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Airline Management, Bombardier, Commercial Airliners, Major Airlines, Other Aviation Issues, UPDATES

UPDATE: United Airlines as expected has chosen the Boeing B737-700 over the CS100/CS300 offer from Bombardier and E195-E1 from Embraer. Bombardier stock has dropped 9.17% to a new low of $1.09 (21.1.16 4:21pm) on the news, which should not have been a surprise to those that read my blog. This was the first head to head battle between Bombardier’s CSeries and Boeing’s B737 line, in the end it was all about PRICE, and now Bombardier and all investors see what I have been talking about for some time, Bombardier will NOT be able to compete with Airbus and Boeing on Price. The Duopoly is going to see to it that the CSeries gets undercut on price on every deal, and Bombardier has to be really worried now. The United Airlines deal for 40 x B737-700’s was apparently closed at $US +/-23 million per aircraft (a whopping 71% OFF the List Price), and here lies the Achilles heel of Bombardier, it is not able to compete on Price with the duopoly of Airbus and Boeing, and with low fuel prices, fuel efficiency, new design, value proposition, etc. all take a back seat to Price (capital costs). The writing is on the wall, little Bombardier entered the Big League totally ill prepared for the fierce competition and now it is going to get really tough to make any profitable deal as Airbus and Boeing are prepared to defend their market from a new entrant that they know is very vulnerable and shaky. In a simple SWOT analysis, the THREAT of entering this narrow-body segment was the defensive and offensive position Airbus and Boeing were and are going to take against any new competitor, and this should have been a major RED FLAG for NOT entering this market segment, and Bombardier is now realizing the severity of its weak position vis-a-vis Airbus and Boeing as competitors, as they are no Embraer and ATR, which Bombardier battled with for years with it’s dying Q400/CRJ brands, and ultimately lost to in the past 4 years. Now, on to this next Bombardier PR disaster, Delta Air Lines interest in the CSeries, which is not much different than the United Airlines deal, and the result, which I do not expect to be anytime soon , will be the same. Delta’s very successful and forward looking CEO Richard Anderson has already said what it will take to win his airline’s order when he said “at the RIGHT PRICE, it’s quite a competitive airplane”, right price ? what price ? List price of the CS100 is $US 71.8 million, CS 300 is $US 82.0 million, Bombardier CANNOT compete with deals at 70% off and stay in this business for very long, no way, now how, the duopoly has economies of scale with large production numbers, many different models, and can offer discounts on other aircraft deals to sell their B737Max and A320neo products. On top of the duopoly, the narrow-body segment has 2 new very well financially backed entrants coming, the Russian government backed Irkut MC-21 and the Chinese government backed Comac C919, and it is going to be a great time for airlines to make sweetheart deals, but sadly Bombardier Aerospace (Commercial and Business Aircraft) will not be enjoying the next few years at all, and ultimately “Combardier” (China’s Comac buying Bombardier) is a real possibility in the next 4 years.

Well it is official and as expected, United Airlines has chosen to order 40 x Boeing B737-700’s over the Bombardier CS100, CS300 and Embraer’s E195-E1. I touched on the reasons a few ago why Bombardier was NOT going to win this order, basically United Airlines operates 310 x B737’s already with 100 on order. It is not about to change suppliers, and Boeing was not about to let Bombardier win an order from one its best customers.

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United Airlines B737-700 beats the CSeries in the first head to head competition between Boeing and Bombardier, it is going to be all about PRICE, a competition Bombardier cannot win when Airbus and Boeing are going to defend their duopoly at all cost and crush Bombardier early on before it makes dent in their market share.

 

Boeing is able to cut it’s List Price significantly, especially for the B737-700 which has been a slow seller for several years and it needs to keep the NG line going till the Max line is ready for production, and anyone that thought Bombardier had a chance to win was naïve or misinformed, it was in my opinion a 99% probability that Boeing would win out. While fuel efficiency is important and where Bombardier has an advantage (though now down from 20% versus existing aircraft, to +/-3% against the new Boeing Max, Airbus neo and Embraer E2 lines), the largest cost component of an aircraft acquisition is the up front capital cost. Fuel efficiency is not as big of a selling point as it was 8 years ago, the economics model for older aircraft is very good these days for airlines and very bad for Bombardier’s CSeries sales.

