READ: Blog article on Delta Air Lines and Bombardier CSeries of January 21, 2016 plus many articles on the CSeries in past articles
It is official, after months of rumors, Delta Air Lines (DAL) has ordered 75 CS100’s from Bombardier with 50 options, the deal could be valued at $US 5.6 billion ($US 74.6 million per CS100), but realistically a DAL order would have required a sizable discount (+/- 50% off list price), even for the smaller CS100 which really has only Embraer’s E195/E2 as its competitor, as the 108-133 seat CS100 is too small for the A319neo and B737Max7.
DAL’s Chairman/CEO Richard Anderson comes from Northwest Airlines and they loved their Airbus’s and operated many, the better technology, and he was always impressed with the CSeries technology, and it probably made the deal, though the 2018 delivery is something Embraer would not be able to deliver on with its new E195-E2, as the smaller E190-E2 is the first E2 model coming out, but ha snot flown yet though shown to the world 2 months ago, maybe problems in Brazil are causing delays ?
Anyway, as far as the CS100, it has the 108-133 seat market for now all to itself, with the E195-E2 coming by 2019 and the Sukhoi SSJ-130 as well. The disaster for Bombardier will be the CS300 which is up against the A319neo and now the B737Max7.5, and if they ever go ahead with the even bigger CS500, that will get killed by the A320neo, B737Max8, C919 and MC-21 if Bombardier is foolish enough to go toe to toe with the 4 manufacturers it will be a slaughter.
The BIG question as you will read in this article is trying to figure when Bombardier will make money with the CSeries ?, and in short it really looks like a no win situation, and most likely NEVER.
The 100-150 seat market just does not have the demand to satisfy the supply that the CSeries needs, and then you still have 3 other OEM’s trying to get a slice of the market that last year had only 53 deliveries and has averaged only around 180 the past 9 declining years, and probably will average no more than 140 units per year for the next 10 years and 5 OEM’s (Airbus, Boeing, Bombardier, Embraer and soon Sukhoi), way off from Bombardier’s fantasy forecast of 7,000 over 20 years or 350 per year !
This is a rare ‘battle’ as most of the orders so far have been for the CS300, and there Airbus and Boeing compete. The CS300 has 197 orders (60% of orders) and the CS 100 now has 128 orders (40% of orders). This battle was with Embraer and the Brazilians today have their own problems at home, from economic crisis to presidential impeachment to vast corruption.
I have to admit, I did not think it would happen so fast, with pilots in federal mediation over pay increase demand of 40% over 3 years and the US notice that it considers the planned Bombardier government bailout a barrier to trade as well as concerns over the possible use of Export Development Canada financing to support CSeries sales in the US market against Boeing Commercial Aircraft, politics ! Also, with NO FAA or EASA certification for the CS100 after 5 months, if I were DAL I would be worried, with 12 weeks to entry into service, Canadian Type Certification is not a guarantee of FAA or EASA certification without problems or delays.
I hope that this is NOT another ploy by DAL to get a deal with its pilots, as on July 15, 2015 DAL cancelled a $US 4.0 billion aircraft deal for 40 x B737-900’s and 20 x Embraer 190’s (used, ex-AC) after the pilots rejected tentative agreement ! Oh, that Richard Anderson is a tough cookie, and he has worked hard to make Delta Air Lines the big success it is today, and he will stop at nothing to get his way, and right now the pilots are in federal mediation for a new agreement, hmmm ?
Again, as it did for 4th Quarter, 2015 results on February 17, 2016, Bombardier chose today, April 28, 2016 to announce the DAL deal just as it released its 1st Quarter, 2016 financial results, which are as expected (just in):
Revenue $3.6 billion, EBIT $56 million, with Commercial deliveries at 20 aircraft (12 x CRJ-900’s, 2 x CRJ1000’s and 6 x Q400’s) and revenue of only $616 million, with a EBIT margin of -10.7% and a horrible book to bill ratio of 0.1 (10 deliveries for each order), as 20 deliveries were made but only 2 orders received for the CRJ900. So Backlog by March 31, 2016 was 77 CRJ’s and 33 x Q400’s, only 24-30 months of production at best. Though last week an order for 5 CRJ-900’s from Chorus and 4 from Trident were received, bringing CRJ backlog to 86 aircraft, all orders now are from existing customers.
