READ: Blog article on DAL deal, April 28, 2016
Well the Delta Air Lines (DAL) deal for 75 x CS100’s and 50 options is done, and brings the current order book to 325 ‘firm’ orders, though the 40 aircraft order by Republic Airways (USA) from February, 2010 is out, as that airline is in Chapter 11, and the Bombardier contract will cancelled during the bankruptcy process, so its only 285 ‘firm’ orders right now, with a LOI by Air Canada for 45 x CS300’s to become an order soon, so 33o ‘firm’ orders by the end of May is possible, and unfortunately all are at a loss, so WHEN if EVER will Bombardier make money with the CSeries ?
The Air Canada deal will be a big money loser for sure, it’s LOI was waiting for the DAL deal, I am sure the Air Canada deal helped secure the DAL, and Air Canada’s CEO Calin Rovinescu, surely has to get ‘tough’ with Bombardier and get the same discount DAL got ! because had he gone to Boeing for the Max7 and now Max7.5 he would have received a huge discount.
As Air Canada has Max8 and Max9’s on order, and Boeing with it’s vast product line, is also able to encourage further Max orders with good discounts on future B787’s , which Air Canada loves and the B777-300ER’s, this is what Boeing can bring to the table versus Bombardier, and why Bombardier will NOT succeed in the end with the CSeries.
NOTE: I have always questioned roughly 90 orders (36% of “firm” orders) on the Bombardier CSeries order book as “highly” doubtful (e.g. Ilyushin Finance, Republic, Odyssey, Iraqi Airways, Gulf Air, Lease Corp Int’l, etc.). Bombardier has been deceiving the market with inflated order book, I get it, it is embarrassing after 8 years to have only 330 orders. But orders reflect demand, and that should have been a RED FLAG for the past 5 years, as airlines were not lining up to order, even when oil was $+100 per barrel and there was no A320neo, B737Max or Embraer E2’s, now oil is $+/-40 per barrel and all new aircraft have new fuel efficient engines, and the competitive advantage this so called “game changer” had, is gone ! Now it must compete on PRICE, good luck with that !
Especially worrying is the fact the current commercial products are dying, the Q400 has 33 orders in backlog and the CRJ line has 77 orders as of March 31/16, but has received in April 2 orders, an order for 5 x CRJ900’s from long time Canadian customer Chorus Aviation and 4 x CR900 order from Trident Leasing for CityJet, so back log is 86 tight now.
Based on 2015 deliveries of 29 x Q400’s and 44 x CRJ’s, the current backlog for the Q400 line is good for 14 months (June, 2017) and the CRJ line is good for 24 months (May, 2018), so basically by 2019 the CSeries is THE Commercial Aircraft Division for Bombardier, and that don’t look good for a long term sustainable business.
The Republic Airways deal was done in December, 2013 when Republic Airways sold Frontier Airlines for $36 million in cash after buying it for $108.8 million and and agreement not to pursue $150 million in unsecured bankruptcy claims, but Bombardier has kept the order on its books knowing it was not going to happen.
Bombardier is a company desperate for money and orders, having spent $5.3 billion on the program by 2015, it wrote of $3.4 billion on that program in 2015, as it also wrote of $243 million on the CRJ-1000 program and between 2014-2015 it also wrote off $2.6 billion on the Learjet 85 program, a sad testimony to the leadership of then President/CEO Pierre Beaudoin, a walking disaster that has taken the company to the brink of ruin during his 76 month reign as President & CEO of Bombardier (June, 2008 to February, 2015).
Now, Pierre is leading a Bombardier project to start and finance an airline in Iran ? good, let him stay there and run it ! and let President and CEO Alain Bellemare run the show, hast of to the guy for taking on this huge mess and trying to make it work, maybe 2 years earlier things would be different today.
So the big DAL deal is as expected, a huge order WIN for the CSeries order book, BUT a huge LOSS for the accounting books, as desperation has lead to a reported by Aviation Week, Reuters, Bloomberg and private sources 75% off the $71.8 million list price of the CS-100, or $18 million per aircraft, less than the list of a current 48 passenger ATR-42-600 turboprop !
