Workers at South Carolina Boeing work on a 787 Dreamliner for Air India at the plant's final assembly building in 2013. (Randall Hill/Reuters)

In April 2016, Delta Air Lines shook up the aviation world by announcing it would buy 75 jets from Bombardier, the Quebec aircraft manufacturer. Such orders are the routine stuff of the aviation industry, but this one was anything but routine. For not only did it allow the financially strapped maker of “regional” jets to finally launch a line of larger fuel-efficient jets into the American market, but it also put Bombardier on a course to challenge Boeing and Airbus in the larger and more lucrative market for bigger planes.

Now, two years later, having failed to use their legal and political muscle to preserve their highly profitable duopoly, Boeing and Airbus have done what desperate duopolists invariably try to do — buy up their potential competitors. For reasons that are both legal and political, the aerospace giants are likely to get away with it.

There are, in fact, two duopolies in the commercial aircraft business. There is the market for large jets — roughly speaking, those with 140 to 400 seats and a range of 3,500 to 8,000 miles, dominated by Boeing and Airbus. And there is the market for smaller “regional” jets with 40 to 90 seats, used on shorter flights to secondary cities — a market dominated by Bombardier and Brazil’s Embraer. Until recently, there was little or no overlap in the two markets and the duopolies had settled into a comfortable, at times cooperative, coexistence. But when the world’s airlines started to show interest in buying planes with 100 to 150 seats, Bombardier and Embraer saw an opportunity to extend their product lines in ways that, for the first time, would put them in a position to steal business away from Boeing and Airbus, which had not fundamentally redesigned their smaller single-aisle planes in decades.

For Bombardier, development of its new C Series of planes took more time and more money — $6 billion in all — than it had anticipated, requiring what amounted to a bailout from the governments of Canada and Quebec. Although Air Canada had placed an early order for the new jets, the leading U.S. airlines held back, partly out of concerns that Bombardier had spent so much developing the plane that it might not be around a decade later to offer training, parts, support and follow-on orders.

Boeing, however, was taking no chances. So eager was Boeing to prevent Bombardier from gaining a toehold in the American market that when United Airlines announced it was looking to place an order for new planes in the 120-seat range, Boeing offered to sell the smallest version of its 737 for a bargain-basement price, estimated in the trade press at $22 million, edging out Bombardier and Embraer. A month later, an increasingly desperate Bombardier responded in kind, snagging the Delta order for its C Series jets at a price Boeing would later claim was less than $20 million per plane.

Having failed to prevent Bombardier from finding a “launch customer,” Boeing did what it has always done — wrapped itself in the American flag and demanded help from Washington. Over the years, no American company has proved more adept than Boeing at using its political and legal muscle to boost its commercial fortunes. So within weeks of the inauguration of the most protectionist president in modern times, Boeing filed a complaint with the Commerce Department alleging Bombardier had snagged the Delta contract by “dumping” its government-subsidized airplanes in the U.S. market at a price below the cost of production, in violation of U.S. trade laws. After a lengthy evidentiary hearing, the Commerce Department agreed and recommended the independent International Trade Commission impose a 300 percent tariff on the C Series planes to offset the government subsidies Bombardier had received.


The first Airbus A320neo plane, for the German airline Lufthansa, at the Airbus factory site in Hamburg in 2016. (Lukas Schulze/AFP/Getty Images)

With the Delta order now in jeopardy — and with it, the future of the company — Bombardier went looking for partners and found a willing one in Airbus. Airbus agreed to form a joint venture with Bombardier to produce the C Series jets at Bombardier’s plant in Quebec and at a new Airbus facility in Mobile, Ala. Because the planes for Delta and other U.S. customers would be assembled on American soil, they would not be imports and not be subject to the anti-dumping tariffs.

It is a measure of how desperate Bombardier was for a financial lifeline, and for a way to sell its new plane into the U.S. market, that it agreed to sell Airbus a controlling 51 percent share of the new joint venture for $1 (Canadian), along with a guarantee that Bombardier would absorb the first $700 million in production losses from the C Series. Airbus, in turn, will take over responsibility for selling and servicing the airplane, which will be part of the Airbus product line. A few weeks later, nobody in the industry was surprised when Airbus announced it would discontinue production of its 124-seat A319.

Boeing was quick to criticize the Airbus-Bombardier alliance as “a questionable deal between two heavily state-subsidized competitors.” But to many in the industry, it looked as if Boeing’s strategy had backfired. Not only could Bombardier now enter the U.S. market with a sleek new fuel-efficient plane against which Boeing could offer no alternative — at least not without undermining its pricing for its smallest 737s — but it also had unwittingly strengthened the market position of its archrival, Airbus.

So Boeing decided it had no choice but to respond in kind and began serious negotiations to buy the commercial aircraft division of Embraer. Though the talks are ongoing, the deal would create a joint venture combining their commercial jet operations in which Boeing would retain 80 percent control, Reuters reports. The deal is under active consideration by the Brazilian government, which remains a shareholder in Embraer and has insisted Embraer’s defense division remain independent. An announcement is said to be imminent. If approved by antitrust regulators, what were once two duopolies in the global market for commercial jets will morph into what an analyst called one “super duopoly.”

