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Bombardier, Commercial Airliners, General Aviation, Regional Aircraft, UPDATES

SUMMARY: Bombardier’s on going 5 Year Transformation Plan looks to $25 billion in Revenue by 2020 (+53% on 2016 Revenue of $16.33 billion which is down 18.8% or $3.8 billion since 2014), with $15 billion (60%) to come from Aerospace, Commercial Aircraft (BCA to $5 billion + 129% on 2016) and Business Aircraft (BBA to $9 billion +54% on 2016). I look at how realistic that is given the CSeries poor sales after 8+ years (320) and several old, tired and dying programs that need to be culled, from the Q400, Learjets to the 1970’s designed CL-600 Challenger and its evolutionary cousins the CRJ, G5000/6000 (BBA’s once “cash cow”) and new G7000 line. My take is that Bombardier will fall short by at least $6.5 billion on its Commercial and Business Aircraft goals, as realistically by 2020 all Bombardier will have to sell in Aerospace is its CSeries, the new Global 7000/8000 business jets and the Challenger 350. At the same time all of its products are going to face lot more competition from Airbus, Boeing, Comac (China), Irkut (Russia) and Embraer on the Commercial Aircraft side as the ‘duopoly’ turns into 5 competitors, with Bombardier the weak “5th Wheel”, while Business Aircraft (BBA) is facing new competing aircraft from Gulfstream (G500/600), Dassault (Falcon 5X/8X) and Textron (Longitude/Hemisphere). Bombardier is also facing a ‘perfect storm’ of tougher global market, economic and political forces that will challenge Bombardier’s on going struggle to become financially viable without taxpayers Government money. Empowered by ‘state aid’ the company is now arrogant enough to launch another new aircraft program, as Sweden is investigating serious bribery charges against the company and the top 5 Bombardier executives get almost 49% pay increase for what I do not know ? yet 14,500 employees are being laid off, and the “gong show” at Bombardier continues.

READ MORE ON BOMBARDIER on this Blog just go to ‘Categories’ and click on Bombardier

https://www.linkedin.com/in/tomas-chlumecky-3200a021/recent-activity/posts/

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Bombardier Inc. released its 2016 Annual Report last month and while the company had Revenues of $US 16.339 billion in 2016 (down 18.7% on Revenue of $20.111 billion in 2014) and recorded a Net Loss of $981 million (accumulating $7.567 billion just in the last 3 years), yet the stock price (TSX:BBD.B) is still mysteriously above $2.00 (see graph below), after falling to $0.88 per share on February 5, 2016.

The company almost filled for bankruptcy in 2015, and is alive today thanks to $US 1.5 billion from Quebec’s pension fund CDPQ for a 30% share in its Transportation (trains and trams) division and then $1.0 billion from the government of Quebec for a 49.5% share in the struggling CSeries program that no OEM wanted to buy in 2015 when it was for sale, a new company CSeries Aircraft Limited Partnership (CSALP) was formed, to ‘spin off’ the CSeries from Bombardier to the dismay of Embraer and ATR and both are going to the WTO claiming ‘illegal state aid”.

In February, 2017 Canada’s Federal government gave Bombardier a $US 282 million in 4 installments from its Strategic Aerospace Initiative program, that has given handed out taxpayers money to Bombardier, P&W for years, but how much the Feds have given, we Canadians do not know, its a “state secret” from taxpayers, but some claim as much as $4.0 billion to Bombardier.

Now they are looking to a new aircraft according to CEO Alain Bellemare, who said “now that we’ve moved into a different place from a financial perspective, we are starting to think what we will be doing next on the aerospace side” ? No hint if its a Commercial (BCA) or Business (BBA) aircraft, yes they need new products, but the CSeries is on the road to “nowhere” and the jury is out on the $72.8 million 17 seat, 7,300nm Global G7000 that has only 63 orders and a questionable market segment size.

Seriously ? near bankruptcy in late 2015, in 2016 they get $2.5 billion from Quebec, sell 120 CSeries to Air Canada and Delta Air Lines below cost (my estimate a loss of $+/-840 million or $7m per aircraft), no new big CSeries order in almost a year (2 x CS300’s for Air Tanzania is all), just talking to many airlines off course, with 3 OEM’s now, every airline CEO should be talking to Bombardier, to get a better deal from Airbus and Boeing !