I am actually surprised that the order is for the CS100 as the story was these were to replace the 25.5 average age 116 x MD-88 aircraft with 149 seats (16F, 25E+ and 94E seating) which have an average stage length of 500nm (925nm) with a CASM (cost per available seat mile) of $0.113.
But the 108-133 seat CS100 is more in size to the 90 x B717-200s at DAL which have 110 seats (12F, 20E+, 78E seating) and are 14.4 years old on average with stage lengths of 435nm (804 km) and a CASM of $0.09 (a good number). So will they order CS300’s for the MD-88’s which are in serious need of replacing or will they play of Airbus, Boeing and Bombardier on that one ? The B717-200 is a good aircraft with only 156 built and now only 136 in service (66% with DAL), see photo below:
Surely the CS300 will be considered to replace the MD-88’s but it will face tough competition from Boeing’s new B737Max7.5 (shrunken Max8) with 150 seats in 2 class configuration and the A320neo, as 116 MD-88’s is a real opportunity for all OEM’s.
Below you get a glimpse of DAL’s current fleet strategy, and how it is moving from 50 seat RJ’s into 76 seat RJ’s and up and up, and with each step the units costs (CASM) go down but more importantly unit revenue (RPM), a DAL is very actively pushing First Class and Economy Plus/Economy Premium seating to attract higher yield traffic, something not possible with the 50 seat RJ’s and limited with even 76 seat RJ’s (current seating limit for CPA partners-Delta Express capacity purchase agreements).
Note the B717-200 has 12 First Class seats and 20 Economy Plus seats, which is 29% of the seats available in the aircraft. The B717-200 CASM of $0.09 is equal to around $4,450 per flight hour in operating costs, roughly $40 per seat per flight hour, a very good number for an aircraft 14.4 years old (average).
My guess the discount is at least 50%, as DAL Chairman/CEO Richard Anderson is a clever negotiator and knows that Bombardier is desperate for orders, since this is the 1st new order for the CSeries since September, 2014, and therefore Bombardier had to dig deep, so $US 2.8 or billion is most likely what the deal is, probably even less.
In fact, the loss is huge, and we will see that in Bombardier’s 2Q/2016 results, as a “special charge” or “onerous contract” for $US 500 million will show up that covers the 75 x DAL CS100’s, 45 x Air Canada CS300’s and 7 x airBaltic CS300 orders of this year (Air Canada is still LOI for now), that is $US 3.93 million per aircraft on average, which to me says they sold these 127 aircraft at $500 million below cost ! and this not going to change in the 100-150 seat market as you will read why further down.
This program, will probably NEVER make money due to LOW demand in its segment and very low pricing due to intense price competition, a business where you WIN and order but LOSE money is never going to work for very long ! Yet Bombardier still claims it will break-even with the CSeries in 2020 ? maybe if they use taxpayers money to write down everything through “special charges” and have no investment
Look it is a WIN for Bombardier’s order book, but it is a LOSS for its financial books, as Bombardier has $2.5 billion in cash, and $9 billion in debt, while the Cseries is still without a FAA or EASA type certificate, 12 weeks before entry into service (EIS) with Swiss, that has to be worrying indeed.
This DAL deal is a bold move by the airline, the program was for sale back in October, 2015, and Bombardier is struggling to get Canadian government money, to fund its production of the aircraft. In fact, the plan is to spin off the CSeries off into a new separate company that will be 1/3 owned by Bombardier, 1/3 owned by the Government of Quebec and 1/3 owned by the Canadian government, with Quebec and Canadian government kicking in $C 2.6 billion together.
This deal would take pressure of Bombardier’s books, and transfer the RISK to the new entity, and I do say RISK as the program still has many challenges, and it will transfer the RISKS on the Canadian taxpayers.
The Canadian government has not yet been suckered into this deal, it wants the Beaudoin and Bombardier families that control +54% of the voting shares to reduce it to a minority and to have better corporate governance, as their own Executive Chairman of the Board, Pierre Beaudoin is fully responsible for the current mess at Bombardier under his leadership as CEO/President from 2007 to 2015, a period of HUGE investor loses and mess that can still destroy the company built by Mr. Bombardier.
After 8 years, the CSeries has managed only 250 firm orders, but upon closer evaluation it is more like 160 orders with Republic Airways, Odyssey Airlines, Gulf Air, Iraqi Airways, etc. most likely NOT going to take the aircraft for various reasons (political, no capital, new strategy, etc.).