This means the widely acclaimed great victory deal worth $5.6 billion ($74.6 million/aircraft ?) is in fact $1.4 billion or $18.6 million for each CS100. That is a deal with a huge loss, far beyond the the planned 2Q/2016 $500 million “onerous contract” (a type of contract where the costs involved with fulfilling the terms and conditions of the contract are higher than the amount of economic benefit received) charge for the 120 aircraft going to Delta (75 x CS100’s) and Air Canada (45 x CS300’s, still LOI at this time), or $4.16 million per aircraft. Basically, Bombardier has entered into an agreement that it knows will lose money and it records the loss, and can record the costs later as it understands its costs better around the time of delivery.
The only winners at Bombardier on this deal will be the executives that get a “bonus” for the sale, even though it will lose hundred of millions of dollars, but those executives will be long gone when the CSeries is shut down and orphaned, as this program cannot continue to lose money, but there is NO LIGHT at the end of the tunnel for profitability, the market is tough, dynamic and changing over the next 4 years, to make it impossible to survive for long.
Though, I believe there will be more to that “onerous contract” with time, as Air Canada has a LOI, and I am sure that CEO Calin Rovinescu, like the smart executive he is, waited for the DAL deal, and will now ask for the same terms and conditions that DAL got away with, and Bombardier surely knows that and more and more “special charges” will be forthcoming during between now and 2020.
So already we know, as expected the Bombardier is doing loss making deals to get orders, something I have been warning about on this blog for some time, as this is the reason why the CSeries is doomed, the 100-150 seat market has a low demand (53 last year, peak in 1991 at 330, last 10 years averaged 180 per year, next 10 years 140 per year at best) and with 4 manufacturers, deals are fought over with huge price discounts, as low as 75%, and Airbus and Boeing can afford such discounts as they produce almost 700 aircraft annually each across a very wide product line.
Meanwhile Bombardier will get to 120 CSeries per year maybe by 2020, and no Q400’s or CRJ’s as those products have 33 (Q400) and 86 (CRJ) in backlog, at best 24 months without more orders, but Commercial orders are now down to a book to bill ratio of only 0.10 (10 deliveries to 1 order), as the ATR72-600 turboprop and the E175 regional jet slaughter the Bombardier products in sales by a wide margin.
In a market where demand is low, pricing/margins are low how can Bombardier ever survive financially competing with competition from Airbus, Boeing and Embraer, which have lower cost of production in single aisle aircraft, healthier balance sheets and products just as economical as the CSeries ? It CANNOT survive for long, the writing is on the the wall.
From information I have, the cost of producing a CS100 will be $+/-29 million and $+/- 34 million at some point in the future, as Bombardier plans to build between 255 (minimum) and 315 CSeries (maximum) by the end of 2020. So by that, they should be ALL SOLD OUT thru 2020 with it’s current 330 ‘firm’ orders (inc. Air Canada-LOI).
This DAL deal means that on each aircraft, Bombardier looks set to lose $10.4 million ($18.6m – $29.0m) per aircraft, or $780 million dollars for the 75 ‘firm’ CS100’s. So with revenue worth $1.395 billion for the 75 aircraft and costs being around $2.175 billion, that is a profit margin of -56% on the deal ?
This is it, the exact reason why this 100-150 seat market will KILL the CSeries in the end, it is the BLACK HOLE that has swallowed up the A318 (81 dleiveries) B737-600 (69 deliveries) and now slowly killing the Bombardier CRJ-1000 (44 deliveries in 6 years and a $243 million write down in 2015 due to “low demand).
The manufacturers are fighting over a few orders, and when they come up, the margins are low to negative, like United’s deal for 65 x B737-700NG’s in February, deal was done at $22 million per aircraft, mainly to bridge NG production with Max production, makes sense, but 75% off by Bombardier just to get its 1st new order in 19 months ! a big order for sure, but when will Bombardier’s CSeries be profitable ? Probably NEVER, the market dynamics are against it, from demand, pricing, competitors, production costs, market power, they should have never tried to enter the market of Airbus and Boeing (130+ seat airliners).
