I have been quiet for awhile on Bombardier, watching what will unfold, with a heavy heart, seems that the new year is not going to be much better than last year, when Bombardier’s stock (TSX:BBD.B) lost 60.9% of its value, ROI (return on investment) was -44.0% and market capitalization is down to $2.51 billion, cash $2.89 billion (+2.5 billion due for 49.5% sale of CSeries and 30% of Transportation) enterprise value is $US 8.79 billion, total debt $US 9.1 billion.
READ past articles on Bombardier to get up to date
The Stock price on Friday, January 15th, closed at $1.13, down at one point to $1.09, so it is NOT far from becoming a “penny stock”, I give it a few weeks to get there, news that United Airlines is not buying the CSeries and that the Canadian Government will NOT put in $1.0 billion into Bombardier can make that happen real fast.
This year, 2016 is the make it or break it year for Bombardier, all eyes are on the CSeries sales, EIS (entry into service) and production ramp up, all 3 have to go smoothly, or not only will investor confidence deteriorate further but the market is watching very closely, and I do wish them success as most Canadians are proud of Bombardier.
Again, I repeat myself, but I say NO taxpayer’s money UNTIL control of Bombardier is out of the hands of the 2 families that control it and that are responsible for the current mess, the dual shares with their special voting rights for the special BBD.A shares have to go. Also, it is time for the 2 families that control 54% of the voting shares to put some of their own billions into the company as well, before tax payers money goes in.
I do not understand why anyone would invest into a struggling company like Bombardier, when those that ruined it are still in control, it needs better governance than that. Anyway, it plans to move more work to Morocco and Mexico from the dying Q400 and CRJ programs, and they want Canadian taxpayers money ? nice try !
Another thing to go is current Chairman of the Board Pierre Beaudoin who led the company as its CEO into this “hell” for employees, suppliers, investors and the new executives, as the inept previous executives are now gone with nice severance packages off course, for what I do not know.
The BIG news last month was the 30 airplane order by United Airlines for 100+ seat jets worth $US 2.0 billion, and Bombardier was apparently in the running with Boeing’s B737-700 and Embraer’s E195.
To make its case, Bombardier has let it be known that it is “prepared to cut CSeries pricing amid the 15 month order drought”, are you kidding me ? Yes, CEO Pierre Beaudoin held firm on price, believing they had a “GAME CHANGER” well that fantasy is gone, their 20% competitive advantage on fuel savings is pretty much gone as well as the Boeing B737Max, Airbus A320neo, Embraer E190/195-E2 all will have new generation fuel efficient engines-Check Mate !
So there is no great value proposition to the CSeries anymore, the new A320neo (new engine option) for instance is at least 15% more fuel efficient than the A320ceo (current engine option).
By increasing maximum seating on the A319neo to 160, A320neo to 189, Airbus gained an additional 3% fuel efficiency per seat, so now the delta is 2% between CSeries and A319/320neo with new savings to come. The fuel saving argument is pretty much a moot point today, especially with the low fuel prices.
Embraer at this time has 267 orders for its new E2 models (90x E195’s, 77 x E190’s and 100 x E175’s), with 265 options, again nothing compared the 150-200 seat A320neo/B737Max orders, but good for a late program, and the commercial jets have a backlog of 513 aircraft, and delivered 101 aircraft in 2015 while taking in 149 orders for a book to bill ratio of 1.47.
Meanwhile Bombardier’s commercial backlog on the Q400’s is around 55 and the CRJ line at around 72, the end is near for both lines, the Q400 lives off existing customers renewing orders (e.g. WestJet, Chorus and Horizon), but little in terms of new customer orders and the same for the CRJ line which received an order for 10 x CRJ900’s just before the end of the year from existing customer China Express and earlier in the year an order for 7 x CRJ900’s from Mesa (USA), it is rare now to see a CRJ-700 or CRJ-1000 order, those models are pretty much dead.
I am still waiting to see CSeries Economics, it is a real SECRET at Bombardier, they are very guarded, which makes me suspicious. What I can point to is current 2015 Direct CASM at United Airlines, and at least demonstrate a minimum benchmark for the CSeries :
1. Boeing B737-700LR, 118 seats, 1,250 sm stage length, CASM is $US 0.090 or $US10.62 per sm, roughly $US 4,460 per flight hour.
2. Boeing B737-800, 156 seats, 1,350 sm stage length, CASM is $US 0.070, or $US 10.92 per sm, roughly $US 4,586 per flight hour.
Those are good CASM numbers, and United is the overall highest cost US airline with a stage length adjusted CASM of $US 0.124. On the other extreme is Spirit Airlines, with total CASM of $US 0.082 with its A320 (179 seats) at a Direct CASM of $US 0.054.
In the under 130 seat narrow-body market the lowest operator is Virgin America’s A319 with 119 seats, with a Direct CASM of $US 0.062 on a 950 sm stage length while total CASM is $US 0.145.