Now, we have 325 orders, still a very small amount after 8 years, and while many airlines are looking at the program, please understand that is normal with so few manufacturers today, and airlines will play them all to get the best deal, but understand that the CSeries will be in all major contests in the 100-150 seat segment, it will be played as the 3rd wheel, and the only place it really has a good chance to win will be the CS100 as that pins it against Embraer.
I have already discussed the 100-150 seat market many times, a market that has been in free fall for 9 years now, and only 53 deliveries last year by 4 manufacturers, and its peak was 330 in 1991, and in NO WAY can you believe Bombardier forecasts of 7,000 new airplanes over the next 20 years (350 per year) it is total bogus BS.
This is the segment that has destroyed the A318 after 81 deliveries, destroyed the B737-600 after 69 deliveries, killing the current Bombardier CRJ1000 with only 44 deliveries after almost 6 years and a $243 million write down in 2015 due to ‘low demand’ and there is nothing to show that the CSeries won’t follow the same path in due course.
The 100-150 seat is the WRONG market to be in for Bombardier at the WRONG time, see graph below in regard to the 100-150 seat markets rise and fall and the 150-190 seat market (A320 and B737-800) ascend over the past few years, says novels about the CSeries problems to come.
Currently the A319neo has only 50 current orders and the B737Max7 has 60 current orders, or 110 for both, while the 150-240 seat single aisle A320/321neo and the B737Max8/9 have a combined order book of 7,235 orders, this means the 100-150 seat market is outsold 66:1, yes 66 order for every 1 order in this very poor market segment, and here Bombardier expects to make a living ?
It will not happen, the market is not there, and you do not stimulate market demand for aircraft with new technology, airlines buy aircraft to make money with, and the market will ultimately kill the CSeries in due course, the aircraft is good, but airlines are NOT buying it, look even with Air Canada’s 45 order (which is still a LOI), the CSeries has at best 280 orders after 8 years (inc. DAL’s latest order), it is NOT selling, see Order Graphs below by AirInsight, again says novels about the poor selling 100-150 seat market, and the high flying 150+ seat single aisle market.
The company says it needs $2 billion for the next 2 years of CSeries entry into service and production ramp up, but it will need much more than that, as I am sure that the current ‘real’ 280 orders, are not making money for Bombardier, so orders go back to 2009-2010, and this means that for the next few years production will be at a loss, as the ramp up is slow and unit costs will be high, even with the $3.2 billion write down of the program, unit costs will not compete with Airbus or Boeing unit costs.
Production according to Bombardier will by the end of 2020 produce 255 (minimum) to 315 (maximum) CSeries, so the current money losing 280 orders will be all delivered by 2011 (minimum production rate) to at best late 2020 (maximum production rate), the plan calls for 1-20 in 2016, 30-35 in 2017, 45-55 in 2018, 75-85 in 2019 and 90-120 in 2020.
The sales have been slow, but the DAL deal breaks the 2 year drought, but do not expect a major breakthrough, with a maximum of 315 to be delivered by the end of 2020, all slots are “suppose” to be filled now. BUT, as I have said before, with around 90 orders “questionable”, the “real” order book is most likely around 225 now, so room for another 90 aircraft at best for delivery before the end of 2020. See ‘firm’ order graph below, a very slow sales campaign by any standard:
See the fact Air Canada is looking at 2019 deliveries and DAL is looking at some 2018 deliveries, is proof that Bombardier knows it does not have 325 “firm’ orders, its the only way Air Canada and DAL can be guaranteed early deliveries
A sustainable business in the 100-150 seat market is unattainable for Bombardier, it lacks demand and lacks pricing power, and with Airbus and Boeing determined to destroy Bombardier for entering its market segments (135+ seat aircraft), and they are going to price them out of all BIG deals, this CS100 was a rarity in North America, as major airlines do not operate 110 seat jets today, the market has moved on, and DAL is the only major one to still operate smaller jets.
Look at the graph below on average seat capacity per flight, the trend is for bigger aircraft and another indication of many , why the 100-150 seat segment is the segment of “doom” today, low demand x low margins = failure, and this is the segment the CSeries is 100% positioned in, it is going to be very tough for Bombardier to make money with the CSeries.