I do not get it ! 14,500 announced layoffs in 2016 (21,450 since January, 2014), 2016 Revenue down 10.1%, EBIT margin -0.4%, net loss $981 million, FCF of $-1.06 billion, new debt at 8.75% to retire old debt at 5.5%, backlog of Q400’s and CRJ’s down to less than 12 months, current liabilities at $9.933 billion and they are in a “different place” ? and they want to launch a NEW aircraft ? OMG they want to hit Canadian taxpayers again and again for more money, it never stops with Bombardier. 

By the way CEO Alain Bellemare, in my opinion is doing a very good job given the ‘mess’ created by ex-President/CEO Pierre Beaudoin, BUT it is sad to see the pay raises they received of almost 50% ($9.5 million for Bellemare from $6.4 million in 2015) when the company is far from healthy, long way to go and shameful greed has tainted his reputation, especially with the workers, as what have they done to deserve a raise ?

In my opinion it is “illegal state aid”, and why Bombardier and the Federal Government do not release the figures for loans and grants to Bombardier and how much was returned to taxpayers, Bombardier lawyers fight tooth and nail to keep it “secret” from Canadian taxpayers, that is the state of our democracy ? and why, because the figures will show substantial money to Bombardier since 1966, money for the CSeries in 2008 again in 2017 and when will this ‘corporate welfare’ for Bombardier stop ?

At the end of 2016, Bombardier had $3.384 billion in cash and equivalents of which 71% was from Quebec in 2016, otherwise the cash on hand would be around $966 million, not enough to cover less than 1 year requirements of $8.593 billion ($590 m for interest, $4.12 b for purchase obligations, $425 m for derivative financial obligations, etc.).

The company also took steps in 2016 by shoring up its own finances by issuing $1.4 billion of unsecured Senior Notes with a coupon rate of 8.75% due Dec 1, 2021 to retire $750 million of secured notes at 5.50% due 2018 and $650 million senior notes bearing 7.5% due in 2018 as well, retiring lower coupon rate notes early with much higher coupon rates due 5 years out, is a sign they know they have big financial problems for years to come, and ready to pay interest rates 59% higher to be ‘safe’.

TSX:BBD.B Share Price

One wonders where the optimism comes from as the company struggles in both planes and train sales and deliveries, and Revenue has dropped 18.7% ($3.772 billion) since 2014 when the stock price was just under $4.00 per share for most of that year.

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Bombardier’s CEO Alain Bellemare still thinks the company will become a $25 billion a year company by 2020, that means an increase in Revenue of $8.661 billion over 2016, a 53% increase in Revenue over the next 4 years ?

Well, the graph above shows how Bombardier ‘hopes’ to get to $25 billion, and I would love to see the company achieve that goal, but when one understands the current market dynamics in the company’s commercial and business aircraft market, I do not see how the company can honestly believe that it can take the current 2016 Commercial Aircraft (BCA) Revenue of $2.617 billion and $5.741 billion in Revenue from Business Aircraft (BBA), a total of $8.3 billion to $15 billion (to $6 billion for BCA and to $9 billion for BBA) by 2020.

This will require a 80.7% increase in BCA and BBA Revenue in the next 4 years ($8.3 billion to $15 billion), which means +129% increase in Revenue from BCA  and +56% increase in Revenue for BBA ? very optimistic for BCA and even BBA given what is happening in the market and Bombardier’s ‘dying’ product line.

I do not know much about the Transportation (trains and tram) or BT business, but even Bombardier estimated that business to be pretty much stable in the current $8.0 billion going to around $9.4 billion by 2020, so Bombardier’s ‘hoped’ of achieving the $25 billion Revenue is in the Aerospace business (Commercial and Business aircraft, plus its relatively ‘small’ $1.549 billion Aerostructures and Engineering Division (BAES), with Transportation (trains, trams, etc.) with $7.574 billion in Revenue (46.3% of total BBD Revenue).

With 2020 projections assuming 15 billion (60% of total projected Revenue) from BCA (Commercial aircraft) and BBA (Business aircraft), this is where my analysis will focus and look at why that goal, seems very much just a ‘hope’ but reality is against that goal being achieved.

The Bombardier 2020 plan is BCA to be around $6.0 billion and BBA at around $9.0 billion, but that looks very optimistic given the sales problems with the CRJ, Q400, CSeries, Globals, G7000 and Learjets today, which are a combination of global market forces at work and an old and tired product line that is in desperate need of new products and no more “revamping” of interiors, avionics and engine upgrades, as some of the products date back to the 1960’s and 1970s today. 