Now, I assumed in my last Bombardier blog that Boeing would discount to 50% off the B737-700 List Price of $US 80.6 million, to $US 40.3 million, which would mean Bombardier would have to discount the CS300 List Price of $US 82.0 million by 49%, which they cannot afford unlike Boeing, they have nowhere to make up the loss on the deal, whereas Boeing has several programs and production just shy of 800 units per year.

Well, if rumors are to be believed, the B737-700 was priced around $US 23 million a piece ? ($US 185,483 per seat) that would be a 71.4% discount ! OMG, now we see how Boeing is going to deal with potential new entrant into its “turf” and there is NO WAY Bombardier can stay in such a game. To lose millions and millions of dollars per deal, Bombardier will be bust in no time, this deal has sent Bombardier a message, and it is a ominous message, that they will be crushed in every deal and that they will not win deals easily and profitably.

So this 40 unit deal is, if rumors are to be believed, only $US 920 million and it really speak novels about what the duopoly of Airbus and Boeing are prepared to do to keep the competition out from here on, and Bombardier now finally knows what it is up against, foes with very deep pockets and tremendous market power, and this also applies to Embraer, Comac and Irkut for the coming 5 years, that will bring a major Price War for market share.

I have to say that Bombardier is so desperate to raise investor confidence, that it releases misleading information to raise the share price. I said it from the start ‘ BS, they will not win United Airlines, Boeing had to sell more B737-700NG’s to keep production of NG up, it had to keep Bombardier out of its market, it had to satisfy United Airlines and this was the first head to head competition between Boeing and Bombardier, and while I am sure Bombardier gave it it’s best price, I am stunned that some think Bombardier went as low as the upper 20’s ($US 28 million a piece), as for a company that lacks capital, that would surely be a huge loss.

I think their cost even after the $US 3.2 billion write-offs, is around $US 40+ million for the CS300 and $US 35+ million for CS100, heck they don’t even have their production up so they don’t even know the final tally once all is done, simply they could NOT afford to WIN this deal, and many more will NOT win, this is the BIG league of commercial aircraft, Bombardier now has to deal with Airbus and Boeing which is a whole new game than dealing with Embraer and ATR, welcome to big league !

Let’s turn our attention to the next Bombardier ruse, the hyped up Delta Air Lines possible CSeries order now.

So, the stock price of Bombardier (TSX:BBD.B) presently sliding down 9.17% to $1.09 (Jan 21/16), after it recovered upwards to $US 1.25 in the past week, on the rumors of great things for Bombardier at United Airlines or Delta Air Lines (DAL). Seems, the United Airlines news is causing a sell of again, and boy will the investors be disappointed with the Delta Air Lines deal as well, as it is too early for that and again NO WAY will Boeing let this one fall in Bombardier’s favor, the Price War is on.

All the hype is about a few comments that Delta Air Lines CEO Richard Anderson made during his latest investment conference call on January 19th, when the following comments were made by CEO Richard Anderson in regard to the CSeries:

    1. The Atlanta based carrier is “taking a very serious look” at purchasing the Bombardier CSeries. (NOTE: also looking at A320neo and B737Max lines and Embraer’s E2 and MRJ).
    2. “It’s a pretty impressive airplane” (NOTE: that it is, a real beauty).
    3. “At the right price, it’s quite a competitive airplane” (NOTE: What price ? list is $US 71.8m for CS100 and $US 82.0m for CS300).
    4. He praised the aircraft’s geared turbofan engines, “the new engine is the industry’s biggest innovation since Boeing pioneered a carbon fiber fuselage with it’s 787 Dreamliner jest last decade (NOTE: the P&W 1000G engine is also on A320neo, MRJ and the Embraer E2’s).

