07 May 2015, C. Leeham Co: Last week we looked at Airbus first quarter result and compared its commercial aircraft unit with Boeing’s. Now with do the same with Bombardier and Embraer. As both have sizeable Business jet businesses we will include these in the analysis as they share many technologies and developments with the commercial aircraft.
Embraer reported their results last week and Bombardier today. Both reported quarters in the aerospace area which were a bit inferior to last years first quarter and for the same reason, the Biz jet market has gone soft.
Bombardier, who has a larger proportion of its turn-over in Biz jets, has managed this better, it has delivered more aircraft and generated slightly higher revenue and profits from the area but new orders has been slower.
Embraer does separate its business segments for revenue but not for profits. It reports that the lower revenue and profit for the quarter was mainly because the Biz jet area delivered fewer aircraft at less margin. Commercial aircraft deliveries were strong, with good efficiencies in the production and delivery of E-Jets.
Deliveries, revenue and sales
Bombardier delivered more commercial aircraft (13 CRJ900s, one CRJ1000 and eight Q400s) than Embraer who delivered 20 E175s in the quarter. On the Biz jet side Bombardier delivered 45 aircraft versus 12 for Embraer. Revenues for Civil aircraft and Biz jets were $673m + $1537m = $2210m for Bombardier and $662m + $167m = $829m for Embraer .
Sales were good for Embraer in the Quarter as backlog only decreased with $0.5bn from $20.9bn 4Q 2014, backlog of E-Jets stand at 454 which is around 4 years of production. Backlog at Bombardier Commercial aircraft stayed put at $12.5bn while it went down $0.6bn at Biz jets to $23.4bn. The major portion of the commercial aircraft backlogs are for CSeries with 243 aircraft. The backlog for CRJ stands at 90 aircraft which is 18 months production and for Q series at 52 aircraft which is close to two years production.
Profitability and free cash flow
The two groups have totally opposing fortunes in their respective divisions. At Bombardier the Biz jet side is earning the money with $107m earned during the Quarter whereas the commercial side is losing money with -$10m. This shows that Bombardier keep the Civil airliner revenue and production going with CRJ and Q-series to cover the divisions fixed costs but badly needs CSeries to regain profitability in the division.
At the quarterly announcement, the new CEO, Alain Bellemare, also said that certification of CSeries will be made during 2015 but that the announced first customer, Swiss, would only take the first series aircraft mid 2016. As the CSeries will be produced at a loss for first years the commercial side will stay in negative cash flow for years to come. Until the CSeries is program profitable at a development and tooling cost of around $5bn it will take decades.
Free cash flow for the quarter was down to -$745m from -$915m a year ago, the result of restructuring and a halt to the Learjet 85 program.
For Embraer it is the other way around. The commercial aircraft side is the revenue and profit generator with the Business aircraft side generating more modest results. The reason is that whereas the Biz jets for Bombardier is mainly profitable mid-sized and large Biz jets the Embraer Biz jets are mainly small and mid size which generate less revenue and profits.
Free cash flow 1Q 2015 for Embraer was -$530m compared to -$446m 1Q 2014. The company said that investments in R&D for the year will be around $300m.
Embraer might be the world’s third largest producer of civil airliners but the civil aeronautical sector is less than half as large as Bombardier’s. Embraer’s commercial aircraft sector is more successful however with deliveries of E-Jets close to 100 per year with a backlog of 450 E-Jet of both the legacy and the new E2 type. It has also streamlined the present product line with a newly refreshed E175 being the main delivery and at good margins.
Bombardier on the other hand is the world’s dominant large Biz jet producer together with Gulfstream. This is where the revenue and profits are with prices in the same league as for a regional jet. This is why the development of the top of the line Global 7000 and 8000 are almost as important to Bombardier as the CSeries, as these will continue the groups profitability together with the train division and pay the bills until CSeries can be produced at a profit.
Bombardier has raised a significant amount of cash to pay for the load the CSeries places on the group. During the last six months new shares and loans have raised the cash position from $3.8bn to $6bn. This shall now cover the period until CSeries and Global 7000/8000 can contribute to the bottom line. The new management is also dressing the Train division for co-operations with a minority stake IPO planned for end of this year.
I think decades is an over dramatization, maybe A decade, or 7 years or so. It all depends on production rates. If they launch CS500 then the whole equation changes quite dramatically, and since it can be done relatively cheaply, the whole R&D sunk cost picture will change quite dramatically.
Yes, I meant; you add that cost and production cost losses and you probable are close to $10bn before things go north, then with say $10m av. amort. per frame (which is good for a $30m net price!) you are close to 1000 frames, takes a while, especially as I don’t think you always gain $10m per delivery.
Do you really think that a profit margin of 10 millions per airframe is realistic?
What is the profit margin for the B737/A320?… Only a few millions per airframe I assumed.
So how it is possible for BBD to achieve larger profit margin on a smaller aircraft with a lower production rate (probably around 4-5 airframes/month for several years comparatively to 40-50 airframes/month for Airbus and Boeing) and which is at the beginning of the learning curve?
