The news at Bombardier Inc. keeps getting worst, as this past week China’s locomotive manufacturers China CNR Corp. was acquired by China CSR Corp. in a $US 26 billion merger, creating a large state owned enterprise (SOE) that will surely give the 3 other large train manufacturers Siemens (Germany), Bombardier (Canada) and Alstom (France) lots of future competition in that industry, just when Bombardier Aerospace is struggling with the CSeries, as it continues to drain funds away from other aircraft updates so badly needed.
Bombardier alleviates investor fears over its liquidity problem by raising $C 868 million in new equity, priced at 10% below current low share price and $C 2.25 billion in ‘high’ yield debt, to keep its CSeries and Global 7000/8000 programs moving forward and to pay off debts due this year, and still have money to ‘upgrade’ its Global 5000/6000’s in face of new competition from Gulfstream.
With Lufthansa Group deciding on replacing the 21 old Fokker F70/100’s at Austrian Airlines with existing 17 Embraer E195’s from LH CityLine, it is almost certain that the launch customer will be the newly re-branded Swiss Global Air Lines that will have the honor of operating up to 30 x CS100’s starting sometime in late 2016 to replace its 19 x Avro RJ100’s. Nothing official yet, but this is about as good as one can expect from the list of firm orders to launch the CSeries, the Swiss will take care of any issues that can arise quickly and efficiently, the Swiss way. Bombardier needs a smooth transition into service with its CS100’s, and no better customer than Lufthansa Group for that, it was always a good early Bombardier customer with DHC-8-100/300’s, CRJ-200/700/900’s and now CS100’s.
Swiss Global Air Lines will also operate 6 x B777-300ER’s as Lufthansa Group is desperately seeking low cost alternatives on Long Haul, with its wholly owned Eurowings operating up to 7 x A330-300s in the near future under contract to Sun Express (50:50 JV with Turkish Airlines) and now Swiss Global Air Lines with up to 6 x B777-300’s. On the short haul Eurowings will operate up t0 23 x A320’s to replace 23 x CRJ900’s, Lufthansa Group is struggling under mounting pressures from European LCC’s and now the Middle East carriers diverting long haul traffic to India and Asia through Doha, Abu Dhabi and Dubai.
On the aerospace front, Lufthansa Group which has 30 CS100’s on order with Bombardier, is going to limit investments in new aircraft as fuel prices stay low and it transferred 17 of its 120 seat Embraer E-195 to Austrian Airlines from Lufthansa CityLine to Austrian’s 21 old Fokker F70’s/100’s. Austrian was looking at the Bombardier CSeries, but economics favored the E195 at this time. Time for Bombardier to re-examine its offering, something is not convincing airlines to buy and it is not the certification delay only, they are all used to it, to me it appears that the problem with economics is the LIST price of $72 million for CS100 and $71 million for the CS300. No customer today pays LIST price today, Bombardier has been discounting its Q400 for years as much as +40% for Porter and Encore, as well as CRJ-200/700/900’s on big orders.
Time to discount the CSeries, it is not the “game changer” they thought they had, most of the cost savings in fuel were in the new technology engines which Boeing, Airbus and Embraer are now installing on the new models. Bombardier is in the BIG league with the CS300 competing head to head with Airbus A319/320neo and Boeing’s Max7/8 and here competition is fierce, price discounting is huge (up to 60%) on BIG orders for BIG airlines, and if Bombardier wants to play in this league it needs to do the same, right now it needs a BIG US order from either Delta, America or United, they want BIG discounts, without them you do not get the order, it is that simple, more on this further down.
This has to be worrying for Bombardier, as last May, Air Canada came to the same conclusion with its 25 x Embraer 190’s, the aircraft have good economics, high customer acceptance and did not warrant a replacement by the CSeries, and since then fuel prices have dropped significantly, making the current aircraft that much more attractive versus buying new aircraft.
Bombardier needs to put forward a better business case for the CSeries, talk is cheap, and airlines are NOT buying into the economic arguments, for if they did then Air Canada would be buying the CS100 to replace its E190’s and Austrian would be taking on the CS100’s and not E195’s. This has to be worrying for Bombardier, I know I never liked their use of using cash operating costs, it ignores capital costs because as Q400 costs $10 million more than ATR-72-600 for instance, but it needs to be total operating costs and including capital costs be they operating lease costs, debt, down payments, etc.
While Bombardier keeps promoting the 20% fuel burn advantage and 15% cash operating cost advantage of the CSeries, the airlines are NOT seeing the advantages at this time, and therefore sales are still at a dismal 243 almost 6 years after the launch of the CSeries.
