Well I have said it months ago that Bombardier’s stock (TSE:BBD.B) will become a “penny stock” by year’s end, and I missed it by 27 days, when January 27th, it hit $C 0.99 a share that is a market capitalization of only $US 2.11 billion, and I as expected today, the stock went further down to $C 0.89 per share, down 10.1% from yesterday, and now that it has passed that psychological $1.00 mark, who know how low it will go ? As you will read it can keep going down, the only way it is going up for now is a new order announcement or the Federal Government will agree to buy the 50% of the CSeries program, like Quebec did 2 months ago.
But that will not help too much as their are major issues with the program, marketing, sales, value proposition, positioning, but the aircraft is good, real good, just in a bad market segment and facing the most powerful economic duopoly in the world, Airbus and Boeing, a war Bombardier sadly cannot and will not win, and we witness a very difficult period, which at the end will see the CSeries an “orphan”.
The company has till first CS100 delivery in June, 2016 to bail out and shut it down, after that it is committed to it “hell or high water”, and then it can take down the whole deck of cards and bring Bombardier tumbling down, like other Canadian brands like Nortel and Blackberry. The move to try and sell the program to Airbus and Embraer in October, 2015 says novels about what Bombardier really thinks of the program, there is no hiding this attempt to bail out and take massive write downs, which they have already done. I am NOT an optimistic on this program, the aircraft is testament to the Canadian Aerospace industry, it is a wonderful piece of engineering work, on the other side is a horrible piece of management, leadership, vision, realism, accountability and financial mismanagement.
The CSeries is a winner, great product but a shame about the company’s past leadership and executives, who created a huge mess and are now all gone (except one), leaving the ‘mess’ to CEO Alain Bellemare and his team, many investors, employees and supporters are eagerly waiting for Pierre Beaudoin to quickly vacate his Chairman of the Board position, and the end to the Bombardier family’s control of the company through special voting rights that give it almost 60% control with only +/-14% of equity holdings, now worth only $295 million.
Now that it is below $1.00 the problem is that in can be delisted by the S&P/TSX stock index. Though the TSX do not have a minimum share price they do monitor several criteria for listed companies, and inclusion requires a minimum volume weighed average price of $1.00 over 3 months and must be at least 0.05% of the index. Though many investment, mutual and hedge funds, will not hold “penny” stocks, and the sell off will create further pressure on the share price in the next few days/weeks.
The only “HOPE” right now for any good news is an unexpected big order, which won’t happen anytime soon or the Canadian Government buying the other half of the CSeries program, joining Quebec, which bought 49.5% in November for $US 1.0 billion, or they pull a rabbit out of their hat with a new order, but after 17 months of NO orders, and the bad publicity from Bombardier’s attempt to sell/dump the CSeries to Airbus and Embraer, it really is a risky proposition for any airline. As a former airline executive, I honestly would not touch the program until the CSeries is in service with Swiss and I the production line is in swing.
I like to know where is the Bombardier family with some money ? do they NOT believe in their company ? the company they control with +/-60% of the votes ? they need to “put their money where their mouth is”, and put in $500+ million at least, BEFORE any federal money is put into the company, their absence says novels about what they think of Bombardier’s future, I guess their cement business is more important now, says a lot anyway.
But no matter what, the probability of this aircraft being an “orphan” is in my opinion 60% over the next 4 years, a high probability exists that over the next few years, Bombardier will NOT be very successful with big major airline orders, they are going to be stalked by Airbus, Boeing and to a lesser degree by Embraer, and the pricing will be out of this world ! Just look at the United deal last week, Boeing discounted its $US 80 million LIST Price B737-700NG by 71% to around $US 23 million per unit, at that price.
Even after the massive write program write-offs and the selling of 49.5% of the CSeries program to Quebec’s Government, I estimate Bombardier would lose roughly $US 12 million per unit on the CS300, and $7 million on the CS100, so had it won with the CS100 it would have lost at least $280 million on the deal. The problem is WHERE would it make up any loss ? Q400 ? no, CRJ ? no ? while Boeing has other programs to make up for a strategic loss here and there (e.g. B777, B787, B737Max8) and Airbus has the A350, A330neo and A321.
They do not have other programs to make up for the CSeries. The current Global 5000/6000 production and demand is going down, and this was the shining star for years for Bombardier, realistically going forward to 2020, the only programs that will continue to see success are the Challenger 350 and 650, and then the 650 is facing new challengers (e.g. Textron’s Hemisphere) on the horizon, while the rest in my opinion have 3 years at best.
