On an otherwise bleak day when Bombardier announced plans to cut 7,000 jobs worldwide over the next two years, the company also issued a rare, long-awaited piece of good news: Air Canada has signed a letter of intent to purchase up to 75 CSeries aircraft. Bombardier’s commercial jet project has been beset by delays and cost overruns since it began in 2003, and orders have been few and far between. One reason international carriers have hesitated with the CSeries is that even domestic Canadian airlines had yet to make a commitment, according to aviation consultant Robert Kokonis. But the agreement with Air Canada could be a game-changer for troubled Bombardier, encouraging other aircraft purchasers to take a closer look.
The problems with the CSeries have imperiled Bombardier, contributing to a 65% decline in the company’s share price in the past year. In January, shares dipped below $1 to the lowest level in 25 years. Bombardier is seeking another bailout, even after a cash infusion from the Quebec government last fall. But Air Canada’s interest in buying 45 CS300 aircraft (along with the option to purchase up to 30 CS100 planes, a slightly smaller aircraft) marks an end to a 17-month-long dry spell in which Bombardier was unable to drum up any serious interest. Now, even with massive job cuts planned, Bombardier anticipates devoting more resources to the CSeries. No one is expecting the CSeries to be a market leader at this point, but it may yet find a niche.
Prior to Air Canada’s interest, Bombardier had secured 243 firm orders, just shy of its target of 300 by the second quarter of 2016. But for all of the bad press the company has received, there’s one thing many industry analysts and aviation experts agree on: The CSeries is a damned decent plane. The two models of the narrow-bodied single-aisle plane are quiet and 20% more fuel efficient than other similar-sized jets, while also offering decent leg room, unlike other planes of the same size. Pilots for Swiss International Air Lines—the first airline to take delivery of the CSeries—are currently in training to operate the craft. Fred Cromer, president of Bombardier’s commercial aircraft unit, was bullish about the prospects on a conference call with analysts in December. “It flew exactly as advertised, and they were pretty excited about it,” he said of the Swiss airline’s experience. “I think it was all thumbs-up from their point of view.” The market for narrow-body aircraft such as the CSeries is fairly robust; the order backlog for such planes is much larger than for bigger aircraft, according to a recent Bloomberg report. The demand is coming from carriers in densely populated areas of Continental Europe, Asia and even the U.S., where shorter regional flights are increasingly common.
But there are still two major hurdles for Bombardier to overcome to secure more orders. The first is that the company has to deliver its next slate of planes on time; AirBaltic is scheduled to receive 13 and Swiss International Air Lines is expecting 30 from Bombardier this year. “There’s nothing more they can do at this point,” Kokonis says. “They just have to execute now.” Carriers need to see more evidence of how the jets work in real-world conditions, and positive reactions from Swiss Air Lines and AirBaltic could entice customers.
The second problem is that Bombardier hasn’t been able to compete on price. The 110-seat CSeries has a list price of US$63 million, while its slightly larger counterpart sells for $72 million. Bombardier’s competitors, mainly Airbus and Boeing, are able to offer steep discounts—sometimes up to 50%—but the smaller, debt-plagued Bombardier has been constrained. But management has been signalling it could change its tune on pricing. Former CEO Pierre Beaudoin believed the jets could demand a premium, while Cromer told Bloomberg in December that he “know[s] what it takes to win large orders” and acknowledged that new customers are “going to expect an aggressive deal.”
Delta Air Lines, for one, is (mildly) interested. “We actually think at the right price it’s quite a competitive airplane, particularly given the engine technology,” said CEO Richard Anderson on a quarterly conference call in January. “We’re taking a very serious look at it.” Other industry players are supportive too. “CSeries is a fantastic 100-seat airplane,” Bob Leduc, president of engine maker Pratt & Whitney, told Reuters this week. “They can get a couple of orders, and I think if they do, they will be fine.”
The company’s cash position is also stable for this year, at least, giving it some time to sort through these issues. The CSeries is buoyed right now by Bombardier’s transportation wing, which is comparatively healthy. “They have some contracts to burn though,” says Chris Higgins, an analyst at Morningstar. “That unit has long-term viability without major changes.” It’s also cushioned by funding from Quebec, of course. The company received a US$1-billion bailout from the provincial government, which took at 49.5% stakes in the CSeries program, and a US$1.5-billion injection from Caisse de dépôt et placement du Québec in exchange for 30% of the transportation unit. Bombardier is in talks with the federal government to secure even more financial aid, and the market believes the company won’t be allowed to fail. “My perspective is that they’re not going away,” says Chris Murray, an AltaCorp Capital analyst.
Still, radical changes might be necessary, according to some analysts. Control of the company rests with the Bombardier and Beaudoin families, who, if the company’s current situation is any guide, have not been the most astute owners. Although Bombardier hired Alain Bellemare as CEO in 2015, the company’s dual-class share arrangement means control remains with the founding families. “The dual-class share [structure] will be forced to collapse,” says Higgins. “In the grand scene of things, that would be positive.” That would free management to pursue new avenues that could prove to be in the best interests of the company and its shareholders, such as splitting up the aviation and transportation divisions. Indeed, the federal government is said to be reluctant to provide financial assistance without changes to Bombardier’s management structure, according to reports.
Higgins, for one, is expecting big changes soon: “They cannot come out, after share prices that have sunk so low, to say that they’re still working on things.”
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