The savings are correct when applied to current production aircraft, but the new A320neo, Embraer’s E2 line and the B737Max line also offer such savings with their re-engine and aerodynamic tweeking programs, the advantage came with the new generation engines, now that all OEM’s are certifying their aircraft with the new PW1000G or CFM International Leap engines, the cost and fuel savings argument applies to all versus existing aircraft to very similar savings. So what the CSeries had as a competitive advantage 6 years ago, is now gone, the neo’s, Max’s, E2’s can offer similar advantages, the “game changer” is just another airliner trying to carve out a market niche for itself.
For instance at hybrid LCC JetBlue using the A320ceo (current engine option) without sharklets as the BASE, the airline has determined the following on a per ASM basis:
1. Versus A320ceo with sharklets – CASM saving of 1% and a gain of 3% in fuel efficiency (per ASM).
2. Versus A320neo – CASM saving of 6% and a gain of 12% in fuel efficiency (per ASM).
3.Versus A321ceo – CASM saving of 12% and a gain of 9-11% in fuel efficiency (per ASM).
4. Versus A321neo – CASM saving of 17% and a gain of 17-19% in fuel efficiency (per ASM).
We still do not have a official launch customer for the CSeries yet, at one time it was looking like Austrian Airlines but it is now pretty certain it will be the newly re-branded Swiss Global Air Lines (ex-Swiss European Airlines) a Lufthansa Group partner that presently operates 19 x Avro RJ100’s (97 passenger seats) and that has just been chosen to operate 6 x B777-300ER’s as well, as Lufthansa is looking to offer a long haul LCC through Eurowings and now Swiss Global.
The Swiss Global Airlines CS100 is to be in a 121 seat configuration, and EIS (entry in service) will most likely be 2nd half 2016.
With ATR having made 160 firm sales (nearly 90% are ATR-72 orders) in 2014 (66% of all CSeries orders to date in 6 years), and almost 50% of all regional aircraft sales below 90 seats, 80% of all turboprop sales, ATR is showing that the turboprop market is alive and airlines and leasing companies are loving it.
So it was no surprise that Ross Mitchell, VP of Business Acquisition at Bombardier, has started to change the message on the Q400 and re-position it in the eyes of operators. The Q400 was designed and marketed as a fast turboprop that will do well on the 300nm to 450nm sectors, that was its ‘positioning’ from the beginning, keeping it between the DHC-8-Q300 and the CRJ-700’s, trying not to cannibalize its product offerings.
As the Q400 has gone down to 10% of the backlog of the ATR which now stands at 280 aircraft, Bombardier is sending out a new message, emphasizing flexibility. Ross has commented that many ATR’s are sold to Asia, which is a big growing market, one that the Q400 has missed out on as in 2014, ATR had 239 ATR-72’s in Asia with 108 on order versus 90 Q400’s plus 9 on order, that is a 3.5 to 1 ratio in favor of the ATR-72.
Ross off course brought up the North American market, and here ATR has not done well lately at all as US regional have mostly gotten rid of turboprops in favor of regional jets. As of 2014, the ATR-72 fleet in the USA was a total of 20 aircraft:
- Empire Airlines x 7 (freight), Island Air x 5 (pax), Mountain Air Cargo x 8 (freight)
In Canada there were only 8 x ATR-72’s:
- Calm Air x 2 (pax) & 2 (freight), First Air x 1 (pax) & 1 (freight), Morninstar x 2 (freight)
Meanwhile in the US market there were 57 Q400’s with only 2 operators:
- Horizon x 52 (pax), Island Air x 2 (pax)
In Canada there are 71 Q400’s
- Jazz x 21 (10 ordered and 13 on option), North Cariboo x 2, Porter x 26, Sky Regional x 5, Westjet Encore x 17 (up to 28 more coming)
In Canada Bombardier has done well defending its home market, with huge discounts (30%-40%) for Porter, Encore and Jazz, here the ATR-72 had NO chance to break through.
The current orders for the Q400 are coming from existing customers, Jazz, Horizon and Encore, but few if any from new customers, while ATR is selling to many new customers in places such Papua New Guinea, Myanmar and Thailand, which holds much promise.
The two remaining turboprop heavy weights in production, the Bombardier $35 million Q400 (TOP left photo) and $25 million ATR-72-600 (TOP right photo). Both aircraft look similar, but each was designed for different mission profiles, everyone knows the Q400 was designed for the 300-450nm sectors, a fast turboprop that could compete with jets yet offer turboprop economics, as of last summer 421 were in service globally, while the ATR-72 was designed for routes under 300nm where jets are uneconomical and where turboprops can offer the economics required to make short haul services profitable, as of last summer 581 were in service around the world, and 140+ were ordered in 2014 alone.
