As it looks now, the Bombardier CS300 is set for its 1st flight tomorrow, Thursday, February 26th, as it now has the approval from Transport Canada to test fly the aircraft.
The Bombardier CS300 is in the 135 to 160 market, so it will compete with the Airbus A319neo and Boeing B737-Max7, a tough duo of competitors, but it has something to offer, according to Leeham, the CS300 on a 1,000 nm sector has 4.3% lower fuel burn and 5.1% lower trip costs than the A319neo, and 5.1% lower fuel burn and 9.0% lower trip costs than the B737-Max7. The lead the CSeries has eroded with the program delays, but there is some potential to win big airline orders, the once advertised 15% lower cash operating cost advantage and 20% fuel burn advantage was true for the B737-300 and early A320’s, but against the new Airbus A319/320 neo and Boeing B737-Max7/8 the differences are less than 3% by my calculations, not what Bombardier wants to hear, it is a new product so we shall see what the real economics are when certification is done and launch operator is up and running with the aircraft.
NOTE: Discounting is a must, Airbus and Boeing are discounting heavily on some models for various reasons, the CSeries must have a major US airline order by the end of 2015, you need to be successful there for the program to be a long term success globally.
** Read previous blog articles on Bombardier Inc. (Feb 18, 2015, Jan 20, 2015, July 24, 2014, July 23, 2014 and June 10, 2014) for more insight into the troubled OEM.
The $US 71 million CS300 is a 135 (standard 32” pitch, 1 class) to 160 seats (high density 28” pitch, 1 class) commercial jet airliner with a maximum range of 2,950 nm, and presently represents 180 (74%) of the 243 orders for the sales struggling CSeries program, and less than half of what is needed for the program to breakeven (estimated at 550+ aircraft now). The CSeries was to be a “game changer” but that is not what it is today, it has been checked at the top by Boeing and Airbus with the B737-Max7/8 and A319/320neo and at the bottom Embraer has checked it with is E2 models of the 190/195 using the same P&W engines, which is also used by the Airbus neo family.
The fuel efficient argument is out, the only thing the CSeries has now is that it is a new airframe design with new light weight materials versus older airframes with new engines and improved aerodynamics. At this point the CSeries risks being a ‘niche’ aircraft in a market segment that is in decline from what it once was (100-149 seat segment), time for Bombardier to accept the reality and get on with selling it any way it can.
The CSeries program is a major financial burden on Bombardier Inc., which underestimated its true cost back in 2008 at $3.4 billion, for which it received $300 million from the Canadian government and $350 from the UK government and a unspecified amount (est. at $150+/- million) from the Government of Quebec to help launch the highly ambitious program. The program was cancelled back in January, 2006 when no airline orders were found for the launch, at that time the program was estimated at $C 2.1 billion, and has now grown to $5.4 billion, due to delays and cost overruns.
The new President and CEO, Alain Bellemare has to come up with a plan that will revive confidence in the company from investors, customers, prospects and employees, as well he will have to raise equity and debt, while cutting out dividends and selling those assets not needed or non-core to Bombardier Inc.
Hopefully he will be more successful than the last ‘outsider’ to run Bombardier Inc., Paul Tellier, who had to deal with much of the same in 2002, but failed to turnaround the company and was terminated 2 years later.
This past week, Bombardier worked hard to raise its liquidity a major concern of many investors and credit agencies, and was able to raise $C 938 million by issuing 424.4 million new shares (TSX:BBD.B) which can be converted to common shares (with shareholders approval) at a 10% reduced price (at time of announcement) of $C 2.21/share (today trading at $C 2.60/share) syndicated by several underwriters and another $C 142 million can be raised if underwriters exercise their over- allotment option, so up to $C 1.08 billion is possible. The company plans to raise $C 2.1 billion to have enough liquidity so $C 1.2+ billion in debt financing will be needed in 1H/2015, and more non-core businesses sold off, possibly Aerostructures Division & Engineering Division ? it is non-core at this time.
It’s a roll of the dice right now, if the CSeries gets its aircraft type certified in 2015 and new ‘real’ orders are received the stock, can shoot up quickly, the stock has a 52 week range of $C2.30 to $C 4.43 per share a very wide range, and its Forward PEG (price/earnings growth) is 0.64x which means it is underpriced, BUT while its Forward P/E is 8.89, I would question earnings growth of 13.9%, that is very optimistic, maybe too optimistic.