Antitrust laws, of course, are meant to prevent mergers that substantially reduce competition, particularly in industries such as this one where there are already only a few competitors and high barriers for any new players to enter. What’s missing in this case, as so many others, are regulators or judges willing to aggressively enforce those laws and adapt them to a globalized high-tech economy where winner-take-all competition is more the rule than the exception.

In the case of Airbus and Bombardier, the Federal Trade Commission spent a couple of months reviewing the joint venture before deciding not to go to court to block it. The companies themselves declined to comment for the record, but according to people in government and industry, regulators concluded that without the joint venture Airbus-Bombardier would have failed financially and so the combination actually serves to enhance competition rather than reduce it. The FTC had accepted the same “failing firm” defense in approving Boeing’s purchase of its only remaining American rival, McDonnell Douglas, 20 years ago.

What that “failing firm” reasoning ignores, however, is the possibility that global competition could have been enhanced if the alliance with Airbus had been blocked and Bombardier had made its alliance with Japan’s Mitsubishi or China’s Comac, both of which are eager to break into the global market. That would have created a third strong player in the market to challenge the Boeing-Airbus duopoly — exactly what the antitrust law seeks to encourage.

American regulators and judges, however, have traditionally been reluctant to engage in such “what if” speculation. To the American ear, its smacks too much of “industrial policy,” with government playing too much of a role in deciding how many and which companies compete in strategically important markets.

That wasn’t always the case. As John Kwoka, an antitrust expert at Northeastern University Law School, has written, there was once a long line of Supreme Court cases that held that the “elimination of a firm perceived to be a potential entrant could violate the antitrust statutes as much as a merger between actual competitors,” on the theory that a mere threat of entry could act as a competitive check on the behavior of the dominant firms.

All that changed, however, in 1974, when the Supreme Court ruled in U.S. v. Marine Bancorporation that to stop a merger, the government must offer evidence of a substantial likelihood that the company being bought would have otherwise become a competitor. The court set the evidentiary bar so high that few potential competition cases have been brought in the past 40 years and even fewer have been successful.

Despite the reluctance of government officials to think of what they do as industrial policy, in fact industrial policy is always lurking behind every decision involving the aerospace industry, which every advanced country views as vital to its economy and its national security.

Competition regulators from the European Union, for example, have moved aggressively in recent years to rein in the market dominance of American companies such as Facebook, Google and Microsoft. But when it came to the Airbus-Bombardier deal, the E.U., as far as I can ascertain, never bothered even to review it. E.U. officials declined to discuss the matter, but you can be sure they were aware their political masters in Paris, Berlin and Brussels would not be thrilled if they tried to stop Airbus, the European champion, from gaining some advantage over Boeing.

For the same reason, don’t look for American regulators to stand in the way of Boeing’s tie-up with Embraer. To me and anyone else who will listen, Boeing officials already are peddling the idea that government-subsidized competitors from China, Japan and Russia are the real competitive threat looming on the horizon and that allowing Boeing to take over Embraer will put the American champion in a stronger position to withstand that “unfair” competition.

Their complaint about subsidies by foreign government is a valid one, of course, but it ignores the inconvenient fact that Boeing itself has benefited from billions of dollars in subsidies from the states of Washington, South Carolina and Missouri in recent years, to say nothing of the federal subsidies it received by way of loan guarantees from the Export-Import Bank and research and development subsidies embedded in the tens of billions of dollars of Pentagon contracts on Boeing’s order books. The “unfair subsidies” argument also ignores the inconvenient fact that, until a few years ago, Embraer itself was a government-owned enterprise and it has received billions of dollars in government support. And it ignores the inconvenient reality that, with a protectionist president and a protectionist Congress in power in Washington and strong anti-Russia and anti-China sentiment among voters, it will be many years before a Russian or Chinese airplane is sold into the U.S. market.

You might expect that the nation’s airlines would be complaining about losing the possibility of having three or four airplane companies vying for their business, but so far they, too, have been silent. Given that the airlines themselves have spent the past two decades reducing competition by merging with each other, they can hardly be expected to lead the charge for more vigorous antitrust enforcement. Rather than complain to the government about the anti-competitive nature of the joint ventures with Bombardier and Embraer, the airlines are more likely to use such opportunities to wring pricing and delivery concessions from Airbus and Boeing in return for keeping quiet.

Boeing, in fact, recently used that very tactic in responding to the proposed merger of two of its biggest parts suppliers, Rockwell Collins and United Technologies. When the $23 billion deal was announced in September, Boeing and Airbus publicly complained it would reduce competition in the aerospace supply chain. Then suddenly last month, Boeing dropped its opposition after announcing that United Technologies had agreed to participate in a Boeing supplier “cost-cutting initiative” — a polite way of saying it had been bought off.

It should be clear by now where all these mergers and acquisitions are leading to — a less than fully competitive aerospace sector in which there are only two giant parts makers and two or three engine makers supplying two giant aircraft manufacturers, which in turn supply only three or four giant airlines. To believe otherwise is simply naive. The level of consolidation in this, as in so many industries, has already reached the point where it is producing outsize profits, higher prices for consumers and declining rates of investment and innovation.

It will only get worse as long as judges and antitrust regulators refuse to recognize that it is no longer sufficient to look at existing competition in reviewing a merger or joint venture.

To remain relevant in today’s winner-take-all marketplace, effective antitrust policy now requires protection of potential competitors as well.

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