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Lets start with BCA, where Bombardier today is facing a serious problems with its CRJ and Q400 product line, which have both been living of their backlog for a long time, and as of Dec 31, 2017, the CRJ line was down to just 52 aircraft ( 9 x CRJ700, 26 x CRJ900 and 17 x CRJ1000) in backlog after delivering 46 in 2016 (3.8 deliveries per month), which equals just 14 months of production at 2016 levels, this means with no new orders, the backlog is depleted by March, 2018. With just 19 orders in 2016 (all CRJ-900’s) on 46 deliveries book to bill ratio is a low 0.41 and in 2015 that ratio was 0.56 as deliveries have been exceeding orders for 4 years.

The current list prices are $41.4m for CRJ700, $46.5m for CRJ900, $49.5m for CRJ1000 with discounts calculated by me running at around 28% off list when I compare Revenue and deliveries and list prices, and that applies to Q400 as well, so sales are price discounting led these days, and still below deliveries.

 

The next 4 graphs clearly show the decline of the CRJ line as it clearly is in the declining phase of its product life cycle and a planned cabin retrofit and some tuning of the  aerodynamics and GE CF34 engine will not stem the tide, as US airlines are preferring the Embraer E175 (PHOTO below) over the CRJ900 these days.

The only near term hope at this point is that some major orders may come out of China as it embarks on a new regional airline strategy, banning new entrants from narrowbody aircraft (A320’s/B737’s) until they have built up some critical mass, of at least 25 regional aircraft before they can import narrowbody airliners.

This so-called Rule 96 could be a boost for regional jets (EJets, CRJ and SSJ) and turboprops (ATR) in China, details are hard to find, but basically part of the new 5 year plan to open up many secondary airports and that is why they want regional jets to serve these new secondary airports.

That move will surely get Chinese airlines to buy more ARJ-21’s as well but that program is a disaster still with just 2 in service and 6 built, 302 orders and large number of deliveries could be many many years away, and anyway with just 189 regional aircraft in China (6.7% of commercial fleet of 2,800 aircraft with 57 airlines), the Chinese are not used to ‘small’ airliners-yet. Yes, a shift to smaller regional aircraft may give Bombardier’s CRJ line a badly needed boost, but the problem is large cities with large airports are congested, slot restrictions means a need for bigger aircraft.

The initial word on the ARJ-21 with AVIC owned Chengdu Airlines with 2 aircraft in operation is that the back is very noisy, with the last 2 rows being left empty and the aircraft fly in good weather only with many issues with noise, warning systems, door pressure issues and therefore it cannot fly in rainy weather ? Sound slike the MA60 all over again, just badly built aircraft.

As of December 31, 2016, Embraer had 175 EJets orders in backlog (12 x E195’s, 56 x E190s, 104 x E175’s, 3 x E170’s) that is 3.3 times the CRJ backlog, plus 283 E2’s (100 x E175-E2’s, 92 x E190-E2’s and 90 x E190-E2s’) which is close to the CSeries 320 orders yet launched 3 years after the CSeries.

One has to remember the CRJ line is a Challenger 600 business jet from the 1970’s stretched after Bombardier bought Canadair into a 50 passenger aircraft (CRJ-100, CRJ-200), a 70 passenger aircraft (CRJ-700), then a 76-85 passenger aircraft (CRJ-900) and ultimately a 104 passenger (CRJ-1000), with 1,850 deliveries by Dec 31, 2017 (1,021 x CRJ-100/200/440, 343 x CRJ-700’s, 402 x CRJ-900 and just 51 CRJ-1000’s). Below you can see the dismal sales performance (68 orders) of the 104 seat CRJ-1000 and the decline in orders.

The above graphs paint a real picture, one that shows that the CRJ line will most likely not make it into 2020, as Bombardier forecasts it will, they already wrote off the CRJ1000 (104 passenger) in 2015 to the tune of $243 million as the 100-150 seat market still shows little signs of life and why the CSeries struggles with orders after 9 years and only 320 firm orders. (not counting Republic Airways PR order for 40 x CS300’s), and still many orders highly ‘questionable’ (+/-60 or 19% of order book of 320 aircraft from Gulf Air, Odyssey, Iraqi Airways, Ilyushin Finance, SaudiGulf Airlines).

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The $31.9 million Q400 is no better off than the CRJ, it has done well, with 541 deliveries as of Dec 31, 2016, bating the 404 x DHC-8-100/200’s and 267 x DHC-8-300’s. But as you can see from the graph below, it now struggles with the ATR-72-600, and current backlog is just 31 aircraft as of Dec 31, 2016, with 33 deliveries in 2016 (2.75 per month), the current backlog will be depleted in 11 months or January, 2018 at current 2016 rate of production and no new orders in 2017. In 2016 25 orders were received for a book to bill ratio of 0.86 following 2015 with 0.89, better than the CRJ but still running down its backlog by 8 aircraft in 2016.