So this gives Bombardier an indication where it needs to be, can the CSeries be close to a Direct CASM of $0.065 ? that is $US 7.02 per sm or roughly $US 3,053 per flight hour for the 108 seat CS100 or $US 8.45 per sm, or roughly $US 3,675 per flight hour for the CS300 on stage lengths of 1,300 sm ? if so great, if not, ouch.
US airlines had a great 2015, with low fuel prices, at United Airlines it’s fuel cost per ASM went from $US 0.041 in 2014 to $US 0.027 in 2015, a reduction of 34% in fuel costs per ASM, to a domestic cost per ASM of $US 0.124 in 2015 from $US 0.136 in 2014, a 8.8% overall CASM reduction.
The low fuel prices are good for airlines, BUT they are not good for Bombardier CSeries sales, as fuel costs are not as important, and why the economics of retaining older aircraft in service is in many cases a better play than buying a new aircraft in the short/medium term.
Back to Bombardier, they have only 243 firm orders on the book ?, only 140 “REALISTC” orders after taking out “fantasy” orders on the books, some since 2010+ (e.g. Republic, Iraqi Airways, Gulf Air, Lease Corporation International, Odyssey, etc.). Of worry is the 53 CS100’s orders versus 190 CS300 orders, where actually is the market for the CSeries if at the 100 seat end (CS100) there are few orders and you have to compete with Embraer’s E190/195-E2’s or at the 130 seat segment (CS300) where you have to compete with A319/320neo, B737Max7/Max8 ?
One also has to worry about the viability of the entire 100-150 seat market, I do not believe it is there anymore, definitely not 7,200 units over the next 20 years as Bombardier forecast. I think the market has pretty much moved up in size (up-gauged) to the 150+ seat segment, and continuous to move up as the following average seats per departure trend (2009 to 2015) shows:
1. US market, 98 to 109 seats, +11.2%, at 80% LF that is an average 136 seat aircraft.
2. European market, 127 to 143 seats, +12.6%, at 80% LF that is an average 178 seat aircraft.
3. South American market, 124 to 139 seats, +12.1%, at 80% LF that is an average 173 seat aircraft.
4. Oceania market, 108 to 124 seats, +14.8%, at 80% LF that is an average 155 seat aircraft.
5. African market, 120 to 136 seats, +11.5%, at 80% LF that is an average 170 seat aircraft.
Again, these are ALL signs that the CSeries is in a market segment that is being abandoned by airlines as they up-gauge, and I have touche don the poor sales of the B737Max7 and A319neo, and while Bombardier “Hopes” these aircraft will not be continued.
I think they will continue just to kill Bombardier in the segment, so that it will not be around to take away any sales with the CS300 but more importantly the planned CS550. The last thing the duopoly needs is to have the C919, MC-21 and CS500 competing with its B737Max and A320neo’s. It is for sure that Airbus and Boeing and going to make life very difficult for Bombardier, even the hint of a CS500 has firmed their resolve to crush the CSeries and turn it into a “orphan” asap, so who wants to buy a CSeries now ?
Yes Bombardier has only 243 orders since launching the CSeries on July 13, 2008 (79 months ago), by year :
2009 50 orders
2010 40 orders
2011 43 orders
2012 15 orders
2013 34 orders
2014 61 orders
2015 00 orders/zip/nada/zero
It is pretty obvious that Bombardier will NOT win the United order, look someone has to put some “realism” into the situation. Today United operates 310 Boeing B737’s (40 x B737-700’s, 130 x B737-800’s and 140 x B737-900’s) with 100 B737Max9’s on order, you think they will add another type to the fleet ? especially given that their B737-700’s are set up with only 118 seats ?
It’s fantasy on the part of Bombardier to think it has a chance, as United is a huge US customer for its products, and there is no way in hell they will allow little Bombardier to gain a foothold in the US market.
Boeing has huge pricing power, and the B737-700 has a list price of $US 80.6 million ($683,000 per seat at only 118 seats, though maximum seating is 148). Bombardier’s CS100 is priced at $US 71.8 million ($631,000 per seat at 108 seats in 2 class), while the CS300 is priced at $US 82.0 million ($631,000 per seat). BUT, no one buys list price today, it’s a industry secret as to what the final price of deals is, though always quoted in list price terms, but that is deceiving as it is “normal” that deals between 25% to 55% are common more often than not.
A United deal for 30 aircraft where the competition is new arrival CS100/300 you can bet that Boeing is looking to win at all cost, and by all cost I mean 50% off, so expect around $US 40.3 million per B737-700 at $342,000 per seat, and you know Boeing can do this as they had 768 net orders in 2015 (878 gross orders), and can spread their costs over many more units per year.
Even if Bombardier could discount 40%, it still leaves the CS100 at $43.1million (+6.9% above B737-700 price at 50%, and 16.7% more per seat at $399,000). The CS300 at 40% would be $49.2 million (22.0% above B737-300 at 50% price, and 10.5% more per seat at $378,000), we are using 130 seats (2 class) for CS300 vs only 118 for the B737-700, in other comparisons, the difference would be much greater in favor of the B737-700.
