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Aeropolitics, Airline Management, Bombardier, Commercial Airliners, General Aviation, UPDATES

UPDATE: Bombardier could not sell/dump the CSeries program to Airbus, Boeing or Embraer last year, but it has found a buyer (aka sucker) in the Province of Quebec and most likely the Canadian Federal Government. The two Governments will together invest (aka “throwing taxpayers money out the window”) $C 2.0 billion for what the Prime Minister naively calls a “superlative” (unrivaled/marvelous) aircraft ? that for all it’s acclaim of “game changing” greatness has only 243 orders since 2009 of which 100+ are “dubious” orders from questionable customers that will most likely not happen. If the CSeries is so “great”, why are airlines not buying it ? yet buying the new Embraer E2’s at a much faster rate ? The CSeries is positioned in the 100-150 seat market segment, which has been in a steady decline for the past 9 years now, and had only 53 deliveries last year by 3 OEM’s. This latest call for government assistance is the 51st request by Bombardier since 1966 which can only be called “corporate welfare” or “crony capitalism”, yet Bombardier is still 54% controlled by 2 families with only 13% of the shares, and no interest to put in more money into their own struggling company or willing to lose majority control, yet one of their own, Executive Chairman Pierre Beaudoin, mismanaged the company so badly and wiped away billions of dollars of investors money as the stock value plummeted and billions in corporate net losses accumulated since taking the helm in June, 2008. But thanks to Canadian taxpayers the company and it’s owners will be saved for a little longer as the CSeries will be put into a new limited partnership with its own CEO/President, which will shelter Bombardier financials from the eventual collapse of the program, a great set up for Bombardier, and a major rip off for Canadian taxpayers, again. A better solution would be to take the $2 billion and buy shares in Bombardier directly, which today would get you 1.739 billion ‘B’ shares or 91% of all outstanding ‘B’ shares, at least taxpayers would have a majority ownership in the total Bombardier business which is better than owning the eventual “orphaned” CSeries program, and have nothing to show for it in the end. The current 100 to 150 seat market’s low demand and low pricing (United got $23 million per B737-700 recently) cannot profitably sustain all the players, from Bombardier’s new CS100/300 the Boeing B737-Max7, Airbus A319neo and the Embraer E190/195-E2’s, so who will be the loser ? The Canadian taxpayer off course ! The Bombardier forecast of 7,000 units over 20 years is total BS, garbage in, garbage out as in the last 10 years, only 1,879 deliveries were made in this segment (188 per year average) by 3 OEM’s, now there are 4 OEM’s in this segment with price discounts off list price +50% being the new normal, as Airbus and Boeing are determined to crush Bombardier’s entry into their ‘turf’. Bombardier’s 104 seat CRJ-1000 should be a RED Flag on this market segment, 6 years into the program and only 70 orders (now less with some cancellations) and only 45 deliveries and a very low backlog, with a $243 million write off last year in anticipation that it’s days are soon over. There is a disaster in the making, as very LOW DEMAND combined with very LOW PRICES equals very low or non existing PROFIT MARGINS for Bombardier, which it cannot afford as it will be totally dependent on the CSeries in a few years as its own CRJ and Q400 line are both in the declining stage of their life cycle. I am convinced Bombardier knows the program is a dead end, and that is why they tried to sell it in October, 2015 only 1 month before Canadian Type Certification, does that makes sense anyway ? Now what airline wants to buy an aircraft which has a 25 year life from an OEM that only 5 months was looking to dump it on anyone ?

I expect the Canadian government to give into Quebec’s pressures and provide Bombardier with a bail out of $1.0 billion for a 1/3 share in the CSeries program, joining Quebec which has already committed to invest $1.0 billion into the program , that many experts, including myself believe will fail miserably. This money will be used to prop up Bombardier for a little while, but we Canadian taxpayers will not see that money ever come back from Bombardier, this is Bombardier’s 51st request since 1966 for government aid, the company has been on our “corporate welfare” program for 50 years, yet where is the money ?

cseries-cs100-bd-500-1a10_PlanespottersNet_618373

I would hope that Canadians would write or call their local MP’s and let them know how you feel about “corporate welfare”, do we not have better use for the money ? housing, lifting + 25% of our children from poverty ? better than giving it to a family business that is not well run, had destroyed investor value, laid of thousands, while sending jobs out of country, hide $500 million from the CRA in Luxembourg and discriminated in hiring against English speakers ? and now it wants Canadian taxpayers to help it again for the 51st time ? The families that control the company are not putting any money in, but still want control ?

