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.
I suspect the CSeries is held back by a glut of cheap and relatively new second hand A319s. Airlines can trade capital cost, availability and certainty for promised fuel savings.
That glut will work itself out eventually. If Bombardier can get through the development phase intact, the future for the CSeries should be bright.
There is no doubt that the uncertainty about the EIS date has caused some airlines to hold off on placing firm orders but the good news is that there have not been any cancellations to date. Malmö Aviation / Braathens was to be the launch customer but they just changed the delivery date instead of cancelling. This has given BBD some flexibility with the EIS date. They also can make up some time by adjusting their production rate. Their original plan was to start by producing only a couple planes per month and taking three years to ramp up to 12 planes per month. They can still meet their commitments, even with a six month delay, by just increasing the rate of ramping up. That being said, they have to get back in the air ASAP or else they will start getting cancellations.
Nobody needs to be in a hurry to order as the backlog is relatively short. Nothing like the 7 years or so for a MAX or NEO. I guess BBD will be alright once the C Series is in service.
oops, I meant 737 and A320, not just NEO and MAX, better to correct myself before somebody gets picky.
One bad news is that 2-year head start c- series was supposed to have over neo is gone, it will be neck to neck which of the two has earlier EIS. Nothing sells better than flying aircraft on specs. C-series had there windows of opportunity that might be lost forever.
Looks like the PW1100g powered neo might overtake the PW1500g powered cseries EIS.
Dear Leeham Co., Thank you for this broad and well-rounded assessment of the CSeries program and Bombardier Commercial Aircraft.
I have a question whose sharpness may come across as slightly provocative, but is there a (remote) possibility, in your estimation, that the leadership of Bombardier Inc. is looking for “an exit strategy” with regards to the CSeries or commercial aircraft in general? In particular, is it possible that Bombardier Inc. is quitely exploring ways of divesting its newly formed Commercial Aircraft division?
Certainly, the prolonged lack of information from Bombardier Aerospace is feeding speculation, and its relatively major reorganization and management changes could possibly suggest a strategic change of course. Meanwhile, Bombardier Aerospace is expressing that they see long-term strategic opportunities as a supplier of aerostructures and presumably other aircraft components. In addition to the difficulties the CSeries program is having, you mention that sales of Q400 and CRJ also have been lagging lately. Even though Bombardier is a very proud aircraft manufacturer, if they don’t see appreciable chances of its Commercial Aircraft division turning profits in the foreseeable future, I imagine that a divestment could be sensible from a business point of view. I wish Bombardier all the best and I believe the CSeries will be an excellent airplane. Thanks again.
There have been persistent but totally unconfirmed rumors that the Chinese want to buy BBD Aerospace or take a stake in it. A year ago or more BBD flatly denied these reports but they persist.
LN&C: “We view the overall management and corporate restructuring as a good thing, and probably long overdue.”
That’s easy to say but a lot harder to demonstrate. I wish you had developed a bit more on what you think the rationale might be so that we can make sense of this dramatic change. So far I don’t see any logic in this restructuring, which I actually view as a de-structuring more than anything else.
LN&C: “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.”
I wish it was that simple. Even if Bombardier gave them away passengers would still prefer to fly on the Embraer or the ATR. A proper pricing for these obsolete products would not be economically viable for BBD. That’s the quandary they find themselves in.
On the one hand they badly need the cash flow that would be generated by those two models, but on the other hand they cannot sell them at a price that would be in tune with the kind of cash flow they need to support the CSeries development. In other words the selling price can only be too high for the customer or too low for BBD. There is not sweet spot in-between. That time is long gone.
What worries me about the CSeries is not the bad news. It’s the lack of news, good or bad. The corporate silence is deafening. For the first eight months the CSeries was flying at a very slow pace, and for the last four months it has not been flying at all. That deserves an explanation.
LN&C: “Bringing in new blood will, we think, change the thinking and give the program a boost.”
New blood where? At what level? Who is the problem? I think it would be more appropriate to ask WHAT is the problem.
From my perspective ALL the individuals at the C-Level that were let go in the past few years were extremely valuable people and I would be glad to see them back. When a corporation is in turmoil like BBD find itself in right now the reflex is to shuffle people around. Like chairs on the deck of a sinking ship…
– We have to do something!
– Do what?
– I don’t know, do something!
That is how doers react. Maybe they need to think before they act, or re-act. The ongoing Bombardier Aerospace restructuring is an enterprise of destruction as far as I can tell. And no one so far has demonstrated to my satisfaction that it was a good thing.
LN&C: “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.”
Yes but what about FTV1? That aircraft is heavily instrumented and is vital for the flight test programme. But it would be heading for the scrap yard if they had not elected to rebuild it.
