Well finally the Bombardier CS100 has received its Transport Canada Type Certificate today, and the stock (TSX:BBD.B) has gone up $C 0.19 to $1.36 (as of this afternoon, Dec 18/2015) or 16.4%. This is good news, but even better news is that it looks as if Chairman of Bombardier, Pierre Beaudoin will step down some time in early 2016, and most likely make room for current CEO Alain Bellemare to take over.
READ: Why Bombardier will NOT hit it’s 2020 goal of $25 billion in revenue in my Dec 12/2015 article.
I have been advocating this for some time and it is about time the 2 families control of Bombardier is reduced, as it was Pierre Beaudoin that led Bombardier into this massive crisis where it’s entire future is at stake now, and he has NO business steering it now. All investors should insist on his departure, he was a disaster for the family business, employees and investors who lost billions of dollars under his leadership at Bombardier from December, 2003.
Just look at the stock (TSX:BBD.B) graph below, Bombardier has been destroying corporate value and investors money for many years. Bombardier’s future now lies in the fortunes of the CSeries and G7000 program, and to put things in context, Bombardier has a net loss of $4.9 billion in 3Q/2015 with the $3.2 billion Lear 85 and CSeries write down, the current company capitalization is only $C 3.15 billion (market value of all stock x outstanding stock), they wrote off more than the entire stock market value of the company ! and by the way CAE Inc’s market cap is $4.07 billion, making it the largest Canadian aerospace company by market cap.
The replacement for the Chairman’s position will not be known for some time, but it will increase corporate governance as long as it is not another family member or someone too close to the 2 families that control 54% of the voting rights at the company with 14% of equity.
The company has is in better financially than it was 6 weeks ago, as since then it has sold 30% of its Transport (trains) to Caisse de depot et placement du Quebec (CDPQ)a local pension fund for C$ 1.5 billion and will receive $C 1.0 billion from the Province of Quebec for 49.5% of the CSeries program. As well, the company has written off $2.6 billion for the Lear 85 program and another $3.2 billion of the $+5.2 billion CSeries program.
Bombardier has a lifeline for now, $4.0 billion in liquidity and the $1.0 billion from Quebec next year and another $1.5 billion from CDPQ, but will still require much more.
According to Bombardier $2.0 billion in investment is needed to get the CSeries to cash flow positive production by 2020-2021 based on its ramp up plan. Based on Bombardier’s past estimates best to assume $+3.0 billion, as the company expects to spend up to $2.2 billion on the CSeries and G7000 in 2016 and the same in 2017, so $3 billion on CSeries and $1.4 billion on G7000 is very realistic over the next 2 years ! and that does not assume the large price discounting that will be needed for every sale in the future.
Also down the road is the fact that company has $1.5 billion in debt that will mature in 2018 and another $2.0 billion between 2018 and 2020, so another $3.5 billion is needed just as it needs more money to ramp up production in 2018 to 45-55 units per year, 75-85 units per year in 2019 and 90-120 units per year in 2020.
The company will be spending money on production ramp up, G7000 entry into service, paying off debt just as it increases CS100/300 deliveries which will be at a loss for each aircraft, there I see more trouble again, where will more money come from, as it will not come from the CSeries or G7000 programs ?
The money is suppose to come from Quebec, the $1.0 billion and they want the Canadian federal government to kick in $1.0 billion as well, but Quebec got 1/2 the CSeries program what does the federal government get ? and will government money trigger another WTO (World Trade Organization) round of investigations and rulings ? that is up to Embraer, Boeing and Airbus if they want to file a complaint.
The problem with the scenario is that at BEST they will produce 120 CS100/300’s in 2020 (Bombardier estimate), but revenue will NOT be $5.8 billion for commercial as ‘hoped’ but at very best $4.8 billion due to massive price discounting by Airbus, Boeing and eventually Comac and Irkut, and they count on continued CRJ and Q400 sales, forget it, 5 years from now they will NOT be in production as orders now are drying up, with backlogs of around 74 CRJ’s (15 months of production ) and 60+/- Q400’s (30 months of production), and then ?
The company still has big hurdles with entry into service (EIS) come June, 2016 to Swiss of its CS100 and sometime in 4Q/2016 entry into service with airBaltic, then there is the ramp up of production in 2016, forecast to be 15-20 units, all at a loss of course, and lots of things can still go wrong, so let’s not get too excited that things are all behind us, the program still can fail very easily in the next 2 years, sales are still dismal or non-existing, and the stock still can go below $1.00 very soon.
The Business aircraft division they ‘hope’ will have $9.8 billion in sales in 2020, well NO way, they will have the G7000 (no mention of G8000 anymore for now), the G5000/6000 will NOT be in production in 5 years, the Challenger 650 will be dying by then, and Learjets are pretty much dead now, so maybe the Challenger 350 will be left but not doing as well as now, so BIG troubles ahead for Business aircraft as well.