Say NO to federal money for Bombardier ! no more corporate welfare, swim or sink.

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Time for Canadians to take back their government and break up this cozy state backed “corporate welfare” system for billionaire businessmen, especially those that are not very good businessmen and discriminate against average Canadians which is against the law, our Canadian Human Rights Act reads: Discrimination is an action or a decision that treats a person or a group negatively for reasons such as their race, age or disability. These reasons are known as grounds of discrimination. Federal employers and service providers, as well as employers and service providers of private companies that are regulated by the federal government, cannot discriminate against individuals for these reasons.

These 11 grounds are protected under the Canadian Human Rights Act, one of which is national or ethnic origin which Bombardier abused in it’s hiring process.

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The company is sadly controlled by the Bombardier and the Beaudoin families, through holding of only 13% of shares BUT 54% of the voting power as the company’s TSX.BBD. A shares (yesterday at $ C1.34 per share) have 10 x the voting rights of the TSX.BBD.B (yesterday at $C1.15 a share, up from February 8, 2015 price of $C 0.77). There are 1.91 billion outstanding B shares today, at $C 1.15 a share, market cap of $C2.196 billion and only 313.9 million outstanding A shares, for a market cap of $C 420.62 million, for a combined current market cap of $C 2. 616 billion for the whole of Bombardier.

But control of the company is in the A shares as their 10:1 voting gives the A shares 62.17% of the votes based on the current outstanding shares. So why would anyone put money in the company when it is controlled by the shareholders whose very own ex-CEO/President Pierre Beaudoin and now Executive Chairman of the Board, destroyed the company through mismanagement ?

Billions have been lost by shareholders since 2008, so anyone putting their money into Bombardier is just looking for punishment, the writing is on the wall for Aerospace, and that is 50% of the revenue. If Aerospace does not improve with the CSeries and G7000, by 2020 it’s game over, and the odds of it improving are very low as the CRJ, Q400, Learjet 70/75, Challenger 650, G5000/6000 lines will not be viable by 2020, and then no way can the CSeries, G7000, Challenger 350 make up anywhere near the planned revenue, at best $6.0 billion a year by 2020 as the CSeries and G7000 will struggle for orders.

In June 2008 Pierre Beaudoin became President/CEO of Bombardier, the stock was at $C 6.39 (TSX:BBD.B), a drop in value of $C 5.24/share or 82%, roughly a $10 billion loss to investors ! and billions in net income loss,  this Beaudoin is a destroyer of corporate value, not a wealth builder other than for himself and family off course, see graph below of B shares prices since 1982.

BBD since 2001

The government should insist on a change to the control of the company, as a precondition to any money, as well this is the man responsible for “Quebecois nepotism” a discriminating hiring policy well known to hundreds of ex-de Havilland employees (Bombardier bought de Havilland in 1992), where French Canadians were hired to replace english speaking Canadians or were just hired no matter what over english speakers, and recently confirmed in a Maclean’s article (February, 2016) on Bombardier, that this came from the top, Pierre Beaudoin himself.

Unfortunately, our politicians are too close to big business, especially in Quebec (infamous for being the most corrupt Canadian Province), and Bombardier having failed to sell the CSeries program back in October, 2015 to Boeing, Airbus and Embraer, is now close to selling 82.5% (49.5% for Quebec and 33 % for Federal Government) and possibly only 66.6% of the CSeries program to Canadian and Quebec taxpayers for $2.0 billion. Quebec already agreed to a 49.5% share in the program (though it may go down to 33% if the Feds come on board) for $1.0 billion and to set up a new limited partnership to hold the assets of the CSeries program and warrants for up to 200 million subordinate voting shares at a strike price of $C 2.21.