Should type certification NOT happen in 2015 as planned, the stock can and will take a dive, as that would mean a tough 2016 as well for the Aerospace Division, and Bombardier has $750 million debt due in 2016, while there are signs of possible weakening in the Business Aircraft orders as new aircraft are beginning to challenge the “cash cow” Global brand. The company is at a cross road, but it is “too big to fail” and the protectionist Quebec Government has already said it was prepared to “bail out” Bombardier, to reassure new equity and debt holders that it stands behind the company at all cost. The company will need more money in 2016 as EIS (entry into service) is looking more like 2Q/2016 and certification in 1Q/2016, and production rate will need 3 years or so to get up to a planned 100-120 aircraft per year, though that output may be too optimistic given current market behavior in the 100-149 seat segment.
Sadly, this is looking like another Canadian brand in trouble, we have lost some great companies over the past few years, from Nortel to Alcan, while Blackberry is on life support. A lot of tax payers money has gone into Bombardier Inc. over the years from the federal and provincial governments in terms of direct loans, grants, tax breaks, etc. and aircraft financing through the EDC. Canadians are proud of Bombardier, but it has lost its way in the past few years
The CS300 is the key to Commercial Aircraft Division’s future, like the Global’s are to Business Aircraft Division, and now is the time to change that which has prevented lots of new orders, changing of executives, pricing, terms and conditions, it is time to discount the CSeries to get a launch North American airline, heck they discount the CRJ’s and Q400’s by 30% to 40%, so do it ! they have nothing to loose now, they need new high profile customers, especially in the US market (e.g. AA, DL, UA) to really establish the aircraft.
Will the BIG 3 operate 100-149 seaters in large numbers again ? the trend is against it, though DL is operating 88 x B717’s with 110 seats, so one never knows, but at direct CASM (cost per ASM) of 18.0 cents is very high for an average stage length of 475 miles, and Hawaiian’s direct CASM is 21.0 cents for an average stage length of 145 miles ! so never say never.
We are all waiting to hear who the launch customer will be, as it was to be Malmo Aviation/Braathens Aviation of Sweden, but in September, 2014 it decided to back out from that role due to “increased uncertainty” about the program, NOT good, and now apparently there is a launch customer but it is a secret, my thinking is one of Lufthansa’s subsidiaries, probably not European Swiss Airlines (replacing RJ100’s), but either Austrian Airlines to replace its Fokker F-100/F-70’s or to Eurowings which is taking on a new role within Lufthansa as that carrier struggles to find a solution to its European point to point and hub operation which has been severly affected by LCC’s (low cost carriers). Any launch customer has to be a big organization that can deal with the introduction of a totally new aircraft, that is Lufthansa, it cannot be a air Baltic or Iraqi Airways ! (Note: a mistake Sukhoi did with its SSJ-100 going Armavia of Armenia as its launch customer-total disaster).
The CRJ900 and Q400 have 3 years at best and then the Commercial Aircraft Division will be totally dependent on the CSeries, and if it is not going to work, then time to sell it to Comac of China, while the Business Aircraft Division is dependent on the Global brand (Global 5000 and 6000 now) and the future 7000/8000 models.
As for the restructuring process, Mr. Alain Bellemare should take note of the McKinsey study that found that high quality leadership teams displayed 4 of the 20 possible types of behavior, those 4 explained 89% of the variance between strong and weak organizations in terms of leadership effectiveness.
1. SOLVING PROBLEMS EFFECTIVELY – the process precedes decision making, it is about information gathering, analyzing and consider all info and options.
2. OPERATING WITH A STRONG RESULTS ORIENTATION – leadership goes beyond just developing and communicating a vision and setting objectives but also following through to achieve positive results, need to emphasize efficiency and productivity and prioritize highest value work.
3. SEEKING DIFFERENT PERSPECTIVES – monitor trends, grasp changes, encourage employee to contribute ideas that can improve performance, sound analysis and avoid many biases to which decisions are prone to.
4. BE SUPPORTIVE – understand and sense how other people feel, by showing authenticity and sincere interest they build trust and inspire and help colleagues to overcome challenges.
We look forward to a successful 1st flight of the CS300 and a successful 2015 with the certification process and sales campaigns.
Till next time, thank you.