So these are very good comments, and very positive, and off course Delta Air Lines is taking a look at the aircraft, not like there are many commercial aircraft OEM’s left, and it is a new product worth looking at, and just like DAL looked at and bought the Embraer 190/195’s (Delta bought 20 second hand E190’s in June/2016 from Boeing, ex-Air Canada models) and will be leasing 11 x A319’s in 2016 from Aer Cap Leasing, as it doubles down to fill the gap between the 76 passenger Regional Jets (RJ’s) of its Delta Connection partners and its 110 to 160 passenger mainline airliners,:

  1. Compass Airlines 2. Endeavor Air, 3. ExpressJet Airlines, 4. Go Jet Airlines, 5. Shuttle America 6. SkyWest Airlines

DAL is quickly reducing its fleet of CRJ-200 50 seat regional jets (above photo), down to 125 by end of 2016. With lease rates now down to $65,000+/- per month (was $180,000+ per month) and low fuel prices, the 50 seat RJ’s economic model has changed dramatically, it’s worth looking into today.

 

Currently, Delta Air Lines (DAL) operates the following aircraft in the 110-160 seat category:

    1. DAL has 90 x Boeing B717-200’s with 110 seats (12F/20E+/78E seating), with an average age of 14.4 years, and in 2015 the Direct CASM (cost per ASM) was $US 0.090 on an average stage length of 500 sm.
    2. DAL has 57 x Airbus A319’s with 126 seats (12F/18E+/96E seating), with an average age of 14.0 years, and in 2015 the Direct CASM (cost per ASM) was $US 0.132 on an average stage length of 725 sm.
    3. DAL has 10 x B737-700’s (plus 129 x B737-800’s/900’s) with 124 seats (12F/18E+/94E), with an average age of 9.3 years, and in 2015 the Direct CASM (cost per ASM) was $US 0.114 on an average stage length of 875 sm.
    4. DAL has 115 x MD-88’s with 149 seats (16F/25E+/108E), with an average age of 25.5 years, and in 2015 the Direct CASM (cost per ASM) was $US 0.113 on an average stage length of 575 sm.
    5. DAL has 65 x MD-90’s with 160 seats (16F/25E+/119E), with an average age of 19.0 years, and in 2015 the Direct CASM (cost per ASM) was $US 0.096 on an average stage length of 675 sm.
delta-a319-N317NB_(15246655850)Delta_Air_Lines_Boeing_737-732(WL)_N303DQ
DAL A319 (above left photo) and the B737-700 (above right photo)
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Delta Air Lines under CEO Richard Anderson is very unique in its fleet planning, it likes to buy lots of used airliners at a good price (DAL has the oldest average aged fleet in the US, at 17.0 years), as capital costs are reduced significantly with an acceptable higher direct operating costs (DOC’s), and with low capital costs aircraft utilization can be significantly reduced in off season periods just by parking some of his older MD-88’s/MD-90’s. This is  a man that likes to say what is on his mind, “I think playing golf is a huge waste of time” and “he dislikes schmoozing with other CEO big shots, the Boeing fishing trips and Airbus Hawaii junkets”. “If Boeing wants to sell aircraft to us, they’d better come down to Atlanta and see me in the office”
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 For Bombardier to replace the B717/A319 fleets in the future, it will have to offer again, very competitive price, Mr. Anderson said it right “at the right price, it’s quite a competitive airplane”, now this comes from a man that has been buying and leasing 110 passenger B717-200’s over the past few years (from Boeing, Southwest/Air Tran, Blue 1, etc.) that have a mid range values between $US 5.3 million (1999 model) to $US 7.5 million (2005 model), and his idea of right price for a 108 passenger CS100 is going to be very low for sure. Look he runs those B717-200’s at 9.9 cents per ASM (Direct Operating Cost), so $US 10.80 per mile (sm) and roughly $US 4,573 per flight hour, that the CSeries should beat, but the capital costs will be surely 4-5 times higher.
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The B717-200 is an ideal candidate to be replaced by the CSeries down the road, while the MD-88 and MD-90′ will be replaced by B737-800’s and B737-900’s in due course.

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DAL Boeing B717-200 (above photo)

 

The current Delta Air Lines domestic fleet strategy is to “produce a more cost effective fleet with higher customer satisfaction and lower capital costs”. Increasing average seats per departure by 5-7% between 2015-2020, which drives unit costs down and capacity expansion. Larger aircraft allow a better customer experience at DAL, and it one of the reasons the airline has the highest RASM (revenue per ASM) in the US, at $US 0.164, while it has the highest domestic CASM at $0.133 in the US, but the gap (RASM) – (CASM) is a very healthy $0.031 (18.9%). Now wonder the airline has achieved a +16% operating margin, +35% EPS (earnings per share), 28% return on invested capital, almost $US 4.0 billion in Free Cash Flow (FCF) in 2015.