The ATR-72-600 is more economical than the Q400 and even Bombardier’s CEO Alain Bellemare once said the Q400 ” is too much aircraft” for some customers, with two 5,071 shp PW 150 engines versus two 2,750 shp PW 127M engines, one can see why the Q400 is fast at 360 kts versus 275 kts, but a lot less fuel burn and maintenance costs. In the end, the Q400 was designed for the 300-400nm sector, below that the ATR-72 is more economic and above 400nm the RJ’s are more economical, that is how Bombardier positioned the Q400 between its Q300 and its CRJ’s.

I think its clear the future is NOT with the CRJ or the Q400, they should be done next year, but with a few orders here and there and a cut in production to 2.0- to 2.5 per month for both they can extend that into late 2019 but 2020 ?

Presently, ATR has 20+ orders in backlog which is today good for 2.75 years (33 months) of production at a rate of 6.7 aircraft per month, must frustrate Bombardier seeking the backlogs of ATR and Embraer, and then what are they thinking ? why are they LOSING the regional market, bad marketing, sales ? something is NOT working at Bombardier that is for sure.

Seriously where is the market, and if today the CRJ contributes roughly $1.55 billion to Revenue with 46 deliveries and the Q400 contributes around $760 million in Revenue, for a total of $2.31 billion in 2016 to Revenue, at best or very best, in 2020 they could contribute $1.4 billion in 2020 with 48 deliveries, but why drag out production at low delivery rates if its not economical ? unless they can produce at reasonable rates it makes no sense.

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So the future at BCA is the CSeries, no CRJ or Q400 by 2020, so can it come up with $6.0+ billion in Revenue in 2020 with planned delivery of  90-120 aircraft ?

The answer is NO, at 90 deliveries that would mean $66 million per unit (average combined discount of 19%) ($76.5 million CS100 and $85.7 million CS300 mix) and at 120 deliveries that would still mean $50.0 million per unit (average combined discount of 38%) delivered (CS100 and CS300). That today is unattainable when prices discounts are +60% off list price in the narrowbody market, where 2016 was tough, and sales were low by Airbus and Boeing, and no one knows that better than Bombardier which had to discount its deal with Delta Air Lines for 75 x CS100’s by a reported/calculated 69% off list or around $23 million per CS100 where unit cost is around +/- at least $30 million, or $7 million loss per unit ($525 loss on DAL deal).

The market for 100-150 passenger aircraft sucks, I have discussed this many times, but the demand is NOT there, what is there is Airbus A319neo, Boeing B737-7 and Embraer E190/195-E2’s, and with just 54 deliveries by 5 OEM’s (inc. Bombardier’s failing CRJ-1000) in 2015 and +/-84 deliveries in 2016 by 4 OEM’s, too much price competition, too many competitors results in low to negative margins, the graph below says it all about the DEMAND in this market, and where demand has been going for the past 10 years ? up-gauging to bigger aircraft.

Bombardier should know how tough the 100-150 seat market is, its 104 seat CRJ-1000 has been a ‘sales disaster’ (only 68 orders and 51 deliveries) , and it will join many aircraft to have failed in this segment, the Airbus A318 (80 delivered), Boeing B737-600 (69 delivered), and then add in the BAe 146-300, Fokker F-100, ARJ-100, B717-200 and Embraer’s largest EJet, the E195 (120-132 passengers) also struggles, with just 166 orders (155 deliveries) since 2005 and only 12 orders in backlog, not a big seller either (average 13 deliveries per year).

So WHERE is this big market Bombardier claims in its forecast 7,000 new aircraft over the next 20 years in the 100 to 150 seat segment will be delivered to ? that 350 has NEVER been achieved, 330 was the best back in 1991 (26 years ago), and here in a nutshell is the disaster that the CSeries finds itself in, little demand and 3 other competitors competing for under 90 aircraft deliveries per year, as up-gauging by airlines has reduced the 100-150 seat segment to a shadow of what it once was (deliveries are off by +75% to the early 1990’s).

After “winning”the order for 45 x CS300’s from Air Canada and 75 x CS100’s from Delta Airlines with very deep discounts early in 2016, since then Bombardier’s new sales have been nil, with just little unknown Air Tanzania stepping up for 2 x CS300’s ;ate in the year, and that is troubling. Yes, Bombardier will probably win a British Airways Club World order to replace the 2 x Airbus A318s in VIP configuration of just 32 seats that fly London City Airport to New York’s JFK (non stop from JFK but 1-stop West bound, that the CSeris will eliminate with non-stop service ).

