Bombardier CSeries faces new uncertainty after Republic weighs order options

MONTREAL – Bombardier’s CSeries aircraft faces new uncertainty after Republic Airways, the plane’s largest customer, said it was weighing options on what to do with an aircraft that no longer fits into its operating model.

The U.S. carrier told investors it hasn’t decided to cancel that US$3.06-billion firm order made in 2010 for 40 CS300 planes.

Instead, it has deferred making a decision on the CSeries as it focuses on the profitability of its regional operations since selling low-cost carrier Frontier Airlines last December.

Likely options include selling the early production slots, negotiating later slots that would give it more time to make a decision and cancelling the order and paying penalties to Bombardier.

Bombardier (TSX:BBD.B) insists the order is “in tact” but is helping Republic assess its regional aircraft needs as it focuses on being a regional provider for larger carriers.

Spokeswoman Marianella de la Barrera says it has not discussed Republic’s plans for the CSeries.

“Our contract is a firm contract, it remains in tact and what Republic decides to do with it once it takes the aircraft it’s their discretion,” she said in an interview.

De la Barrera said Bombardier typically helps customers by doing an analysis of what aircraft are best suited for their needs and would take the opportunity to pitch its regional aircraft as Republic looks at its overall operations.

Analysts say Republic’s move is negative for the CSeries, whose deployment has been delayed until the second half of next year and which has been slow to attract new orders.

Republic’s comments came days after Air Canada (TSX:AC.B) said it would not buy the CSeries at this time and would stick with its 25 Embraer 195s.

Walter Spracklin of RBC Capital Markets says Republic appears to have about two years to make a decision before taking delivery of the planes, likely in the second half of 2016.

“Republic’s comments are no question a negative and does highlight continued sales risk for the CSeries program,” he wrote in a report.

“However, Republic’s order is a firm order and Republic management has to determine how much value the purchase agreement holds and whether it makes more sense to sell the early production slots or still take delivery of the aircraft.”

The analyst said concerns about Republic’s CSeries order are not new. The airline changed course by selling Frontier, which operated an all Airbus fleet. When Republic placed an order for A319 NEOs in 2011, there were worries that the CSeries order was in jeopardy.

“However, once Republic sold Frontier in 2013, we had thought that if anything, the A319NEO order would be the one that would likely be under review.”

He said the comments of Republic CEO Bryan Bedford highlight the continued sales risk for the CSeries program, but the ultimate decision will have less impact on Bombardier because Republic has a firm order and will likely decide whether to sell the slots or take delivery.

Benoit Poirier of Desjardins Capital Markets said an order cancellation from Republic would be negative. However, he added that Bedford’s recent comments after touring Bombardier’s Mirabel flight testing facility that he was impressed by the CSeries and believed it would deliver the promised performance were encouraging.

Meanwhile, Bombardier has confirmed that a fourth CSeries flight-test aircraft flew on Sunday for nearly three hours, reaching an altitude of 12,500 metres and an air speed of 550 km/h (300 knots). The plane will test the aircraft’s performance and validate its speed, range, drag, airflow characteristics and fuel burn.

“We see flight of FTV4 as an important milestone, and quite possibly the most important test-flight vehicle, as it is set to validate and certify performance data critical in driving new sales,” noted Spracklin.

On the Toronto Stock Exchange, Bombardier’s stock closed down four cents at $3.88 Wednesday on heavy volume of 17.4 million shares.

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