So the United Airlines deal with Bombardier will not happen, just “pipe dream” for now, the BIG players will order when aircraft is in service and in production, we are 6 months away from CS100 EIS (entry into service) and things can still go wrong.
Just look at the A320neo 1st delivery, a minor thing but ok its Airbus, that is fine, but Bombardier does not have that market confidence to have such a minor thing go wrong, never mind a major problem (e.g. B787 battery issues), which could kill the program before any EIS.
So even discounting will not cure the sales ills of Bombardier, they entered the BIG league from minors and finding it hard to compete with the big boys, who combined in 2015 had 1,804 orders (768 for Boeing and 1,036 for Airbus), and delivered 1,397 aircraft (762 by Boeing and 635 by Airbus), while Bombardier plans on delivering 120 CSeries per year by 2020 (10 per month) ?
Such a low volume, will never produce the economies of scale and scope to compete with what looks like around 122 B737Max/A320neo’s per month by Airbus and Boeing, and don’t forget the new Comac C919 is coming to the market by then and possibly the Russian MC-21 as well, Bombardier will face a big price war, where it’s opponents are going to be very rich and powerful institutions/organizations you cannot compete with:
3. Government of the People’s Republic of China
4. Government of Russia
Now that is a major David versus Goliath undertaking, surely Bombardier has NO IDEA of what they have walked into, the people who thought of the CSeries are ALL but gone, and the mess is in CEO Alain Bellemare’s hands and his sales & marketing “dream team” that has yet to show it can sell.
I do not put the blame on the CEO or his “dream team” they are incredibly talented, knowledgeable and experienced executives, that have been put into what I believe is a NO WIN situation in the long run. I do wish them success, but while I do have a great of experience and knowledge of this market, I am not seeing a way forward, they are smart enough to know that, it is why they took the path to Airbus, it was the best play to make, but they were shown the door.
The best CEO Bellemare can do is to reorganize and go full speed ahead, and put on a bright face and say everything is getting better and the “CSeries is en route for success” .
The B737 order book is slowly transitioning from the NG’s to the Max, and in 2015 there were NO orders for the smallest of the B737’s, the 700/Max7 which by the way has to be a warning signal to Bombardier, if they ever open their eyes that the 100-150 seat market is NOT a big market and they got it wrong and will pay for that mistake for the next few years of low sales, before the aircraft does become an “orphan”.
Yes, the “orphan” term came up at a recent Airbus annual conference a few days ago by their CCO, an orphan is an aircraft program that been discontinued by its manufacturer, it causes great anxieties for airline executives, its why you DO NOT BUY INTO RISKY AIRCRAFT PROGRAMS, like the CSeries and the Sukhoi SSJ-100 SuperJet, as they are candidates to become orphans within the next 4 years.
Airbus thinks the CSeries will eventually be “orphaned”, and they should know, they were approached by Bombardier to take the CSeries of their hands for very little money, so if Airbus does not believe in the 100-150 seat market, there should be big concern in the investment community.
Here are just a few recent “orphaned” aircraft, some were good and some were junk, but orphaned by their manufacturer they were :
1. MD-90 program, later renamed Boeing B717-200, 156 built, 1998-2006. (top row left photo below)
2. Dassault Mercure, 12 built, 1971-1975. (top row center photo below)
3. Saab 2000, 63 built, 1992-1999. (top row right photo below)
4. Bae ATP, 64 built, 1988-1996. (bottom row left photo below)
5. IL-114, 20 built, 1992-2012, now being resurrected. (bottom row center photo below)
6. Fokker F70, 47 built, 1992-1997. (bottom row right photo below)
In 2015, there were only 5 Max9 orders (1 was Max9 BBJ), while there were 404 orders for the Max8 (4 were Max8 BBJ’s). Again, I have to point out the 5 x B737 BBJ orders as again, I believe that the $US 75 million Bombardier Global G7000 will compete with the BBJ and ACJ, and again where is the market ? again, read previous articles on why I do not believe that the 5 year Transformation plan for Aerospace will happen.
The BBJ and ACJ as discussed in previous articles have been averaging only 16 units per year, so where is this $75+ million market for business jets ? like the 100-150 seat market, it is there it is just small and will NOT be viable enough to sustain Bombardier in the Commercial and Business jet market for very long. The writing is on the wall, but they pretend they do not see it, and now seek $1.0 billion from the Canadian Government, which is facing an economic slowdown mainly in the oil industry and the slide of the Canadian dollar to less than $US 0.70.
That may have some benefits for Bombardier for sure, as revenue is in $US, but then also many components are priced in $US, so it would be interesting to see if the low Canadian dollar helps Bombardier in 2016.
Time will tell soon what the fate of Bombardier really is, 2016 will be the make or break year.
I will be here as usual reporting on any new developments.