Talk of Jetblue, Spirity and a LCC in Europe is tiring, stop talking about all the customers who you are talking to and just close a deal !, but they need real orders, one’s that make money and big names, as they had to go with long time struggling airBaltic (Latvia) to be the launch customer for the CS300, seriously ? says a lot about the lack of QUALITY in the current order book after Lufthansa (Swiss), Air Canada and Delta Airlines.

See Graphs below, for a visual of what is happening, with the market, average capacity per flight and the orders for the smaller Airbus and Boeing products with time, the signs are all there that the CSeries will struggle every year for orders, especially as Airbus plans to go to 60 A320neo family production per month by 2019 and Boeing is planning 57 B737 Max family  per month by 2019, so combined duopoly production of 117 aircraft per months 1,404 A320neo and B737Max aircraft per year, in 2019 Bombardier may deliver 75 to 85 CSeries, how do you compete with that ? on price, customer support and delivery ? you don’t when you are producing 5% to 6% of your competitors output.

Into this low demand segment comes the CS100 and CS300, and down the road possibly the CS500, which will put Bombardier directly against the B737-Max8 and the A320neo, with the Chinese C919 and Russian Irkut MC-21 coming by 2020, which will make sales into Russia and especially China much harder.

While Bombardier’s current 320 orders (not counting the 40 for Republic Airways on the books since 2010), its current planned production/delivery was 7 CSeries in 2016, and is planning on 30-35 in 2017, 45-55 in 2018, 75-85 in 2018 and 90-120 in 2020, they will deliver somewhere between 238 and 293 CSeries by the end of 2020, which assuming even the low 320 orders is ‘real”, it still will take the current orders into 2021.

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NOTE: Bombardier claims 360 orders a sit includes 40 x CS300’s since 2010, when the airline owned Frontier Airlines, today it is just a regional airline (76 passenger aircraft or less) flying CPA (capacity purchase agreement) routes for US Major airlines as United Express, Delta Connection or American Eagle.

The operation basically fixed fee code sharing (+/- ACMI leasing), and cannot use the 130-160 seat CS300, the deal was done when Republic sold Frontier Airlines to Indigo Partners many years ago, but for PR its on the books.

In fact its still on the books as Republic Airways Holdings Inc. goes through Chapter 11 Bankruptcy, mainly to restructure its $3.6 billion in debt and dispose of 27 x Q400’s, 80 ERJ-140/145’s and 19 E-170/175’s and they could have disposed of the commitment for 40 x C300’s but surely some incentive was offered by Bombardier to keep the 40 aircraft (11% of its ‘360’ orders on the books, as it wants that figure to grow and not decrease from a PR point of view), so now it is an official  “DEFERRAL” of scheduled payments and deliveries, BUT that is just BS from Bombardier, as Republic Airways will NOT operate CS300’s EVER.

Bombardier did this back in the early 1990’s, a Taiwanese airline Uni-Air (combination of Great China Airlines, Taiwan Airways and Uni Air all owned by EVA Air). The airline operated about 8 x DHC-8-300’s and ordered the new Q400, but later wanted to cancel it, Bombardier offered them a “keep it quite” deal for at least 1 year, no word of cancellation as Q400 sales were slow and the PR of a cancellation would not be well received by the market. For this Uni-Air received 1 new DHC-8-300 and traded in 1 older aircraft of the same type with $1 million ‘extra’ on top of fair market value, and the cancellation was kept quiet and Uni Air never received the Q400, that how the real world of aircraft sales works, ‘smoke and mirrors’, and that is the Republic Airways CS300 deal all over again, but much bigger $US 3.38 billion (based on list) but really around $1.35 billion (-60% off most likely since it was done early on in the CSeries sales drive, in 2010).

Possibly Delta Air Lines could pick that up at some point ? either way noone is talking about it, not Bombardier, not Republic Airways, and the silence says to me the order is “bogus”, and therefore only 320 CSeries orders are ‘real’ (?), not 360 as claimed by Bombardier.

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These early orders have been on the books in some cases since 2010, and you can bet they were all at very low prices as orders were very slow to come by year by year, so Bombardier will be tough pressed to get anywhere near $50.0 million per unit (average CS100/300), and without the CRJ and Q400 I cannot see $5.0 billion in Revenue, at 90 deliveries it may get to $3.2 billion and at 120 deliveries maybe $4.2 billion, but pricing is not something Bombardier controls.