Personally, I think that the probability that the CSeries will never break-even is non-negligible (same thing for the 787…). I raised this issue on a previous post but most of the commentators don’t believe it. What do you think?
I would be very interested in your assessment of a CS500 stretch. Could they use the same wing? Would they have to change engines? Since the second evacuation door is already engineered into the fuselage, what else other than the two extension segments would have to be added? Any guess on how long it would take to produce? Thanks in advance.
Wait a little more than three weeks and you may have your answer. According to my own ‘market intelligence’, Bombardier may launch the CS500 in Paris this year. I had lunch with Alain Bellemare yesterday and he told me that they… No no, that was a dream I had last night. Sorry! 🙂
Seriously, during the presentation of the last quarterly results Bellemare ‘accidentally’ said that Swiss was going to be the launch customer for the CS500. This Freudian slip clearly indicates that it is at least in the back of their mind, if not closer. I also heard Fred Cromer say a couple weeks ago that Bombardier was planning to make a few announcements in Paris this year. This may have nothing to do with the CS500, but I think it could. And the ever attentive Jon Ostrower reported in the Wall Street Journal yesterday that Bombardier were considering a third model of the CSeries. Follows a few excerpts from that article.
TWSJ: Bombardier Inc.’s new commercial aircraft boss said Thursday that it is considering of a third model of its new CSeries jetliner that could compete with the core single-aisle jet offerings from its European and American rivals.
TWSJ: “We’re seeing opportunities where a next version of this plane can be more of a reality,” Mr. Cromer said in an interview.
TWSJ: Mr. Cromer indicated Bombardier needs to get through testing the first two models to determine if there is an opportunity for a CS500 that might use the same wings, for example, a major cost savings. He said it is too soon to discuss potential specification or capacity for a new model, but that “it would have to be” aimed to compete with the most popular models of the 737 and A320 “otherwise we wouldn’t do it.”
Of course that is not enough to ascertain that the CS500 will be announced in Paris, but I would not be surprised if they did so. Can you imagine if after showing the CS100 on static display and flying the CS300 over Le Bourget they were to announce that they are going to build the CS500? It would certainly create an unprecedented wave of publicity for this wonderful aircraft. Like I have mentioned at the beginning of this post I have dreams some times.
PS: If the CS500 is not launched in Paris this year please don’t hold me responsible for your disappointment. 😉
“It all depends on production rates.”
A few year ago, BBD announced a production rate of 20 airframes/month.
Now it is more like a maximal production rate of 10 airframes/month.
But Bombardier will not be able to reach this rate before several years, the backlog is not large enough.
“If they launch CS500 then the whole equation changes quite dramatically, and since it can be done relatively cheaply, the whole R&D sunk cost picture will change quite dramatically.”
You need to consider the total cost when launching a new variant (or aircraft). If you consider both R&D and production losses, the program cost will be larger than you think.
Of course you need to consider cost. Developing and certifying a CS500 variant will a tiny cost relative to the current program, especially considering it was part of the plan all along and probably has been designed. I don’t think the stretch will cost more then 250M.
You are very optimistic to assume a total cost of 250M. Particularly if you consider that the stretched variant will probably need a engine with a new rating (current rating, 19,000/21,000/24,000lb) and initial production loss.
I do not think that a CS500 would need a new engine. A CS500 would carry 150 pax in a two class mix config. The CS 300 can already carry 160 pax in a single dense config. P&W also announced a 4% thrust boost option as part of a software patch. $250m is a conservative estimate. It is a simple stretch and they have already engineered in the double escape door in the mid section. I would not be surprised if they announce the CS500 at the Paris Air show.
You are comparing apples and oranges. The capacity of the CS300 is 130 passengers in a 2-class configuration. The CS500 will be probably able to carry 180 passengers in a high-density configuration.
An other point, the development of the A350-1000 is quit expansive even if it is an “stretch” of the A350-900. And the 787-9 will take more time to break-even on a unit cost basis than the 787-8 so a “stretch” is not necessary as cheap as you may think.
I can tell you for sure that the CS500 is not in development at this time. It was not planned from the beginning like the CDS100 and CS300 types were. That doesn’t mean it wouldn’t be a good idea though…
BBD is heavily in debt right now, $9.0B. Just this year BBD borrowed $3.0B.
So, I am pretty sure that the CS500 will be on hold for a few years.
Actualy the debt is about $5B. See the conference call transcript here: http://seekingalpha.com/article/3165666-bombardiers-bdrbf-ceo-alain-bellemare-on-q1-2015-results-earnings-call-transcript?page=4&p=qanda&l=last
It was at $6B and then they used some od the proceeds of the equity issue to pay down the 4.25% 2016 notes. No more debt maturities until 2018.
They need the CS500 to provide a family of aircraft. The 150 – 180 pax segment is the sweet spot and would be a good seller.
Some people are very optimistic for the CS500 but personally I don’t think that BBD will launch the CS500 before the CS100/CS300 will become cash positive. Even when the CS100/CS300 will become cash positive, BBD needs to pay back a lot of debt before investing in a stretched version of the CSeries.