Even then the Global 5000/6000’s are now facing Gulfstream’s new G500 and G600, Dassault’s new 8X at a time when the top end of the business jet market is in decline, and 2016 promises to be a very bad year for OEM’s, as right now only the US market is showing good numbers, the rest of the world is in a major decline in demand, especially the BRIC (Brazil, Russia, India, China) countries, once the drivers of demand, so do NOT look for business jets to save Bombardier’s Aerospace as it has been doing for the past +5 years, the cash flow from Global G5000/6000’s is decreasing very rapidly due to low demand and new competition and Business Aircraft itself will be struggling financially next year.
The Global G7000 is going into the BIG league of VIP aircraft, and here the duopoly have been selling 16 units per year on average over the past 15 years, it really is NOT a BIG market, and with economic decline in Russia, India, China, Brazil who will buy the G7000 in large numbers ? On top of that, in 4 years the Chinese will have their Comac 919 certified (?) as will Russia with it’s MC-21 (??), and as these are centrally controlled countries, the local oligarchs/billionaires will be ‘pressured’ to buy VIP versions of their country’s aircraft, and this will take further orders from Bombardier.
Look to those who read this Blog regularly, they have seen that my projections were right on, Bombardier has been in a “marketing myopia” for years, like a kangaroo at night caught in the headlights of an on coming vehicle, they just truly believed they had a fabulous “game changer” and saw nothing else, the aircraft without question is very good. There are 2 main problems with the CSeries that will prevent it from being a great commercial success, even though it is a great technical success:
I) The market in the 100-149 seat is nowhere near the 7,200 units over 20 years Bombardier forecast years ago. The days of DC-9’s, B737-200/300’s/500’s/600’s, F100’s, BAe-146-300’s, Avro RJ100’s are gone. Show me the market ? it is NOT THERE to the degree they think, they are blinded by their own myopia, and will pay the price for that blindness.
Airlines have up-gauged and the demand is not there, if they opened their eyes they would have seen that with the demise of the B737-600 and the A318 due to poor sales, and we see for the past few years poor sales for the B737-700NG’s and A319ceo’s the next biggest aircraft from Boeing and Airbus, and IF you are totally blind just look at the horrible sales for the A319neo (50 firm orders out of 4,414 – A320/319/321 neo orders) and B737Max7 (60 firm orders out of 2,654 – Max7/Max8/Max9 orders), that is 110 orders from 7,068 orders (1.55% of orders) are in the 120-149 seat category !
But Bombardier keeps telling everyone it is because the short versions are not economical, yet with 120 A320neo and B737Max family aircraft per month production in 2 years time, you watch how LOW prices can get as production costs come down. It is clear that the CS100/300 are just in a tough market segment that was overestimated and straddles the top end of regional jets and bottom end of narrow-body airliners, and up-gauging of aircraft seating today is increasing every year.
II) Bombardier did not seriously analyze the consequences of entering a duopolistic commercial aircraft market that is a “de facto” monopoly that Airbus and Boeing dominate and the market power they have to set Pricing, through anti-competitive behavior such as predatory pricing, where low prices are set to drive competitors out of the market, and they will drive Bombardier out quickly, as they have bigger problems with China’s Comac C919 and Russia’s Irkut MC-21 narrowbody airliners entering the market by 2019, so best to deal with Bombardier now rather than later.
Bombardier should have calculated the duopolies strategic reaction to a new competitor. Now the main threat is the CS300 to Airbus and Boeing as it competes with the low side of their product range (A319ceo/neo and B737-700NG/Max7), which are “Losers” from a commercial point of view today.
BUT they keep the competition out, and while Bombardier surely “Hoped and Prayed” they would be discontinued, it is clear they will stay to make sure Bombardier does not become a future competitor with its very “stupid” announcement for the larger CS500 which is a direct competitor to the duopolies main market, the narrow-body A320 and B737 lines, and at that point the duopoly knew it was “war” to drive Bombardier out. The volumes that are now coming out of Airbus and Boeing, bring down unit costs on the narrow-body aircraft especially and their marginal cost (the change in total cost that comes from making or producing one additional aircraft/unit).
The United Airlines deal for 40 x B737-700NG’s last week set the tone, price discounts will be so low you Bombardier will never win an competition with us, and if you do, you will lose millions of dollars per sale. The war is on, and Bombardier does NOT have the ability to compete on price against these 2 giants of the industry and it will lose in the end in a head to head confrontation, maybe the smaller CS100 will do better against Embraer’s E190/195-E2’s but every deal will be tough, and financially painful when won.
While Bombardier chose to build a totally new aircraft it’s rivals went a different route and decided to re-engine new generation fuel efficient engines and aerodynamic tweeks, and the B737, A320, E190/195 are competitive aircraft, now you have an A320neo that is 17% more fuel efficient than the A320ceo, and that 20% improvement Bombardier had is now 3% and in a time of low oil prices, not a big deal at all, the market is now all about Price and Delivery, and here Bombardier is out of its league, they know it, tried to get out of it, and now they are full speed ahead heading for the cliff.