According to CEO Alain Bellemare, he wants to stop discounting, well that is nice, but Airbus and Boeing are in a major price war for orders across their product lines, especially A320neo vs B737Max , its a BUYERS market today, and prices will be +50% below List Price for years, as two new entrants arrive by 2020 (C919 and MC-21) that will spark a even bigger price war and hence production increases, that will bring unit production costs down even further, and tougher for the likes of Bombardier to compete on cost and thus price, without taking a ‘bath’ on each deal (e.g. DL and AC deals).

Look, I have said it from the start the CSeries is a great aircraft, all the latest technology, but airlines are good with the new re-engined A320 and B737’s , and Bombardier has been out flanked and  “check mate” from above and below by older designs with new engines, avionics, interiors, fly by wire, etc. Had it not been late and fuel prices stayed at $100 a barrel, yes it would be a different narrative, but as I say, “it is what it is”.

Today, the new Airbus A320 neo line has 5,069 orders (55 x A319neo, 3,624 x A320neo and 1,384 c A321neo), while Boeing’s B737Max line has 3,449 orders (55 x Max7, 1,919 x Max8/200, 418 x Max9 and 679 x undecided but will be Max8 or 9. That is 8,518 orders for the new narrowbody aircraft from Airbus and Boeing launched AFTER the CSeries, and the ratio is 26.6 to 1 in favor of the new neo and Max line, says novels about what airlines want, need and BUY.

You can see the sad pace of CSeries sales versus the Airbus A320neo family in graphs below, neo started 2 years later and has +4,700 more orders Boeing behind a bit with 3,449 Max orders, but Bombardier will say, look we are winning in the 100 to 150 seat market, we have 320 orders and Airbus A319neo has just 55 orders and the Boeing B737-7 (Max7) has also just 55 orders, says novels about the 100-150 seat market, and Bombardier is winning 320 to 110, which represents Bombardier’s total production thru 2020 while 110 A320neo and B737Max is 1 month of production for the duopoly.

A320neo total sales since 2010

CSeries total sales since 2008

Bombardier has not been able to get the price ‘premium’ for all that high tech, airlines are not buying it, they are good with the +15% fuel savings the new A320neo and B737Max family are providing at a good price (Max7 $90.2m, Max8 $110.0, Max9 $116.6m and A319neo $99.5m, A320neo $108.4m, A321neo $127.0), BUT NO ONE pays LIST PRICE today, today +50% off if you are buying several at once and +60% for a large order.

A new all economy B737Max8 (180 seats) could be had between $44m to $55m or $245,000 to $ 305,000 per passenger seat. That is comparable to a $85.7 million list price CS300, at $39m (54% discount) to $48.8m (43% discount) acquisition price which for a CS300 (160 passenger) is $535,000 per seat at LIST Price, and to get to say $305,000 per seat the price would have to be be $48.8 million and at $245,000 per seat the price would be 39.2 million, and this is where the CS300 will have to be to WIN orders, when up against the B737-8 and A320neo. 

SEE GRAPH below and look at the current discounted prices per seat by various aircraft (will vary off course with price), but when you have a B737-800 at $275,000 per seat, OEM’s have to discount to win orders today, the BIG question is how much ? Well, for Bombardier that means $275,000 per seat so the CS300 (130 to 160 passenger seats) price will have to be between $35.75 million ((58% OFF LIST) and $44.0 million (51% OFF LIST), while a rough estimate of the cost of production of the CS300 is $34 million using my standard calculation.

You will see in Graph below, why wide body aircraft are so profitable for the duopoly, they may not have the volume of narrowbody aircraft, but look at the price per seat where a B787-8 can get $480,000 per seat almost 75% more than what they can get for a B737-800 per seat.

Bombardier is screwed with the CSeries, and they know it, its why it wanted out in the fall of 2015, trying to sell it to competitors for “a song” (according to Airbus’s Mr. Leahy), they know, but have no option but to put a brave face on and keep going forward, as 2 new programs come on line in 2019 from two of the big customer nations (China and Russia) things will just get tougher, its will be the 5th Wheel and the weakest of the 5 OEM’s in the narrowbody market, and look for an early exit.

The Russian Irkut MC-21 and the Chinese COMAC C919 (PHOTOS below) will be out by 2020 and competing with Airbus A320neo, Boeing B737-Max7 / Max8 and the Bombardier CS300 and CS500 if it comes, and the duopoly will now have 5 OEM’s competing in the 150-180 seat narrowbody market, and you would have to be a real betting man to bet on the CS300, its 2 aerospace giants and 2 large state aircraft programs versus Bombardier, the 5th wheel is out, its out of its league and should not be playing in this market, and has and will pay for trying to play where it had no business to be, a simple SWOT analysis would have shown that its not a market for a RJ OEM to be in.

