized initial commercial sale to Delta airlines, Bombardier is letting its C-series jets go at a 60-70% discount, meaning an approximately 4million dollar loss per an aircraft. This is an important sale for Bombardier though, to compete with the likes of Boeing and Airbus, you have to play the game, and these two giants have been heavily subsidized for years by their respective governments. Not only that but in what analysts suspect is a move to keep bombardier out of the market Boeing has offered its competing narrow body airliner at a 73% discount to United airlines. Meaning the 80million dollar aircraft (similar in price to the c-series) sells for about 22million. 

Why is this just so terrible? Well call me old fashioned but I believe free market capitalism drives innovation. When the purchaser of your product is more interested in the discounts, aid, or other kickbacks that they or their country might receive from buying one product over another, they start to completely ignore the most important part of the sale. The quality of the product. I know it sounds crazy but maybe a company who business model is to hold you hostage at 30,000ft then sell you overpriced refreshments doesn’t care that much about the consumer. When Delta buys Bombardier over Boeing, it doesn’t lose chunks of its market because they’re “Boeing” fanboys, the type of aircraft a person flys on has little to do with their favourite manufacturer and a lot to do with price. This is what allows the airline to skimp on quality and focus on price. All you need to do to prove this is look at the other side of the industry. Ethhiad airlines, are one of the world’s most luxurious carriers, who are known for flying wealthy middle eastern sheiks across the globe. Since cost isn’t an issue, and their clients wouldn’t tolerate anything less than quality they focus on the experience their flights provide. They buy the biggest planes, the quietest planes, ones that can fit an “apartment” which includes two double wide seats, a private shower, and a queen size bed in a separate room for sleeping. Over on this side of the pond however, because the consumer is only concerned with price, that’s all the airline, and therefore the airplane manufacturers  are concerned with. Not developing the best planes, not the most comfortable planes, they’re not trying to push any element of that forward. Rather they seek to deliver the cheapest to buy, cheapest to run aircraft. This focus on only one factor means the design process is set up to fail. You can’t innovate if your hands are tied at all times to the almighty dollar. Things that are not always profitable, are a good idea sometimes. Seat-belts have always lost car companies money since they were added. Most people would say they’re probably a good idea however. Many of the safety features we take for granted were initially costly and never turn a profit. Engineers in the modern aerospace industry can’t take the risk on developing something that won’t make money, and when you think about it this is singular minded design process becomes quite dangerous as a result. The industry should be innovating in all areas of the design process but instead, unless its a feature that cuts costs, it likely won’t be developed. 

Our last hope is that the government might stick up for whats right, with all these subsidies surely  they must be guiding the company to develop technologies that are good for all Canadians. Ones that can make our future brighter. However, as I already mentioned since aerospace companies has been largely privatized, this isn't the case. The Canadian government, although funding most of the Bombardier’s activities has little to no say in what they develop. 

Look, I don’t disagree with crown corporations, we need public utilities and so forth in the hands of the people for their protection from profiteers. However, I also am a big fan of private corporations. What i’m not a fan of, is whatever the hell Bombardier is! A private company that makes no profit ? A crown corporation that doesn’t benefit Canadians
Image result for bombardier delta loss
(Bombardier CEO explaining why
giving away planes makes sense)
Sadly, this won’t change anytime soon. Canada, Brazil, The USA, England, France (as well as a few other smaller states) all heavily subsidize their aerospace industries. No one country can stop, unless they wish to fail, or they convince the rest to do so as well. Big votes come from the regions where these planes are made too, when Learjet (Bombardiers private jet line) collapsed, the residents of… Wichita, were up in arms as many would lose their livelihoods. No politicians hands are tied more than when votes are concerned, thats a well known fact.

So to sum up. Consumers demanding cheap flights makes the almighty dollar key - aircraft manufactures develop cheap planes - airlines want even cheaper planes - government can’t let industry fail as they built it up, and votes are on the line - government subsidizes sales to get a foot in the door - aircraft (artificially cheaper than they should be) drive down ticket prices on airlines who purchased them - people demand cheaper fights - (switch which aircraft manufacturer you buy from and repeat the process) 

Governments, either stop subsidizing these terrible, unprofitable companies, or demand they innovate across the board, not solely in areas that save money. I don’t disagree with public, or private corporations in theory. However I do disagree with the messed up hybrid model that aerospace companies employ. Oh, and we as the consumer have to start demanding something other than low cost from the airlines we use. I know you don’t want to pay more, but you are flying after all, shell out a few more bucks and relish in what would have been considered a miracle for 99% of human history. 

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