Thursday, February 19, 2015

Report: Where Are the Sales for Bombardier’s CSeries Jet?

By Benét J. Wilson / Published February 19, 2015

The analysts at AirInsight.com have asked the question the commercial aviation industry has been asking: why aren’t more Bombardier CSeries jets being sold? The question was answered during a series of interviews with industry players conducted at the recent Airline Economics Conference in Dublin that culminated in a new AirInsight report, broken down by pricing, demand and supply.

EXTRA: Bombardier Announces Executive Shake-up; Posts 4Q, 2014 Losses

Last week, Bombardier announced a major executive shake-up, tapping outsider veteran aerospace executive Alain Bellemare to take over as president and CEO, while Pierre Beaudoin will become the company’s executive chairman. The move was made as part of an effort by the Canadian manufacturer to address cost overruns in the production of its CSeries jet, whose costs have risen by $1 billion to $5.4 billion. It was also forced to shelve its Learjet 85 project; both moves were blamed for the company’s loss of $1.59 billion in the fourth quarter and $1.2 billion for the year.

Under pricing, the list price for the CS100 and CS300 is $62 million and $71 million, respectively. “Some industry people believe the appropriate price for the CS300 is around $36 million or roughly 51 percent of list price. At this price the aircraft would be discounted to a similar level as competing Airbus or Boeing aircraft, according to the report.

“In terms of discounts to counter Bombardier, Airbus is the most aggressive. We’ve heard reports of low $30 million prices for an A320, which lists at $97 million, to counter potential CSeries replacements of A319s on more than one occasion,” it said. “Airbus has a wide range of aircraft over which to spread losses from very deep (65 percent plus) discounts. Bombardier does not have that luxury and thus, cannot win a price war.”

EXTRA: Bombardier Commercial Aircraft President Talks CSeries; CRJ Improvements

Industry observers interviewed by AirInsight feel that Bombardier should be more realistic on price and discount more aggressively. “It was suggested to us that if, for example, Bombardier wanted to win a customer like American Airlines, it should go in with two strategies – either it would ask what the airline wanted to pay and work from there, or start at $26 million,” said the report. “Then demand `give backs’ based on performance, for example fuel burn and dispatch reliability. As the aircraft meets its performance guarantees, the airline would give back part of the discount and get Bombardier back to a more reasonable $36 million price point.”

First production CSeries central fuselage unit. Image: Courtesy of Bombardier Aerospace

First production CSeries central fuselage unit.
Image: Courtesy of Bombardier Aerospace

But even at $36 million, Bombardier’s margins will be tighter than those of Boeing and Airbus, which are amortizing fixed costs over several thousand orders for neo and MAX, said the report. “Boeing and Airbus enjoy the efficiency and scale economics of 40+ aircraft per month production rates, versus a planned 10 per month for Bombardier,” it added.

On the demand side, Bombardier claims that it is replacing fleets of older aircraft such as the Bae146/Avro RJ, which only has 292 left in service. “But there are also 255 Fokker jets left in service. In total this means there are potentially 547 `obvious’ replacement opportunities,” said the report. “Bombardier won’t win them all – but even a 50 percent win gives the CSeries program an extra 274 aircraft, which easily pushes current firm orders over the 300 target at EIS the company is aiming for.”

EXTRA: AirwaysNews High Flyer Interview: Bombardier’s Rob Dewar

Another opportunity for the CSeries family is the replacement market for Boeing 717, 737-500s, -600s and -700s, plus the Airbus A318s and A319s, illustrated in the table below. “There are 3,047 aircraft to work with here and the opportunities are rich,” said the report. “Assuming Bombardier gets only 25 percent of the replacements, which amounts to 723 aircraft, along with the 274 replacement aircraft identified above, Bombardier is potentially looking at 997 additional replacement aircraft it could sell.”

Chart Courtesy of AirInsight.com

Chart Courtesy of AirInsight.com

Commercial aviation growth also holds potential for the CSeries in an industry in which traffic is expected to double in 15 years. “The key question is whether growth occurs from larger aircraft (more seats per flight) or additional aircraft,” said AirInsight. “We believe it will be a mix of both, and while the 100-130 seat market will not double over that period of time, it will experience significant growth from the sales levels in the last three years.”

The demand for aircraft between 100-130 seats is something of a niche. “But the niche is really in relation to how many of these sized aircraft Airbus and Boeing have sold. Between 2000 and 2014, Airbus sold 1,296 and Boeing sold 933,” said the report. “For Airbus this was 13.7 percent of single aisle aircraft sold over the period and for Boeing this was 12.4 percent. Even if one believes the segment between 100-130 seats is a niche, historically it is large enough to accommodate the ambitions of Bombardier and Embraer.  Airbus and Boeing appear to be withdrawing from this segment.”

An issue with this segment is that it is shrinking, as Boeing and Airbus push customers to larger aircraft, and at the current time this segment is “no man’s land” – too large for the U.S. regional airlines because of scope clauses, and too small for the major airlines focused on larger aircraft and seat-mile costs, according to AirInsight. “We believe that scope clauses and creative B-Scale arrangements, such as the one Delta implemented for the Boeing 717, can enable aircraft in this niche to succeed.”

Note: Based on a 500-NM trip in a North American environment (Fuel price: $3.20/US gallon) Source: Companies’ websites, Bombardier analysis

Note: Based on a 500-NM trip in a North American environment (Fuel price: $3.20/US gallon)
Source: Companies’ websites, Bombardier analysis

Finally, when it comes to supply, airlines are still looking for fuel efficient aircraft, despite a sharp drop in fuel prices. “Attendees at the Dublin event universally do not expect current fuel prices trends to continue at low levels for very long, they are adjusting upward to an intermediate oil price around $80 a barrel,” said the report. “This could mean deliveries for next generation aircraft might be pushed back by a year. But not for much longer than that. In Europe, growing `green’ pressure means no delaying deliveries because of carbon and noise taxes.”

Airbus and Boeing are growing their production rates despite the drop in fuel prices, and will need to deliver those aircraft to customers. They also do not believe the current low oil prices will remain.

EXTRA: ANALYSIS: CSeries Flies; Further EIS Delay to 2016 Likely

“Despite the potential push-back of some orders, it will remain difficult for airlines to get their hands on next generation aircraft, as the OEMs have a six- to seven-year backlog. The earliest likely slots, without cancellations, will be 2018 at the earliest. Supply will remain tight even as production increases,” said the report.  “While this could provide an opportunity for Bombardier for earlier deliveries, they are also sold out for the first three years of production, albeit there might be some wiggle room for a new major customer. Plus there are the 40 CS300s for Republic probably looking for another home.”

Those holding CSeries orders include: Lufthansa Group, 30 CS100s; Republic Airways Holdings, 40 CS300s; Ilyushin Finance Co., 32 CS300s; and Macquarie AirFinance, 40 CS300s. There are also three CS100 order cancellations from an undisclosed customer and three CS300 cancellations from airBaltic.

In summary, said the AirInsight report, the conditions Bombardier faces are a combination of pressure from the market, but there is also good news that the industry believes the aircraft will be technologically more advanced and efficient. To read the rest of this AirInsights subscribers-only report, click here.

Cover Image: Courtesy of Bombardier

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Contact the editor at benet.wilson@airwaysnews.com

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