The CS100 is a 108-133 seat airliner and it has just 118 orders at this time (36.8% of the 320 orders), and lost a major battle with Embraer at long time Bombardier customer Wideroe of Norway for a 2+12 order to the new Embraer E175-E2, which should raise red flags at Bombardier and airlines should take notice, as the first real head to head battle with the new E2, and it lost.

The CS100 does not have to compete with Airbus and Boeing, just Embraer and in a few years the Sukhoi SSJ-130 (Stretched 130 seater of the SSJ-100) and should be doing better, it did get the 75 x CS100 order from Delta Air Lines at a loss making discount but that was a desperate “give away”in 2016 when Bombardier had to make some sales, and they got Air Canada for 45 x CS300’s by politicking with some legislative and judicial issues Air Canada had with Ottawa and Quebec, so political decision more than economical, and surely a good discount of +60% as well.

At some point the CSeries has to make money no ?

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With BCA coming short on commercial aircraft Revenue, can BBA come up with at least $9.0 billion by 2020 ? In 2016, Revenue was $5.741 billion so +57% in 4 years with what ?

The Learjets, Challenger 650 and Global G5000/6000 are not doing well these days, the Learjet and Challenger 650 are 40+ year old products going back to the original Learjet 23 and Canadair Challenger 600, and the Graph below shows the decline. The only positive product for the future right now is the Challenger 350, while the Global G5000/6000 are in decline, and probably will fall below 40 in 2017 as Bombardier is halting the whole line sometime this year for several week ? So going forward to 2020 you have the Challenger 350 at best (soon to face the $24m Textron Longitude), as the Global G5000/6000’s will fade gradually with the arrival of the G7000/8000.

So going forward to 2020, Bombardier will surely not have the $13.8m Learjet 75/70 and most likely no more $32.3m Challenger 650, and the only one for sure is the $26.7m Challenger 350 and a decreasing number of Global $50.4m G5000 and $62.3M G6000’s as they face the new Gulfstream $43.5m G500 which replaces the G450 just culled by Gulfstream last year (and the G150), plus the new $54.5m G600 as both G500/600 are going after the Global G5000/6000’s.

The $66.8M Gulfstream G650 and the longer range $68.8m G650ER (7,500 nm or 13,890) have the top ultra long range market to themselves for now, that the Bombardier G7000/8000 is aimed at, and on which ALL hopes for success at BBA today lay just like the CSeries at BCA, all hopes ride on these 2 programs for the $15 billion in Aerospace Revenue in 2020 by Bombardier.

So, again we have a new product in a small market, can the G7000/8000 have big success, like the G5000/6000 did in 2014 when they delivered an all time 80 units worth around $4.3 billion and 45% of Aerospace Revenue, which made them the “Cash Cow” of Bombardier Aerospace.

Lets look at the duopoly and what the Airbus narrowbody ACJ (Airbus Corporate Jet) and Boeing BBJ (Boeing Business Jet) market is like, since that is the top end today, where Boeing has sold 191 narrowbody B737’s since 1998 (14 x B737Max, 163 x BBJ and 14 x B737’s) while Airbus has sold 126 narrowbody A320 family ACJ’s in that time (20 x A318, 79 x A319, 2 x A319neo, 18 x A320, 6 x A320neo, 1 x A321), so 317 orders of narrowbody VVIP aircraft by Airbus and Boeing in 18 years is equal to an average of 17.6 aircraft orders per year, hmmm not a big number is it ?

Further down is a Graph of the deliveries of these narrowbody ACJ and BBJ aircraft since 2003, and just not seeing a big market, that the $72.8m G7000 and the $56.9m G8000 are to conquer, and its shows a very small market in the high end.

The G7000, is a 3.43 meter stretch of the G6000 which like the G5000 is a derivatives of the Global Express XRS (BD-700-1A10), which is itself is a CRJ fuselage cross section stretch, so again back to the 1970’s Canadair Challenger 600 business jet that gave birth to all the CRJ’s and Globals, and now G7000 and G7000 almost 40 years later.

The $72.8 million 17 passenger G7000 has a range of 7,300nm and 2,637 ft3 (volume) of space while the $71.0 million 13 passenger G8000 is only a 0.69 meter stretch of the existing G6000 and has a range of 7,900nm with 2,236 ft3 of space (volume). Check out the cross section between ACJ and BBJ versus Global 6000 (fuselage of G7000/8000 and the Gulfstream G650), when flying up to 14 hours, you want space for maximum comfort, that is what VVIP want and need and should expect it.