In the end, between Commercial and Business aircraft, I do not see more than $9.0 billion in revenue for Aerospace by 2020, which is $5.9 billion shy of what they are “hoping” for, which is $14.9 billion from Aerospace ($5.8 billion from Commercial aircraft and $9.8 billion from Business aircraft), it will be more like $4.8 billion from commercial and only and $4.2 billion from business aircraft), mainly due to in my opinion lower G7000 sales in the ultra high end market of $75+ million as competition there is VIP versions of A320’s, B737’s and by 2020 add to it the Chinese C919 and Russian MC-21, the high end market above $75 million has not been very attractive till now (16 units per year), and take out Russia and China and your market potential has greatly diminished.
The company has a 5 year transformation plan to raise its top line from the current $18 billion a year to $25 billion by 2020, you can Read my Blog of Dec 12, 2015 to see why I think they are NOT going to achieve their Aerospace goals, as 5 years from now their cash cows will be the CS100/300 and G7000 and that is it ! and those programs will NOT generate the planned $14.9 billion in sales in 2020, or the increase in margins, NO way, NO how, sorry.
Bombardier’s future lies in the hands of the CSeries and G7000 programs, both are positioned in a market segment that is highly questionable, as the 100-150 passenger seat market does not hold the sales potential Bombardier forecasts and the $US 75 million per unit G7000 is now up against VIP versions of the Airbus A320/319neo and Boeing B737Max7/8 who can compete on price and provide a cabins 120% larger than the G7000, and soon to be joined by China’s C919 and Russia’s MC-21 airliners and their VIP versions which will be “mandated” by Moscow and Beijing to be the 1st choice for their respective billionaires/oligarchs. It is a roll of the dice on the future of Bombardier, that is not looking bright at this moment.
The current 243 CSeries orders (140+ real orders) will have to increase substantially over the next 2-3 years and a MUST for the future of the program, as anything below 10 units per month production, when Airbus/Boeing are going to 120 per month in B737Max/A320neo production by 2018, which lowers cost and will make the $82 million CS300 and the $72 million CS100 un-competitive unless Bombardier reduces prices by 50% ($41m for CS300 and $36m for CS100).
See the Bombardier table below, Bombardier loves to use “cash operating costs” which do not take into consideration very important things like capital costs/ownership and depreciation because based on “list price” per seat their CSeries and Q400’s are costlier than the competition (e.g. A319/319neo, B737-700/Max7, ATR-72-600), so their numbers lack the biggest cost of aircraft operations, ownership costs.
The table is highly distorted as the A319neoB737Max7 will have lower total operating costs than the CS300 and the E195-E2 will have lower total operating costs than the CS100, nice try. In fact now that the A320neo is certified, we know its fuel burn is 15% less than the classic A320, though fuel is not a major factor today like a year ago with oil prices below $50/barrel, and the below graph assumes $3.20 per USG, while some North American airlines are paying less than $2.30/USG today, and the lower the fuel price is, the less attractive the CSeries is.
An interesting confirmation of my doom and gloom prediction comes from VP Kevin Michaels of ICF International “our conviction is that the CSeries is a 50 unit per year aircraft at full production, not the 100 plus that Bombardier touts“. I have been saying it for years, where is this 100-149 seat market the CSeries is to dominate ? its gone, it’s not as big as it was, airlines have up-gauged their aircraft and moved to 150+ seat aircraft. Meanwhile, aircraft analysis ‘guru’ Richard Aboulafia of Teal Group believes that in the end, Bombardier will fail with the CSeries and will shut it down, I think that Comac will buy it and the rest of Aerospace will become Combardier one day int he not so distant future.
So where is this market for 7,000 aircraft in the 100 to 150 passenger segment Bombardier talks about ? It better find it fast or it will not last long.
Let’s start by looking at the Airbus A319 order book of 49 units, while the A320neo has 3,327 orders and the A321neo has 1,067 orders, so out of 4,443 A320neo family firm orders, the smaller A319neo has only 1.1% of the orders, while at Boeing the smaller B737Max7 has only 60 orders out of 2,827 B737Max8/Max9 orders, only 2.1% of all Max orders. No market signs of life here.
Today, Airbus and Boeing have a mere 109 B737Max7 and A319neo aircraft in the 125-149 passenger segment, we know there is no market here, and both OEM’s may have cancelled these aircraft, but most likely they will stay to compete with Bombardier and Embraer to make sure they fail to secure a place in the 125-200 passenger market segment.