Bombardier is trying to “re-position” the aircraft, not to focus on speed but flexibility, nice try but the vast majority of airlines that run the numbers on these 2 aircraft come up with the same findings, and that is why ATR’s backlog is 280 while the Q400 is at +/- 28. The fast turboprop idea never caught on in the US market, the Q400’s average block time was under 60 minutes, which means it was not used on the 300-450nm sectors but on short sectors of 200-250nm which it is not good at, but if offered the right number of seats, 76 as per current pilot scope clauses. A fast turboprop needs lots of power, the Q400 has it and flies up to 360 kts, but that doubled power costs in fuel and engine maintenance costs. Always customer is right, airlines do their homework and run their numbers before buying any aircraft, sales numbers tell a lot about an aircraft.
The Q400 is well known to be an expensive aircraft to operate, and it is the price you pay for going fast, the bigger engine (PW150) with 5,071 shp means more maintenance and more fuel versus the 2,475 shp PW127F of the ATR-72-600, the two were designed for different missions, the ATR-72 for less than 300nm missions, the Q400 for 300-450nm.
You have 2.04 times the power (shp) or 104% more in the Q400 to fly 31% faster (360 kts vs 275 kts) than the ATR-72-600 and fuel burn is a whole lot more:
Q400 fuel burn on 200nm sector is 855 kg, ATR-72-600 is at 610 kg that is 40% more fuel burn for the Q400, and your Q400 block time is 55 minutes versus 58 minutes for the ATR-72-600.
Q400 fuel burn on a 500nm sector is 1,860 kg, ATR-72-600 is at 1,310 kg that is 42% more fuel burn for the Q400, and your Q400 block time is 1:48 versus 2:05 for the ATR-72-600.
PW150 engine overhaul $150 per engine/flight hour plus per engine LLP per cycle of $45.
PW127 engine overhaul $105 per engine/flight hour plus per engine LLP per cycle of $35.
Then take into consideration the price, list price is $35 million for Q400 and $25 million for ATR-72-600, yes Bombardier will discount down to sell the aircraft, in this case it would have to discount 29% ($10 million) to get to the ATR-72-600 price, which these days it will gladly do.
In the end, the customers have voted, and they are choosing the ATR-72-600 in most cases after serious analysis of each aircraft’s operational and economical benefits, that says it all.
Bombardier now is now talking about a ‘secret’ technique that includes slowing down to the ATR-72-600’s speed, you can get same trip costs ? really ?
There is no way the Q400 can match the ATR-72-600 in economics per trip, only the seating configuration will make a slight change to CASM (max ATR-72-600 seating is 74 seats versus 80 in Q400) though 86 seats is offered on the Q400 it really is only practical in Asia.
On the CRJ front, you have US airlines getting rid of their 50 seat RJ’s and buying Embraer 175’s and CRJ900’s to get the maximum 76 seat’s as allowed by current pilot scope clauses.It is no secret that the advantage Bombardier once had in that market has been eroding fast.
As Bombardier’s attention has been on the CSeries, it has taken its attention off the markets it serves, there has been no announced change to the Global 5000/6000 line after Gulfstream announced the 500/600 at the NBAA, and the CRJ900 once a force in the US market has been outsold by Embraer’s 175 240 vs 70 as modifications to the E175 (wing mod, bigger wingtips) have reduced fuel burn 6.4% and it always had a better cabin.
Bombardier is trying to keep the CRJ-900/1000 line going, but those aircraft while reasonably economical are from a comfort side very bad, its a CL-600 Challenger business jet, stretched and stretched, and it will not be competitive against the E175E2, the product is hitting the end of its life cycle, just look around the world, if it were not for US regional airlines needing a 76 seat jet, the CRJ would be dead already, the CRJ-1000 is not selling it all, the market is the US regional market for now.
Bombardier needs to focus on all of its products, but the CSeries is a massive drain on all resources at this time, and products are being neglected, and competitors are not standing still, they smell blood at Bombardier these days. Times have changed, Bombardier commercial aircraft fortunes have turned, notice the following aircraft in service as of June 2014:
ATR-72 = 581
Q400 = 421
E170/175/190/195 = 1,002
CRJ-700/900/1000 = 649
CRJ-100/200 = 640
EMB 135/140/145 = 695
There is no doubt the Embraer E-175/90/95E2 line will put an end to the CRJ line, the people at Bombardier were blind to the idea that Boeing, Airbus and Embraer could re-engine their existing models and check-mate the CSeries before it even got started, and that is a major corporate blunder, you need to model all situations and decisions, and if PW had a new generation engine, did they think they will have a monopoly on it ? off course it was offered to other OEM’s.