A simple SWOT analysis would have warned Bombardier that the duopoly (Airbus and Boeing) would react very strongly to any newcomer into their “turf”, and the duopoly is right to attack the CSeries, it is business, and you do not give your foe any room to grow, you attack when the enemy is vulnerable, disorganized, and still not up to full strength.
Bombardier will not make money on its first 330 orders which take deliveries into 2021, and profitability means ramp up production to the 10 per month they say they will have by 2020, but the there cost of production will never match or come close to the single aisle production (A320neo line and B737Max line) of around 60 units each per month. Then Bombardier needs to get its prices up, but how do you go up from $18.6 million per CS100 ?
The price is so low and now yes many airlines will show interest in the CS100/CS300 if nothing else but to use Bombardier has a pawn against Airbus, Boeing and Embraer for a better deal, and to get to a profitable price of $33+ million for a CS100 and $36+ million for the CS300 will be difficult with Airbus and Boeing in attack mode, in fact every order for the CSeries may be a financial loss and how long can you do that for when Bombardier is now begging for Federal Government money ? They say they need $2 billion for the net 2 years, but judging by this deal they will need billions more for years.
It will be a vicious merry go round, lower your price a great deal and you win a deal but lose money, lower your price by less and you lose the deal, deems like a done deal to me, and probably why they tried to sell the whole program 7 months ago to their competitors. The duopoly is the BIG league, the NHL of aerospace and Bombardier came from the minors, the AHL and a AHL club cannot compete in the NHL.
The duopoly has its own problems, its own single aisle market is going to come under intense competition by 2020 from China’s Comac C919 and Russia’s Irkut MC-21 airliners, all using modern western engines, avionics and very competitive in performance, seating, range and economics, so PRICE will be the weapon, the duopoly is ramping up production of its A320neo and B737Max lines to get units costs as low as possible.
In such a BIG league, Bombardier has NO PLACE, it cannot match the money, investment, production, unit costs and thus pricing, it will be GAME OVER by 2020 either way, the program was ill conceived, yet the aircraft is fantastic, but fantastic airplanes do not drive demand, and the CSeries is in a horrible segment, 100-150 seats that will soon be joined by a 5th manufacturer, the Russian Sukhoi SSJ130 (stretched SSJ-100), and all 5 will fight over +/-140 orders in the 100-150 seat market, there may be a winner, but most will lose here.
Bombardier fantasy forecast is for 7,000 aircraft over 20 years (350 aircraft per year average) in this segment, which defies history, as the peak was 330 units in 1991, and they expect the current fleet of 4,400 to grow to 8,100 by 2024, through 7,000 new aircraft and 3,300 retirements. But those retirements are not being replaced by 100-150 seat aircraft but 150+ seat aircraft. The very worrying things is that Bombardier also forecasts that during those 20 years, those 7,000 new aircraft will have a revenue of $460 billion, which comes to $65.7 million per aircraft (70% of the total revenue forecast for the 60-150 seat turboprop market.
And now I understand why they were so optimistic back when they launched the CSeries, but what we are seeing now is much lower demand then they thought (140 per year versus 350 per year on average) and prices much lower per aircraft ($+/- 33 million versus $65.7 million), so demand is only 40% of forecast and prices are 50% of forecast, so I get a market attractiveness that is 20% of what they thought it was.
This is the BLACK HOLE for several aircraft programs for sure, and it will destroy the CRJ-1000 soon while the B737Max7 is now being “replaced” and re-positioned slightly out of the segment as the B737Max7.5 (shrunken Max8, for 150 seats in 2 class), and the market will be left to the new Sukhoi SSJ-130, E190-E2 and E195-E2 to battle it out with the CS100, while the CS300 will battle the A319neo and the B737-Max7.5.