We can look at Embraer and also see that the E195-E1 (118 max seats) the largest of the EJets, has 165 orders out of 1,421 EJet (E1) orders (11.6% of total EJet orders), the 100-149 seat market is not that big, Bombardier should know that, even its 104 seat CRJ1000 has only 70 orders out of 811 total CRJ700/900/1000 orders, a mere 8.6% of total orders, and the last CRJ1000 order was June, 2013, that is 30 months ago ! I do not think 233 delivered regional jet aircraft with 100+ passenger seats in 10 years, is a real interesting market. The average deliveries per year for the E195-E1 since 2005 has been 16.5 units, while the average delivery per year for the CRJ1000 since 2010 has been 13.5 units (no new order since mid-2013), at best 30 large regional jets with 100+ passenger seats. No market signs of life here either.
We know the 123 passenger (1 class) B737-600’s and 117 passenger (1 class) Airbus A318’s were commercial failures as well, only 80 A318’s were delivered between 2003 and 2015, an average of 6.7 units per year and 69 B737-600’s were delivered between 1998-2006, an average of 8.6 units per year, in total they averaged together only 15.3 aircraft per year ! No market signs of life here either.
So where is the market for the forecast 7,000 jets worth $460 billion in the 100 to 150 passenger segment from Bombardier’s 2015-2034 Commercial Aircraft Forecast ? Which equates to an average of 350 units per year and $20 billion in sales per year, of which Bombardier estimated it would get a 50% market share (175 aircraft and $10 billion a year).
Looks good on paper, but come on and wake up Bombardier ! you are only fooling yourself and your investors with over optimistic forecasts of a market that is at BEST good for 2,500 units over 20 years, or 125 units per year between Bombardier, Embraer, Sukhoi and Airbus and Boeing to a lesser degree, you should be praying that those two BIG OEM’s cancel their A319neo and B737Max7 programs, because with them staying in the 125 to 150 passenger market means massive price discounting on any large airline campaigns that they can afford to do and Bombardier can’t afford to do.
At BEST Bombardier will do a maximum 100 a year (CS100/300’s) which is below the planned 120 unit annual production of 2020 and $4.8 billion a year off ($48 million per unit average price due to large discounting to get deals done where Boeing and Airbus are involved), welcome to the BIG league, soon to be joined by Comac (China) and Irkut (Russia), then it will be a dogs breakfast when it comes to discounting.
Yes, I am being a big optimistic compared to VP Kevin Michaels of ICF International prediction of 50 units per year and Richard Aboulafia’s prediction it will be shut down soon, as I give Bombardier great credit for the great design and economics of the CSeries, fully knowing that great aircraft of their time did not always become great commercial success stories (e.g. Convair 990, L-1011, MD-11, Saab 2000, etc.), and like many before it, they will one day see that it will not be the commercial success they all blindly believed in and “hoped” for.
Too many ex-de Havilland executives at Bombardier wanted to make the ex-BRJX program (Bombardier Regional Jet eXpansion) jet to be resurrected at any cost, and thus the CSeries was born in 2004 and everyone was blinded by it, believing it to be this great “game changer” and oblivious to the possibility that Airbus and Boeing may not start replacement programs for their highly successful A320 and B737 programs which Bombardier “hoped” for.
In the end, Airbus and then Boeing decided airframe technology has not changed much, and a re-engining with new generation engines plus aerodynamic “tweeks” was a less risky and more economical solution and the A320neo and B737Max line was born, that was followed by Embraer with it’s E175/190/195 programs and very quickly the CSeries was squeezed in, and “check mate” it was all but over, its competitive advantage was over, throw in the low fuel costs today and they are up “shits creek without a paddle”.
Also, note that after 2019 Bombardier can forget about sales in China and Russia as those will be taken up by their respective C919 narrow body airliner and stretched 115 passenger SSJ-100SV and the new MC-21 narrow body airliner.
Bombardier estimates 1,900 units in North America (ave. 95 units/year), 1,100 units in Europe (ave. 55 units per year), 1,550 units in China (ave. 77 units per year), which won’t happen as local airlines will buy C919’s when in production, 700 in Latin America (ave. 35 units/year) and another 1,400 in Africa/Asia/Middle East and Pacific (ave. 70 units/year). OMG they are dreaming and need to wake up, they will be lucky to see 100 units per year in total that will have to be split between Bombardier, Embraer, Airbus, Boeing, a possible stretched Sukhoi SSJ-100 and a stretched MRJ ?
ain, show me the market for 100-149 seat airliners ! It myopia at its worst, they are heading for a cliff but its full steam and full throttle forward till the end, they are fooling investors, governments, employees and even themselves, they have to keep the lie going and until proven wrong.
Till next time, cheers and thank you.