A better alternative would have been to spend $2.0 billion of taxpayers money and buy into Bombardier, in fact if Ottawa and Quebec bought $2.0 billion of B shares, they could (assuming all else equal) buy 1.739 billion shares at the current $C1.15 share price, and control 91.0% of all B shares, then Canadians would have something, a majority ownership of Bombardier, and not an aircraft program that is heading for failure, and again I will explain why below.

So Bombardier is dumping the CSeries on Canadian taxpayers and by spinning it off from its books and is covering itself for the inevitable disaster of the program. Brilliant move for a program that no other OEM wants, a program few airlines want (still 243 ‘firm’ orders, but only +/-140 “real” orders since 2009), a program that is in a declining market segment (100 to 150 seats), that delivered only 53 aircraft last year and where price discounts of +50% are the norm, and only for those OEM’s that have the financial and market power to compete, not the light weights of Bombardier stature.

CSeries customers

I want to touch on a point made by Bombardier’s John Paul Macdonald (Senior VP, HR and Public Affairs) recently in regard to “negative commentary about the company in mainstream media, is being used by Bombardier’s competitors to try to influence prospective customers about its survival prospects”. Yes, I admit I do write negative commentary, but I am stating the facts as an industry expert but an outsider looking into what Bombardier has been doing, and I know my stuff, and I have seen through their BS for years and I raised Red Flags about the program, the market, their product line, the competition, but they chose to ignore all signs and deceived people and customers, and it is ALL coming back to haunt them as they are falling apart.

The CSeries aircraft is good, but nothing great, its fuel efficiency came mainly from a new engine, now it has no competitive advantage because those engines are used by it’s competitors, they were so arrogant and blind to see that the technology was easily acquired and used. The market numbers were fantasies, the 100-150 seat market was never bigger than 330 units (1991), and they lied to themselves and everyone, and believed they had a “game changer”, they got marketing myopia fever and believed in their BS stories. Their arrogance has got them where they are, I tried to tell them years ago, but they are so much smarter at Bombardier then anywhere else, and they deserve the hell they are in, in the end business is all about people, and they had the wrong one’s running things.

I wish main stream media would use aviation experts to write about Bombardier, many still right about the 20% fuel efficiency, “game changer” etc. but they know not what they say, as few really understand this market with stories about Air Canada’s CSeries order being a “turning point” ? really ? why ? everyone knows there was no competition, it did not serve the investors in Air Canada that Boeing which has Max8/Max9’s orders from Air Canada could not bid it’s Max7. The Government of Quebec dropped its lawsuit against Air Canada for shutting down its maintenance center in Quebec so it could globally outsource, now it is back to what it did not want, maintaining aircraft (CSeries) in Quebec for many years.

This was a “political coercion” Quebec style, done so quickly it is still a LOI only, and done quickly so that they had “good news” at Bombardier for February 17, 2016 when they announced their HUGE $5.3 billion loss for 2015, it’s all games, but in the airline industry they are not dum, they know the Air Canada deal was ‘planned’ by politicians, and won not on price or performance but location of the airline, Montreal, like Sukhoi’s SSJ100 and MC-21’s going to Aeroflot, welcome to Quebec !

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The latest Globe and Mail article of March 8, 2015″Blackberry vs Bombardier” was a rare excellent piece on value investment and strategy and why Bombardier is NOT an attractive company for investors. “It operates in an industry in which other companies have a competitive advantage and so being in the industry will destroy value for it’s shareholders”. “Throwing good money after bad will not solve Bombardier’s problem. The Canadian governments at various levels seem to either not know this or chose to ignore it at taxpayers expense”.

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Where now 4 manufacturers with 6 aircraft models (CS100, CS300, E190-E2, E195-E2, B737Max7, A319neo) will compete for, which has created huge price discounting that will ensure that high cost producers like Bombardier, will not be able to compete on price, and if they win the occasional order, you can bet it will be at a loss, and Bombardier cannot make up that loss like Boeing can from other aircraft programs, as Bombardier’s Aerospace stable of competitive aircraft is in serious decline.

