Tariffs risk according to NBF
Logic would dictate that our aerospace coverage universe would not be subject to tariffs when importing into the U.S., but politics is not always logical, which is why we cannot totally discount the risk to Bombardier and CAE (the market reacted quite negatively on Bombardier shares on the 25% tariff threat on Canada). Civil aircraft and aerospace components (including simulators) have historically been exempt from tariffs as covered by the WTO's Global Agreement on Trade in Civil Aircraft to which the U.S. (and most other western countries) is a signatory. If the U.S. were to ignore its obligations under this agreement, we further posit that a 25% tariff on Canadian aerospace imports or a blanket tariff on imports of aerospace products from all countries would be counterproductive to U.S. industry as all major aerospace companies are reliant on global supply chains and an import tariff would increase costs for U.S. aerospace companies (Canada is the U.S. aerospace industry's second-largest supplier of aerospace products with imports of US$10+ billion annually) and likely would prompt retaliatory tariffs that would hurt U.S. aerospace exports (U.S. is by far the largest exporter of aerospace products in the world).
Bombardier (Outperform, $130.00 target)
Many of the Trump policy proposals should generally be positive for the business jet market and Bombardier including lower taxes (benefiting wealthier Americans and large corporations both of which are major buyers of business jets), a return to 100% bonus depreciation, and potentially higher Defense spending in the U.S. and globally. A weaker CAD is also positive for Bombardier given its large manufacturing labour pool in Canada (with revenue largely in USD).
However, if a 25% tariff were imposed an all U.S. imports from Canada and aerospace products were not exempt, it could place Bombardier at a disadvantage to some of its competitors given that final assembly and interior completions of all the company's jets takes place in Canada, but roughly two thirds of global business jet demand is in the U.S. Bombardier jets have significant U.S. content value (the majority of the bill of materials on some jet programs) so only a portion of the cost of goods would be impacted by tariffs. Furthermore, other business jet OEMs would also be impacted by tariffs as they all have global supply chains importing major components into the U.S. (including engines in some cases), but the company's closest competitor in the high end of the market, Gulfstream, assembles and completes its planes in the U.S. Dassault builds its planes in France, but interior completions take place in the U.S. In the mid-size segment, Cessna is a U.S.-based manufacturer while Brazil's Embraer can do final assembly of its business jets at a plant in Florida.
Bombardier does have a meaningful U.S. presence with numerous service centres across the country, its Defense segment headquarters in Wichita, and some of its own manufacturing (Global 7500/8000 wings are built at a Bombardier plant in Texas). While we think a 25% tariff on Canadian aerospace imports is a low probability outcome, at the very least the threat could result in some prospective Bombardier business jet buyers holding off on their purchase until there is more clarity on the issue