Pricing is a driver of deals, all aircraft today have new fuel efficient engines, modern cockpits, IFE, etc. the competitive advantage that Bombardier once thought it had, is gone, it was easily copied, and that is the PW1000G engine now on A210neo line and Embraer’s E2 line, while Boeing went with the CFM Leap engine, and the fact it has some new materials that are lighter is nice, but hard to quantify as real benefits in an age of low oil prices and where pricing deals are done at up to 70% off list price when needed by the duopoly. Price is a big determining factor in orders, no question about that, and then operating economics, which have greatly improved for all aircraft today with the new generation of engines.
Look, Bombardier should have anticipated the reaction of Airbus and Boeing and it should have know it did not have the strength to compete on price, and with low volumes of 10 CSeries per month how can it ever match unit costs of a A320neo or B737Max at production rates going to 60 per month by each over the next 4 years ? it can’t and this is why it will fail, as it will lose most major contests and when it does win, it will have to take a very low margin or even a loss to make the deal, so when will Bombardier ever be profitable with the CSeries, probably never ! it has a target on its back, and rightly so.
The CSeries is a wonderful aircraft, BUT airlines don’t buy aircraft because they are wonderful they need to be economical to operate, reliable, offer goof passenger comfort, priced well and well supported, but PRICE is big, because the differences between current Airbus or Boeing aircraft is very close, they match each other very well with latest technologies and in the end its aboy perceptions, perceived price versus perceived benefits, and here there is some quantitative analysis, but like cars where some love a GM, or Chrysler or a Ford, the same applies here, some like Airbus and some are loyal to Airbus, with some politics involved off course.
The above diagram shows the planned product line up, the duopoly was fine with the CS100, but the CS300 is challenging the bottom of Airbus and Boeing’s product range (A319neo and B737Max7), and that is scene as unacceptable and is being dealt with furiously with pricing that will make any CS300 deal head to head with Airbus or Boeing a no win sitiation, yes WIN and order Bombardier will, but it will LOSE financially on each “win”, its like winning a few innings but in the end losing the game.
The CS500 would be suicidal, yes lots of airlines will love it, they will use it to “play” all OEM’s for the best deal, seems people do not understand that just because airlines are now looking at the CSeries, it doe snot mean they are buying, they are all going to play the 3 off against each other, and eventually the 5 off against each other, the winner will be the one with the BEST offer, but that win may not be a profitable win.
This will come out in BIG airline deals, where wide body aircraft are involved, the duopoly will be able to use wide body aircraft discounts, deliveries, modifications as an incentive to make deals on the single aisle aircraft, again this is where Bombardier will struggle with deals, profitability and in the end will bow out like McDonnell Douglas, Lockheed, BAC, Convair etc.
Boeing is now moving ahead with the’new’ B737Max7.5 a shrunk version of the Max8, to seat 150 in 2 class seating and move the Max 7 from the money losing 100-150 seat market, so that it can win the Southwest and United deals to replace their B737-300/700’s when the time comes, and to block the CS300 (130-160 seats) on future deals.
Look, orders are down in 2016 from the high’s of the order boom in 2013 and 2014 where orders by the duopoly were reaching 3,200 a year, with this year order going to at best 1,300 for both, so this year and next year as well, the airlines ordering aircraft will get super deals as orders expected to drop by 30-35% over last year for both Airbus and Boeing, and Bombardier cannot play in this BIG league, its over stepped its capabilities (financial and production) and shows that going from the minor league (Regional Jets) to the majors (Big commercial jets) is a quantum step that should not have been taken.
With Bombardier business jet deliveries to fall at least 25% this year and the Q400 down to 33 orders in backlog and the CRJ down to 86 orders in backlog (inc. recent Chorus and Trident orders for 9), the commercial division is in trouble, 2 dying older products that cannot compete with their respective competition, the ATR-72-600 vs Q400 and the E175 vs CRJ900, as Bombardier is being outsold and out delivered by large multiples every year now.
Even, long time Bombardier customer, Horizon Air last month choice to but 30+ E175’s over CRJ900’s and replace up to 20 of its Q400’s with some of the E175’s, the market does not lie, airlines know and analyse what are the better products and orders show what airlines want (demand), and it ain’t the Q400 and CRJ900 anymore, just repeat orders now as the products are in the declining phase of their product life cycle, and they should disappear by 2019 all together, and then its up to the CSeries and G7000 to hold down the fort, and both will have huge challenges in their quest for orders and profitability in highly contested markets.
Till next time, thanks for reading my blog, cheers.