In fact, we saw with the recent 2 United orders for 65 x B737-700s, which Bombardier competed for, that the price was a low $23 million per unit ! Bombardier would be bankrupt next year at those prices. Yes, it was an order for end of production models, but it shows how low the duopoly can and will go to keep Bombardier out of their market. As well, Boeing can offer discounts to airlines on other aircraft models to close deals, like the United deal which got some deals on B777-300ER’s and swaps of B787-8’s for B787-‘9s, so many ways to cut a deal when you are a BIG player.

This is something Bombardier great under estimated coming into the BIG league, and now finds itself totally out gunned, out maneuvered when up against Airbus and Boeing, and again the LOW prices are another major reason why the CSeries will fail in the end, if you cannot get a good return you will never make money, and that ultimately leads to bankruptcy. Bombardier financials are horrible versus the duopoly, if you cannot play with the BIG boys you should not have ventured into their market. The Chinese C919 and the Russian MC-21 single aisle airliners are coming by 2020 but they have the backing of the Chinese and Russian governments, and by then Bombardier will be the 5th wheel in a huge market share war, so do not expect the CSeries in its current ownership much beyond 2021.

How can they get big orders from the likes of Delta, American and United when up against Airbus and Boeing ? they can’t, Bombardier will go bankrupt quicker with such low priced deals, heck, Delta’s CEO Richard Anderson said it “at the right price” it could be a good airplane, but then any aircraft at a very low price (>$30 million) can be a good airplane as capital costs are your biggest cost, problem for Bombardier they cannot afford selling “at the right price” even after writing off $3.0 billion, because its 120 units a year will not produce the economics to compete with planned 115+ per month A320neo’s and B737Max’s by 2019.

So with the market for aircraft in the 100-150 seat market not the 7,000 units over 20 years  (350 a year) that Bombardier dreamed about, and list prices being discounted by Airbus and Boeing by 60+%, there are next to no profit margins here, so where they maybe thought they would get 50% of the 350 units per year (175 units per year) at an average net price of $45 million (revenue of $7.8 billion a year), Bombardier is now looking at maybe 50% of an annual market for 140 units per year at the very BEST (2,800 over 20 years), Bombardier is looking at 70 units per year at $35 million per aircraft ($US 2.45 billion in revenue a year), that is the killer, and that is the reality if what is coming, low demand and low prices = FAILURE of the CSeries.

As an industry veteran, I am disappointed to see how easy it has been for Bombardier to fool our “dum ass” politicians into believing the propaganda that the CSeries is some “game changer” or as our Prime Minister naively calls it “superlative” (synonyms: extraordinary, magnificent, unrivaled, supreme, marvelous, wonderful, unsurpassed, etc.) which sounds real nice, but it is all BS, the reality which few want hear or read, is that the program is a failure, and it will not get any better.

The aircraft is good, don’t get me wrong, but success comes with having good products (yes), good market positioning (no), good pricing (no), knowing your customers (no) and having a value proposition to sell (no), check mate, game over, the market is not there, they can’t compete on price, they don’t know their market and have no value proposition.

Bombardier knows that the CSeries will fail, why else would they try and sell it 2 months before Canadian Type Certification after 6+ years of work and $US 5.3 billion investment ? they know very well that the low DEMAND and low PRICES will kill their program. Why would anyone buy an aircraft that has a life of 20-25 years knowing the OEM has been trying to sell it to anyone ? Yes, the risk is the aircraft will be a “orphan” within the next 5 years.

