This report has been updated since it was issued to our E-subscribers last Monday to reflect our new estimate of the return to airborne status for the flight test program.
Bombardier two weeks ago made more executive changes to the CSeries program, replacing the vice president of marketing and other officials. The company said additional changes might be forthcoming—a clear signal that something more is afoot.
Bombardier has been stuck on 203 firm orders for the CSeries for the better part of this year, although the number of orders and commitments has swelled to 513 with a much better than expected Farnborough Air Show. Still, MOUs and LOIs aren’t firm orders with deposits and progress payments, and poor sales of the CRJ, Q400 and business jet divisions combine with the R&D costs of the CSeries to put a huge financial squeeze on the company. Layoffs and cost cutting, along with the management changes, add to the perception that BBD is a company in trouble.
Our discussions with Canadian investment banks and media also indicate there is a growing credibility problem over the CSeries program. Bombardier has over the past year become increasingly reclusive about program progress—even before the May 29 engine incident that grounded the flight test fleet. The number of flight hours lagged far behind the Boeing 787 and Airbus A350 flight test programs. BBD hasn’t been especially forthcoming about systems issues that emerged early in the flight test program. On the one hand, the company admirably didn’t throw suppliers under the bus to place blame. On the other, investors, media and even customers are frustrated at the lack of information BBD had provided about the flight testing.
BBD’s reticence is not at all unusual. Boeing went into the bunker during the 787 program difficulties, often acknowledging specific issues only after they were leaked elsewhere. Even today, Boeing has not fully emerged from the bunker mentality created around the 787 problems, routinely frustrating requests for access and information completely unrelated to “bad” news. Airbus likewise hardly volunteered detailed information about the issues surrounding the A350, merely saying that “challenges” remained.
But with layoffs, cost-cutting and management changes (and more likely to come), and the flight test fleet still grounded, let’s take a look at Bombardier.
What about the changes?
Although we were a fan of ousted VP-Marketing Philippe Poutissou, it appears he was simply caught up in wholesale changes. We view the overall management and corporate restructuring as a good thing, and probably long overdue. Sales of the Q400 and CRJ lagged (the latter not being particularly surprising, given the clear passenger experience preference for the Embraer E-Jets). While it’s understandable that focus was on the CSeries, sales of the other two commercial products were needed to support the R&D of the bet-the-company CSeries. Somewhere along the line in management, all the way up to through the C-level ranks, this reality seemed to have been lost.
We’ve often written about the C-level reticence to be more aggressive on pricing and flexible on terms and conditions. We certainly understand that Bombardier didn’t want to do money-losing deals (with a weaker balance sheet than Airbus and Boeing, there is obviously less ability to be flexible), but one or two key transactions were needed to give a clear “Good Housekeeping Seal of Approval” (a US marketing term) to the program. While Lufthansa Group launched the program, this was back in 2009, and no similar order by an airline or lessor of this stature has been placed since—harming perception.
Bringing in new blood will, we think, change the thinking and give the program a boost.
What about the orders—or lack of them?
CSeries has always unfairly been compared with the sales figures of the Airbus A320neo and Boeing 737 MAX programs: few for CSeries and thousands for neo and MAX. The problem with this, as we have consistently pointed out, is that CSeries competes in only the low-end 100-149 seat sector of the A320/737 space. Airbus and Boeing concentrate their efforts and sales in the 150-220 seat sector, where CSeries doesn’t compete.
We discount the CS300 ECS (Extra Capacity Seating), at 160 seats, as truly competing with the A320neo and 737-8 because similar shoe-horn configuration would take the latter to 189 and 200 seats respectively, skewing competitive comparisons. There have been no CS300 ECS deals announced.
In the sector where CSeries is placed, the CS300 far, far outsells the A319neo and the 737-7; BBD is winning this battle, but the company still fails to successfully get this message out. Nor has it successfully communicated a persuasive case that the 100-149 seat sector has sufficient demand, even though even Airbus identifies a more for more than 4,500 aircraft, a figure roughly equal Boeing sees for the demand of 787-8 category jets (“small wide-body”)—a forecast nobody questions or criticizes.
Boeing and Embraer don’t break the 100-149 seat sector out in their 20-year forecasts; Bombardier sees a market for ~7,000.
In the smaller CS100 sector, Embraer beats the pants of CSeries in sales.
Bombardier is criticized for the preponderance of MOUs and LOIs. Certainly this currently over-weights the tally, but in a new airplane program, LOUs and LOIs tend to get picked up at a ratio of up to 85%–so of the 310 commitments, most likely more than 250 will be converted to firm orders sooner than later. This makes the program a success when measured against the typical break even target of 400 aircraft. BBD has not, as far as we know, publicly identified a break-even figure, however.
When does the Flight Testing resume?
BBD says, as it has for some time, flight testing will resume “in the coming weeks.” The Flight Test Vehicle (FTV) fleet has been grounded since May 29, with the three month date just around the corner. There is no indication from BBD when flight testing will resume, but last week we reported we expect the airplanes to return to flight status in early September.
FTV 4, the first airplane in pure airline configuration that would validate all the operational performance promises made by BBD and Pratt & Whitney, was just joining the FTV fleet when the grounding occurred. FTVs 5, 6 and 7 are in assembly, but it’s unclear to us when these will join a resumed airborne test program.
Bombardier and PW are frustratingly mum about the fix to the GTF, even to its customers. PW Friday continued to issue a non-informative corporate statement about the status of the fix, appearing to take a page from the Boeing book of responses:
“We continue to work closely with Bombardier to return the CSeries to flight testing,” a spokesman wrote in an email. “I would also note that the fundamental architecture of the Geared Turbofan engine remains sound.”
However, in our report about returning to EIS, we also had some detail about the fix.
What about Entry-into-Service?
BBD continues to say that the EIS remains the second half of 2015. We are beginning to have our doubts, and think it very possible the EIS could slip to 1H2016, with a 1Q2016 possible. Bombardier has continued ground testing, including dealing with the challenging fly-by-wire system software, so we think most of these issues should be resolved by the time the FTVs reenter airborne service. But even with seven FTVs, we think it will be very challenging for BBD to still meet EIS by the end of this year.