The money is in the 150-240 seat single aisle market, the mist lucrative segment in commercial aviation, where today the Airbus A320/321neo’s have 4,364 orders versus 50 (A319neo) in the 100 to 150 seat market, a 87:1 sales ratio, while Boeing B737Max8/9’s have 2,871 orders versus 60 (B737Max7) in the 100-150 seat market, a 48:1 sales ratio,.
Says NOVELS about where the market IS and where the market is NOT, and the programs that do fail are usually in market segments that are small and have been entered to early or too late, in Bombardier’s case-too late !
As for Business jets, Bombardier will deliver 25% less aircraft this year (+/- 150 aircraft) than in 2015 which was 199 business jets which itself was down 2.5% on 2014 deliveries of 204 aircraft, so things are looking bad their too especially as the “cash cow” Global 5000/6000 (which in 2014 were 43% of Aerospace revenue) were down to 73 in 2014 from 80 in 2014 and look to be below 55 this year with only 14 deliveries in 1Q/2016., and the future lies with the highly questionable G7000 which I wrote about in this BLOG March 22, 2016 and why it will NOT be a success like the Global 5000/6000 line.
The LearJet 70/75 line is also dying, and I expect the company to be sold within 2 years, as deep price discounting have kept the line at 32 deliveries in 2015 and 33 in 2014, but with the cancellation of the Learjet 85, there is NO future for the brand, it will sadly die with the Learjet 70/75 with only 1 delivery in 1Q/206. The Challenger 650 (ex-605/604/601/600) is a tired aircraft, now 36+ years old, it is facing new competition and with 36 deliveries in 2014, and down to 25 in 2015 the model is dying slowly with 2 deliveries in 1Q/2026.
Only the Challenger 350 looks good with 14 deliveries in 1Q/2016 and 68 in 2015 and 54 in 2014. Across its product range, Bombardier is under attack with new models and rejuvenated competitors like Gulfstream, Dassault, Textron smelling ‘blood’ and going for the kill product by product.
The 5 year Transformation plan for 2020 by Bombardier for its Aerospace is a joke, they plan on $5.8 billion in revenue from Commercial, and $9.1 billion from Business jets, for a combined revenue of 14.9 billion.
Sadly at a best 120 CS100/300 units will be delivered in 2020 could generate around $4.0 billion in revenue at BEST, probably less due to major price discounting by competitors and it is very doubtful that any Q400’s or CRJ’s will be produced past 2019, and if they do limp into 2020 the production rates will be very low at best 12 a year for each supplying existing operators, as the ATR-72-600 and E175 are proving to be much more attractive for customers.
The business jet side will not have the Learjet by 2020 and most likely the Challenger 650, and the G7000 will replace the G5000/6000’s by then, so how many $72 million G7000’s , $30 million Challenger 350’s to make up $9.1 billion in business jets, well if we assume 60% by revenue the G7000, then it means 75 x G7000’s and 121 x Challnger 350’s ! NOT possible.
Realistically 30 x G7000’s (tough competition from ACJ319neo and BBJMax in the market that is today averaging around 16 single aisle ACJ and BBJ’s per year ! where is the market ??? and then maybe 65 x Challenger 350’s, so I am seeing total revenue around $4.1 billion for 95 business jets (G7000’s, Challenger 350’s) and no Learjets, G5000/6000 and Challenger 650’s.
No bright future in sight in my opinion, as Aerospace is looking at $8.1 billion in revenue by 2020, with CS100, CS300, G7000 and Challenger 350.
In 2015 the ATR-74-600 had 65 firm orders and 81 deliveries VS 26 Q400 orders (60% less than ATR) and 29 deliveries (64% less than ATR) and most Q400 orders and deliveries are to Canada’s WestJet Encore and Chorus Aviation.
In 2015 the Embraer E175 had 94 firm orders and 82 deliveries VS 25 CRJ900 orders (73% less than Embraer) and 38 deliveries (53% less).
After 8 years it is still a very sad order book, nothing to brag about for sure, while Embraer’s new E2 family of E175, E190 and E195 have after less than 3 years of sales and marketing, 325 orders as of today.
Till next time thanks for reading my blog !