Look, there just is NO light at the end of the tunnel, and for those that read my blog I have written for a long time about it’s sacred “cash cow” Global (G5000/6000) brand’s decline which was 42% of Aerospace revenue back in 2014, and now in decline, the Learjet brand is surviving on massive discounting but its time is up, the Q400 has +/- 54 aircraft in backlog (27 months of production), the CRJ line has a backlog of about 70 aircraft (14 months of production), and the only bright spot for now is the Challenger 650 and the Challenger 350 but for 2-3 years at best.
New orders for 2015 are around 99 aircraft, which is 65% less than 2014 order book of 282 aircraft, while we wait for exact 2015 figures, Macquarie estimates that Bombardier has only 324 aircraft in backlog, which is at best 15 months of production at historical production rates, with the CRJ and Q400 struggling very badly for any orders.
Investors should be worried, if the Canadian Government buys half the CSeries, that will drive stock price up, it may be the last chance to sell, as the stock will now be very volatile and may go as low as $0.50 if their are no new orders by June, problems with entry into service, problems with production ramp up and delays in Global G7000, all real risks at this time still.
In 5 years time, realistically Bombardier Aerospace will only have the CSeries and Global 7000 brands to make it work, and there is NO WAY the 5 year Transformation target of $9.8 billion in revenue will be attainable, at the very best $5.1 billion based on 80 (realistically +/- 66) CSeries and 25 G700’s, as both aircraft are technically very good, but the market positioning and competitive posture is bad.
The 100-149 seat market is not going to produce the forecast 7,200 orders in 20 years (360 per year average) at BEST they are looking 3,000 and the CSeries may at BEST get 44% of that market (1,320 units or 66 per year average) as it faces Airbus and Boeing with their neo and Max lines and incredible market pricing power, as those 2 lines head for 120 unit production per month, and economies of scale that will see massive discounting, that Bombardier cannot match or make money from.
While my 66 is low, it is better than what Dr. Kevin Michaels at ICF estimates, which is 50 units per year, either way few see Bombardier getting to 120 aircraft a year, and even that will never get you the economies of scale to be competitive on price. Before the CSeries write down in October, Leeham Co. consultancy estimated a loss of $US 32 million per CSeries in 2016, 2017 and into 2018, basically the first +/-80 units, and but with the predatory pricing in play, Bombardier may lose money on every aircraft up to 2020 very easily, on top of G7000 development costs, $2.85 billion in maturing debt, CSeries entry into service, CS300 certification plus $US +1.0 billion in production ramp up, and you are looking at another $+2.5 billion by 2018, one very sad scenario, if you want to see reality that is it, if not then pretend it is all ok and wait for the company to go off the cliff before 2020.
The $75m G7000 will also be up against Airbus and Boeing with their ACJ and BBJ line of classic, neo and Max variants, here price and comfort (cabin size of 120% over G7000) will determine orders in favor of the duopoly. How big is this market for VIP aircraft at +$75 million ? well since 1996, Boeing has delivered 159 BBJ single aisle VIP aircraft (BBJ2, BBJ3, BBJ C) and 12 x B737’s, so 171 Boeing Business Jets in 19 years (an average of 9.0 units per year), while Airbus has delivered 116 ACJ’s (Airbus Corporate Jets) (20 x A318’s, 77 x A319’s, 18 x A320’s and 1 x A321), that is an average of 6.1 single aisle VIP aircraft per year, for a grand total average of 15.1 aircraft per year from Airbus and Boeing.
Bombardier Global G7000
That does not include bigger aircraft (e.g. B757, B767, B777, B787, B747-400’s, B747-9, and A330, A310, A340), but if I did add them in it comes out to 382 aircraft (20.1 per year average). IF Bombardier thinks it will duplicate the success of the G5000/6000 and hit 80+ units a year, it is dreaming, realistically, this market for Bombardier at BEST will produce 20-25 units per year ($US 1.5 billion to $1.8 billion), no “white knight” here ! remember the Russian and Chinese market will be ‘asked’ to but local C919 and MC-21 VIP versions and this program is headed for a rough ride as well, no wonder they do not talk about the G8000, it ain’t going to happen.
Again thanks, not a good time for Canadian Aerospace, and I tried very much to get Bombardier’s attention for years, they were to arrogant to listen to some “outsider”, yet I saw all this coming and here it is a battle for it’s very existence that will play out over the next 4 years at best.
Till next time, thank you for reading my blog.