How long is it going to take to assemble a “new FTV1” with all its original instrumentation? And what impact will it have on the flight testing schedule? Am I the only one to worry about this?
At least I can find solace in the fact that most observers are now supporting the CSeries in spite of the difficulties. Everyone seem to recognize that it is a fantastic airplane. And even more important is the fact that the customers themselves are still supporting it.
At the beginning of the year I thought 2014 would be a great year for the CSeries: First appearance at Farnborough, five flight test vehicles flying around the clock and demonstrating unequivocally the virtues of the aircraft, a flock of new orders, etc. But so far it has been a disastrous year.
And I am not so sure for 2015 either. 🙁
LN&C:”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.”
Perhaps there simply is no “message” to get out?
Of the 140 “firm” CS300 orders:
40 – Republic… who really believes they will take delivery?
32 – Ilyushin Finance Co…. Crimea/Ukraine anyone?
5 – Iraqi Airways… IS anyone?
16 – Al Qahtani Aviation Company… ???
The above are for over half of the “firm” CS300 orders with low to no chance of delivery. The rest of the list isn’t exactly blue chip (save Korean).
And I don’t know what the “far, far outsells” is based on? Since CS300 launch Airbus “scooped” the Frontier order, American ordered 65 A319s, etc, etc.
And what of the CS100?
Of total “firm” orders for 63, almost half are for LH the launch customer… but also CSeries partner and supplier. And then there is Odyssey Airlines for 10… but still trying to crowd source financing.
LN&C:”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.”
A brief examination of the “customer list” indicates that far fewer than 250 “commitments” will be converted to firm orders… sooner or later.
Since I wrote my last post I had a cup of tea to calm my nerves (or maybe it’s the other way around). Here is what I saw in the tea leaves at the bottom of the cup. 😉
Bombardier Inc. will be restructured into four distinct and autonomous business entities:
Bombardier Transport will be headquartered in Berlin.
Bombardier Commercial Aircraft will be headquartered in Mirabel.
Bombardier Business Aircraft will be headquartered in Dorval.
Bombardier Aerostructure will be headquartered in St-Laurent.
Plan A: Bombardier Aerostructure will be sold to Spirit AeroSystems in Wichita.
Plan B: Bombardier Aerostructure will be headquartered in Belfast and BBD will eventually sell the unit to the new owner of Aerolia who will have by then acquired the latter from Airbus.
Plan A is the most obvious right now. St-Laurent is the main sub-assembly plant and it is located only a few miles down the road from the Dorval headquarter. And Spirit AeroSystems is a Canadian company, like Bombardier is.
Plan B may sound farfetched at this time, but remember that Bombardier in Belfast was once Short Brothers, the first and oldest aerostructure manufacturer in the world. The Wright Brothers gave them the first contract in history to build an aircraft designed by another party. That is when the concept of “outsourcing” was invented in aviation. 😉
Airbus wanted to get rid of Aerolia but was unable to find a buyer. I believe that prospect might improve if Bombardier Aerostructure was located in Belfast and managed by the new owner of Aerolia.
I am just trying to make sense of a complex situation. I know that this will start the rumour mill but that is part of the game and we have to accept it. I prefer unfounded rumours to the deafening corporate silence of Bombardier.
Now that you know what I imagine will happen, here is what I think of the present situation.
I believe that Bombardier Aerospace is too small and too integrated to break it down into small business entities. We have to remember that Bombardier Aerospace was created after Bombardier Inc. acquired in quick succession Canadair (1986), Shorts (1989) Learjet (1990) and de Havilland Canada (1992).
These four manufacturers were integrated and merged into a single entity that was named Bombardier Aerospace. Each former company became a division of a fully integrated aerospace company. All the design offices were moved to Montréal and the Bombardier Manufacturing System that was conceived for the train division was exported to the aerospace divisions where each business unit had to adopt the same methods of production in order to streamline the operations across the entire company.
But now apparently Bombardier wants to create a new business model. What was once integrated will be dis-integrated. If Spirit or Aerolia is to run the manufacturing plants, who will design the aircraft? To retain the efficiency a single design office will have to work for the other divisions which will now be autonomous. That will be very complicated to manage, in-sourced or out-sourced.
But Boeing did it, and so did Airbus. Bombardier is much smaller though, and more diverse (Business and Commercial). That is my main concern. I can see the logic behind this for Boeing and Airbus, but I think it’s too early for Bombardier, which is still too small and vulnerable.
BBD is prompted to act now because it is strapped for cash. And that would offer a quick solution to the short term money problem. Maybe too quick in my opinion. Because after all that is what this is: only a personal opinion.