Bombardier leaves air show with CSeries momentum, but facing high risks: analysts

MONTREAL – Bombardier left the Farnborough Airshow with some momentum in CSeries orders, but industry analysts say the company still faces key risks in developing and selling the commercial jetliner.

Despite an engine mishap that has kept test flights grounded since late May, Bombardier racked up 66 new order commitments for the CSeries at the trade portion of the air show, which ended Wednesday. The public part of the air show winds up Sunday.

“No question, Bombardier is coming out of Farnborough in better shape than it did entering,” said Walter Spracklin of RBC Capital Markets, pointing to tentative orders and positive developments on the engine issue.

Flights of the CSeries were stopped nearly two months ago after “an engine-related incident” that damaged an aircraft during maintenance testing on the ground.

A fix for the problem believed to be related to a failure in the turbine’s oil system is being tested and test flights are expected to resume in “the coming weeks.”

However, the analyst expects Bombardier’s shares will remain volatile until it addresses “valid investor concerns” by making further progress on the aircraft program.

“We still see a period of elevated program risk for the CSeries. As such we think any upside will be relatively limited,” he wrote in a report.

Bombardier faces several hurdles before it can deliver the CSeries to its first customer, including logging the necessary flight test hours for Transport Canada certification, confirming the aircraft’s promised fuel savings and noise levels, and demonstrating that the fly-by-wire system used to operate the plane is working as planned.

Questions also remain about the company’s ability to pick up the pace of firm orders for the new plane and its overall market potential, Spracklin added.

Bombardier has secured 203 firm CSeries orders and 513 total commitments to date.

Orders are running well below the run-rate for 7,100 planes in the 100- to 149-seat size the company expects will be delivered to the industry over the next 20 years. Spracklin said orders should ramp up as the plane enters into service.

Bombardier slightly increased its market forecast for commercial aircraft during the air show. It expects the industry will deliver 13,100 planes with 20 to 149 seats through 2033 at a total value of US$658 billion. That’s up from 12,800 aircraft worth US$646 billion forecast last year.

The manufacturer downgraded it business jets outlook. It forecasts delivery of 22,000 planes worth US$617 billion, down from 24,000 aircraft worth US$650 billion predicted last year.

Bombardier insists it has enough time in its testing schedule to have the CSeries enter service in the second half of 2015, despite the test flight pause.

Analyst Kevin Chiang of CIBC World Markets was less optimistic, saying he expects “another shoe to drop” that would push out first deliveries to the first half of 2016.

He also expects continued hiccups in the CSeries and Learjet 85 flight programs that could “whipsaw” the share price. The business jet’s test program has been delayed due to problems with the manufacturing process of the composite fuselage.

While those are sure to intensify investor anxieties, the analyst said there remains significant upside for long-term investors if the company can achieve its goals.

With total revenues expected to reach about US$30.7 billion after 2018, Bombardier’s inferred share price would be $9.89, he says.

Chiang said he can’t imagine that CSeries sales won’t build given the aircraft’s better fuel and operating cost efficiency than its competitors.

“We believe that the plane proving out its performance will help drive the sales campaign,” he wrote.

Bombardier also secured a few Q400 NextGen orders at the air show.

Additional orders, including from WestJet Airlines (TSX:WJA), could boost production rates in 2015, added Spracklin.

Analysts also said Bombardier’s prospects are better because of signs of improvement at Bombardier Transportation, its rail division.

Improved efficiencies at its plant in Derby, U.K., should generate higher profits as production doubles with the start of the US$2.1 billion Crossrail project around the second half of 2015.

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