While Airbus cannot comment on it’s negotiations with Bombardier, one can pick out what they think from a few comments made by Airbus’s Chief Commercial Officer and chief salesman, John Leahy:

  1. “Nice little airplane”
  2. “The trouble is that when Airbus moved to the neo and Boeing moved to the Max, the reasons for the CSeries evaporated because they were trying to be 15 percent more fuel efficient than and A320 or a B737”
  3. “Now that we have done our improvement to the A320 product, they’re sitting there with essentially a me-too airplane without a very strong support network”
  4. “So they build build a nice airplane but I think it’s a one-off. It is going to be very difficult to sell”
  5. “It’s a one-off, it’s not a real family, with Airbus or Boeing you get different variants, you get the Airbus A318, A319, A320, A321 and you get a product support network around the world”.
  6. Described the CSeries as “orphan”

The competition (Embraer, Airbus) is using the same new P&W 1000G high technology engines, which provides 90% of the fuel efficiency of the CSeries and the other 10% will be made up with aerodynamic tweeks, new winglets and a few extra seats, and you get fuel burns per seat hour as good as the $US 5.3 billion Bombardier CSeries, competitive advantage is now gone and the company has no economies of scale (production) to be competitive on price, as it’s production costs at 120 units per year will not be competitive to the planned 120+ units per month by the A320neo and and B737Max lines.

Look since 2009, Bombardier has managed to get get +/- 140 “real” orders, the other 103+ are “mickey mouse” orders like Chapter 11 Republic Airlines, which in 2013 became a US regional airline capped at 76 seat (maximum) per aircraft, yet order is on the books, because Bombardier struggles with orders, so it looks good, yet a smart person would question why such a “game changer” or “superlative” program struggles to find customers if it so wonderful ? Could it be that the demand is just not there to the levels “forecast” by Bombardier ?

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So below you have a graph of the 100 to 150 seat market aircraft deliveries since 1965 to 2015 in RED and the 150-190 seat market deliveries in BLUE (limited to A320’s and B737-800’s only), it says it all, 100-150 seat market is down, and NOT an attractive market segment, while the 150-190 seat market has been going up and up, as this is where airlines want to be.

THE 100-190 seat market GRAPH (below) IS A TELLING STORY WHY THE BOMBARDIER CSERIES WILL FAIL, WHERE IS THERE A MARKET FOR 350 UNITS PER YEAR THAT BOMBARDIER LIKES TO TALK ABOUT ?

Where is it ? I don’t see it, Airbus don’t see it, Boeing does not see it, Embraer hopes to see it, but where is this ‘magical fantasy’ market ? The US pilot scope clause is NOT about to change to allow 110 seat CS100’s to fly under CPA’s (capacity purchase agreements), which have been Bombardier’s life line for years on the CRJ-900 as currently the maximum seating allowed is 76 seats, perfect for the CRJ-900, but that is an artificial market made up by pilot’s unions and airline management.

It is all BS, and it spells doom for Bombardier CSeries, and confirms Dr. Kevin Michaels of ICF prediction of 50-60 units per year at best, and that is the demand side, the other side of the coin is the predatory pricing that will keep unit prices in the $US +/- 30 million per unit range as Airbus, Boeing and to a lesser degree Embraer will make sure Bombardier pays heavily for any possible order win.

Even after writing off $3 billion from the CSeries, Bombardier still needs at least $2-$3 billion in 2016/2017 for the CSeries, and quantity x price will keep loses mounting for years to come.

Lastly, the graph below mine, from AirInsight, shows the same about the 100-150 seat market orders (not deliveries), note the Airbus A318 (light blue) and A319 (orange) and how they have died off and the same for Boeing’s B737-600 (dark blue) and B737-700 (orange), died off as well, so with deliveries and orders dying off, one really needs to question why there are 4 OEM’s in this market, and how in the heck does Bombardier think it can ever make money in this segment with its CSeries ? it can’t.

crj1000-performance

 

They should have seen it, and they did, their 104 seat (max) CRJ-1000 (above photo) is a failure with around 45 deliveries since 2010, 5+ years and only 70 orders, many being cancelled, that should have been another RED Flag for Bombardier, the aircraft is in the 100-150 seat market, close to the CS100 and it does not sell very well at all ? Again, how many RED FLAGS do you need to get the message ? obviously dozens in Montreal or they knew it for years and just glad to dump it on Canadian taxpayers.

100 to 150 and 150 to 190 seat.jpg

1-airinsight-narrowbody

Till next time, thank you for reading my blog.

 

 

 

 

 

 

 

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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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