More evidence is out that airlines are upsizing their orders, the trend to more seats is bad news for Bombardier, as customers are looking for bigger aircraft than the 100-149 set market the CSeries is to fill.
Airbus has had 358 order shifts from the A320 to A321 since 2010, as well, 150 shifts from A319 to A320, 38 shifts from A319 to A321, so 546 upward shifts and only 67 downward shifts, this decline is very severe in the 100-149 seat market. The A310neo has less than 2% of current A320 family orders, yet the A319 had over 20% of all orders before the neo conversion. It is all about lower CASM’s, the more seats on an aircraft the lower the CASM.
It is no secret that the 100-149 seat market is shrinking and the orders today show the trend getting worst. Yes, between 2000 and 2014 Boeing and Airbus sold 2,200+ aircraft into this segment (146 per year average) but those days are gone, so if that was the good times, how many per year can be sold today ? Bombardier is hoping at least 120 (10 a month production run), but even that may be too high, and what about Embraer ?
With the CSeries priced at $62 million (CS100) and $71 million (CS300) some industry experts are saying the ‘appropriate price’ needs to be at $36 million or 50% off. This is what it will take to win the BIG orders with US airlines and elsewhere, this is the level of discounts being offered by Boeing and Airbus for BIG orders, recent large orders at Ryanair, Delta and American saw 50-60% discounts from list price !
But Bombardier cannot afford such discounts, the cost of the CSeries program is now $5.4 billion from an initial $3.4 billion, and break-even is most likely at around 580 units by my calculation, though Bombardier is still looking for the ‘magic’ 300 orders, but that goal line has surely doubled by now, they are really in trouble. Going up against Boeing and Airbus with the $71 million CS300 will be difficult as Airbus has gone as low as $30 million (68% OFF) on $95 million A319neo’s ! (Bombardier would have to discount 58%). Airbus and Boeing can afford to do that as they delivered 1,352 aircraft in 2014 (Boeing 723, Airbus 529) and they received 2,888 order ! and can spread those discounts out, Bombardier cannot get into a bidding war with Airbus and Airbus, and they should have known that when they risked the company’s future on the CSeries !
How can they compete with BIG discounts against Airbus and Boeing ? the cannot, and this is the price for entering their markets, the CS300 is a direct competitor to the B737-Max7 and A319neo, and they are now in the BIG leagues, where BIG orders are made at BIG discounts, no one pays List Price today !
Lastly the first CSeries sales announcement since last Summer was made this week, a new planned start-up in Malaysia, Fly Mojo is looking to order 20 x CS100’s and option 20 more, great news ! BUT it is only a LOI so firm orders still stand at 243 (many questionable orders).
The airline plans to offer “value and exceptional customer service”, yet to the observer of the airline industry in SE Asia and especially Malaysia, that start-up will not have it easy.
Passenger growth slowed down in Malaysia in 2014, the home to Asia’s largest LCC Air Asia, as well as Malindo the Malaysian subsidiary of Indonesia’s largest LCC Lion Air, as it and Air Asia fight turf wars in each others backyard.
MASWings, a Malaysian Airlines subsidiary is being converted into a LCC and will soon operate B737-800 (4) on top of the 14 x ATR’s and 6 x DHC-6-400’s. The Malaysian market is a LCC market with Air Asia dominating (183 x A320’s), and I cannot see a CS100 with say 121 seats going up against a 180 seat A320 of Air Asia and being able to compete. If this happens I will eat my hat but I do not see this as a good business strategy with all that is happening in SE Asia with short and long haul LCC.
Lastly, I do not see a bright future at Learjet without the Lear 85, they sold only 33 Lear 90/75’s last year so around $US 336 (at best) million in sales as the industry knows lots of discounting was in place to move those aircraft in 2014. The Learjet brand is not what it was 20 years ago, the new $15.25 million Embraer Legacy 450 and the $18.5 million Legacy 500 are wonderful aircraft, soon to be joined by the $16.25 million Textron Latitude have great appeal, there is not too much life left in the Learjet brand without a new aircraft.
Some company might be interested in that brand, especially Textron Aviation, it has bought Beechcraft and having Learjet adds to their product line and wraps up the Wichita market under one roof, an asset sale is something worth considering, even the Learjet 85, just a thought, a good one I think.
Till next time, thank you again for reading my blog.