This ultra long range market is all about “cabin comfort’ which corresponds to space (floor space in ft2 and cabin volume ft3), as flights of up to 13,000km may be +14 hours long, and VIP’s want and need space to move, relax, do business, sleep, dine and shower, and with such ranges you also need crew rest areas for 1-2 pilots and 1-2 flight attendants, which all requires space.

The high end business jet market is small, after the ACJ and BBJ offerings you have Gulfstreams G650 and 650ER of which 200 have been delivered as of Oct/2016 4 years into production, so 50 a year is impressive, as Gulfstream doe snot disclose its delivery by types, it breaks it down from G300 all the way to G650, and by this it delivered 88 in 2016 (way down), as it delivered 120 in 2015 and 117 in 2014.

The new BBJMax7 now has a range of 7,000nm and has 884 ft2 of floor space and well over 5,500 ft3 of volume space (108% more than G7000 and 143% more than G8000), and the ACJ319 and 320neo will also come up to those range numbers and offer as well 100% more space, the G7000 and G8000 sell will not be easy, price is more flexible with Airbus and Boeing and if you really need long range then you need lots of space for comfort.

Lastly, at this time publicly, Bombardier has only 63 orders for the G7000/8000, while it claims a huge backlog, in business aviation those numbers are ‘phony’ as they do not identify customers like the Commercial side in +90% of the cases, there are reports that 200+ G7000/8000 are on order, but that sounds more like bad PR than reality.

Look at the Graph below in 2006 23 ACJ and BBJ narrowbody aircraft were delivered that was an all time high, and lately the ultra long range market is doing very poorly  from ACJ, BBJ, Gulfstream to G5000/6000’s as manufacturers are living off backlogs, but book to bill ratios are below 1.0 (more deliveries than new orders), and that is a red flag for now, but will it get better with global problems, from China corruption crack down to Russian sanctions to Brazil’s and South Africa’s economic collapse ?

There is a global backlash on GLOBALIZATION and its spreading into politics, as people are realizing that the globalization of free trade has been nothing but a transfer of wealth from rich countries working classes to the poor countries working classes, and casualty has been the manufacturing workers of North America and Europe, as they lost their jobs that went overseas and helped the economies of other countries like Mexico, China, Vietnam, India, etc. boom. The Trump victory in the US election was from these disgruntled workers, the silent minority that wants an end to globalization of free trade, and more protectionism of local jobs.

Look below what the BBJ-7 provides in comfort, including the new option of Fokker’s Panoramic Windows, plus 7,000nm range and 108% more space than the Bombardier G7000, is there any comparison ?

So, as I wrote earlier, lets assume Bombardier does get to CSeries Revenue of $4.2 billion (BCA) with no CRJ and Q400 deliveries by 2020, that is all it can expect from BCA in 2020 based on 120 deliveries, they are all orders below cost (2010-2016).

So all of the 320 orders are money losing deliveries, then maybe at best 40 X G7000/8000’s at $72 million are sold, and 50 x Challenger 350’s (by then weakening demand and new competing aircraft) at $26.6 million, than BBA might be able to get to  $4.3 billion at best, and therefore Aerospace (BCA + BBA) might get to $8.5 billion.

BUT in the end both BCA and BBA will be $6.5 billion shy of the planned and ‘hoped’ for $15 billion, as Bombardier today is dreaming if it thinks that Q400’s, CRJ’s, Learjets, Challenger 650 and Global 5000/6000’s will be in demand by 2020.

It is as I said, an old, tired and dying product line, and ALL hope rests on the CSeries and the new G7000/8000 business jet, 2 product lines and that is it, unless they launch another program soon, knowing that the CSeries and G7000/8000 will not get them to the ‘magical” $15 billion, for if not then Bombardier will be a $18.5 billion company in 2020, exactly where it was in 2013 ($18.15 billion a year in Revenue).

———————————————————————————————————————————————————————————-

This is what happens when you take the easy road, things work well for a while, the CL-600 Challenger became the CRJ line and then the G5000/6000 and now the G7000/8000 line, while the DHC-8-100/200 went on to be the DHC-8-300 and later the Q400, and the Learjet 31 went on to be the 40/45 and than 70/75 while competitors like Embraer designed new products, from the ERJ came the EJets, and a line of new business jets.

Till next time, thank you, hope you learned something new and keep those comments coming, I am not perfect, but I work with data not gut feelings when I pass judgement on airlines, aircraft, aviation trends and OEM’s, 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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