Squint your eyes and you can almost see things looking up for Bombardier. As the chief beneficiary of the largest private order of business jets in history, the Montreal-based transportation giant and perennial stock market underperformer earned a much-needed lift. Placed in June by NetJets, which is owned by Warren Buffett’s Berkshire Hathaway, the order for 425 jets from Bombardier and competitor Cessna could mean an extra $9.6-billion in revenue for Bombardier alone over the life of the contract.
It might even be taken as a glimmer of hope for the recovery of the smaller-cabin business jet market, which has generally been pummeled through the recession and its aftermath. But the order is a mere sideshow to a crucial upcoming test of Bombardier’s future in aerospace.
Nobody really questions Bombardier’s strength in business jets or the market leadership of the Challenger series Mr. Buffett has just endorsed. The company’s transportation division is also doing just fine in the rail industry. The deepest concerns are reserved for Bombardier’s ability to compete in commercial aviation.
The changing economics of the industry are pushing Bombardier further into the commercial market and into direct competition with global powerhouses. Companies have had to increase cabin sizes largely to spread the inflated price of fuel. Bombardier too decided it would have to go big—bigger than it had gone before.
Having abandoned the 100- to 149-seat segment until now, the company is looking to claw its way into a space dominated by Boeing and Airbus. Bombardier has placed its bet on the CSeries aircraft—two models of state-of-the-art, high-efficiency, single-aisle jets with up to 125 and 145 seats respectively. Yet four years after launch, the company has firm orders for just 138 aircraft, not exactly a comforting level of demand.
Judging by the company’s share price, which has been locked in the $3.50 to $5.00 range for most of the past year and which has disappointed investors for most of the past decade, nobody believes the company can deliver the CSeries on time. Bombardier has yet to offer any hint of serious setbacks in the aircraft’s development, says Walter Spracklin, an analyst at RBC Capital Markets. “If they were going to be well off course, I think management would have taken the opportunity to manage expectations.”
Still, the market remains unconvinced that Bombardier can meet its schedule for first flight by the end of this year and first delivery by the end of next year. Potential buyers of the CSeries are some of the same airlines soured by the debacle surrounding Boeing’s 787 Dreamliner, which was plagued by delays and cost overruns before the first models were finally delivered last year, more than three years late. “They are now reluctant to put an order for an aircraft where they don’t have significant visibility as to whether it will be delivered on time,” Spracklin says.
Bombardier is just going to have to prove them all wrong. While there’s not that much farther to fall in terms of share price, even minor delays in the development of the aircraft could prove an additional drag on the company. Major delays, big cost overruns or, in the longer term, a failure to gain enough market share in commercial aerospace could have much more serious implications.