The benefits of up-gauging its fleet are evident, using a 750 sm stage length and $2.25 per USF fuel price, the airline’s unit cost for the 50 seat Regional Delat Connection RJ are around $120 per seat, going to 76 seat jet it goes down by 12% to $105 per seat, then going to the 110 seat B717 cost goes down another 8% to $96 per seat, then moving to a narrow-body 150 seat A320 cost goes down another 9% to $87 per seat  and then down again 8% to $80 per seat with a large narrow-body 180 seat B737-800, so in total from $120 to $80 per seat is a cost per seat reduction of 33%.

So while there have been some good comments from Delta Air Lines about the CSeries, please note the most important one:

Delta is considering the CSeries and other narrow-body models as it replaces small 50 seat aircraft flown by it’s regional affiliate airlines, CSeries order isn’t imminent” said Delta spokesman Trebor Banstetter.

The sad reality is that Bombardier’s CSeries is in a NO WIN situation right now, no airline in its right mind will order it with all that has been going wrong with the company, I am sure even Lufthansa/Swiss and air Baltic have been nervous. Get CS100 EIS (entry into service) done in June with Swiss and CS300 in October with air Baltic, build 20+ units in 2016 and airline confidence will be there.

The BIG ELEPHANT in the room is PRICE, Bombardier is NOT capable of winning big orders against Airbus and Boeing, where prices will go as low as $US 30 million per unit, the duopoly can handle that with their huge production capacities and finances, but Bombardier cannot. The duopoly have other products, Bombardier does not (CRJ and Q400 will be dead within 36 months). Also, on big orders, the duopoly can also negotiate discounts on other deals with the airlines (e.g. B787, A350, B777) to close a B737Max/A320 deal, Bombardier cannot.

A simple SWOT analysis shows that the Opportunity is out there, but that THREAT is pricing power of the duopoly, when they are at each 60+ units per month, they will have a major cost advantage over Bombardier, economies of scale but supplier discounts, and sadly Bombardier CANNOT survive and become viable in this market segment, which will be joined by the Russian government backed Irkut MC-21 and the Chinese government backed Comac C919 in the next 5 years, then its game over-sorry, but I do not see a way out, other than Combardier, where China’s Comac buys the Aerospace division.

Till next time, sorry Canada, I would love to write something positive about the CSeries future, but I don’t see it, maybe I will be proven wrong, and that will be ok with me.

Cheers.

 

 

 

 

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About Aviation Doctor - Helping aviation companies to transform the present into a more profitable tomorrow

I am a Canadian and EU national with an MBA and 33+ years experience in aviation business development with 20 years overseas and work in 25+ countries. A former investment/merchant banker (mergers and acquisitions to corporate turnarounds). airline and OEM senior executive and past owner of 6 successful aviation companies in 3 countries (executive jet charter/management companies, aircraft sales, aircraft broker, airline/aerospace consulting to aircraft insurance). I have a very diverse aviation background with 75+ aviation companies (45+ airlines of all sizes, OEM's, airports, lessors, MRO to service providers) as consultant, executive management, business analyst and business development adviser. Excellent success track record in International Business Development. Most work with airlines is with new start-ups and restructuring of troubled carriers. I sold new business jets, turboprops and helicopters for Cessna, Raytheon, Gulfstream to Eurocopter as an ASR as well as undertaking sales and marketing of commercial aircraft for Boeing, de Havilland, Dornier, Saab and Beechcraft. Brokered everything from LET-410's to B747's and from piston PA31 to G550 business jets. I look beyond the headlines of the aviation news and analyze what the meaning and consequences of the new information really means. There is a story behind each headline that few go beyond. Picked the name Aviation Doctor, as much of my work has been with troubled companies or those that want and need to grow profitably. I fix problems be in the business, and help with restructuring for a better tomorrow. You can reach me with comments or suggestions at: Tomas.Aviation@gmail.com and I comment a lot on Google+, my Facebook and LinkedIN.

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