If they announce the CS500 now it would likely enter service no sooner than 2018-19 which give BBD time to finish the Globals.
Dear Björn, Is it a foregone conclusion that U.S. scope clauses will be adjusted upwards so to accommodate the Embraer E-Jet E2 and other Geared Turbofan equipped small aircraft, or is this a matter very much up in the air? How do industry insiders generally feel? Thank you!
I disagree that BBD will take decades to make a profit on the CSeries. First of all the program development costs were shared with a number of partners. Second, these costs will be amortised over 20 years so they start making a profit with the first plane.
BBD’s aerospace revenue is around $9B/yr. The CSeries at full production will add another $9B to revenues. With the potential to add the CS500/CS700 and CS1000, there is a potential to have to double the production line in the future.
By the way, I think there is a good chance that the CSeries will be certified by Sept and first deliveries still could be in 2015. I like the new policy of under promising as problems could still arise but we know that the first production CS100 P1 is flying now and P2 and P3 are almost finished assembly. They could have 10 or more planes ready for delivery by the end of the year.
“First of all the program development costs were shared with a number of partners.”
This doesn’t change the fact that each partner need to recover its investment. In fact, the total cost is probably higher with several strategic partners because each partner take its share but the cost by partner is reduced.
“Second, these costs will be amortised over 20 years so they start making a profit with the first plane”
It is not possible to make profit with the first plane. The first airframes are significantly more expansive to manufacture because of both low production rate and the learning curve effect. The A380 will be only cash-positive at the end of this year, same thing for the 787. In fact, Bombardier will produce the CSeries at loss for at least one year, if not more, before to breakeven on a unit cost basis.
“BBD’s aerospace revenue is around $9B/yr. The CSeries at full production will add another $9B to revenues.”
Revenue is one thing, profit is an other thing. Don’t mix these two.
You cannot compare Cseries with 787 and A380. The A380 is having problem getting to production break even because of major issues with the custom interiors specified. Its production ramp has been a nightmare as a result. As for the 787 Boeing was producing those will before certification, so they had literally HUNDREDS of parked planes that had to be reworked to production spec. It was a HUGE nightmare. Plus they were so late they had to pay millions in compensation. BBD has learned a lot from those two disasters And they have refused low margin deals like Lion air . The plane will not need a new engine, if the CS300 can operate with 19 lbs then the 24K engine will be fine for the CS500. There is probably headroom to increase it to 26K or so.
“The A380 is having problem getting to production break even because of major issues with the custom interiors specified. Its production ramp has been a nightmare as a result.”
As far as I know this is no longer the case. When Airbus started to assemble the A380 they indeed had to deal with excessive customization of the aircraft, along with severe software problems, but they have since rectified the situation and everything is more or less back to normal today.
“As for the 787 Boeing was producing those will before certification, so they had literally HUNDREDS of parked planes that had to be reworked to production spec.”
Perhaps overall they did have “hundreds” of parked planes since the beginning of the assembly process, but at any given time they never had more than a few dozens. I would say around fifty, give or take a dozen or two.
“BBD has learned a lot from those two disasters And they have refused low margin deals like Lion air.”
While it is true that Bombardier are not keen on low margin deals, we can better explain the Lion Air deal by the fact that Airbus will do anything in order to retain their existing customers and will undercut BBD even if this implies to lower their prices more than they usually do. On a big deal like this a small margin still means a lot of money.
BBD cannot do the same because the programme is not profitable yet and they need to garner lucrative orders as soon as possible to bring some cash in. At this stage of the game they cannot manufacture a huge number of aircraft for a meagre profit. If they did so they would quickly go bankrupt. This almost happened ten years ago when they had to restructure. At that time they realized that they were not making much money because they were selling a lot of airplanes with very low margins.
“You cannot compare Cseries with 787 and A380.”
My intention was not to made a direct comparison but to state that it is not possible to make money with the first air-frame. An other example is the A350. The A350 will only be cash positive by 2019 and the 777-X will probably only be cash positive in 2024-25. So, my point is that Bombardier will still lose money for 1 or 2 years before ramping up the CSeries production sufficiently to decrease the cost.
“As for the 787 Boeing was producing those will before certification, so they had literally HUNDREDS of parked planes that had to be reworked to production spec.”
This significantly contribute to the huge deferred production cost. However, the 787-9 is still cash negative even after the modifications were implemented on earlier air-frames.
“Plus they were so late they had to pay millions in compensation. ”
The CSeries will be 2 – 2.5 years late (EIS in early to mid 2016).
“The CSeries will be 2 – 2.5 years late (EIS in early to mid 2016).”
Technically, what you say here is correct. However, I see it a bit differently. When the CSeries was launched at Farnborough in 2008 they then said it would EIS at the end of 2013. Because I expect the CS100 to be certified before the end of 2015 I prefer to say that it will be less than two years late. The reason I say this is that the first operator cannot take the aircraft earlier than May 2016, not because Bombardier cannot deliver it earlier.
We know that the first production CS100 P1 is flying now?
I certainly didn’t know that…
It is not flying yet, but I believe its assembly has recently been completed. Therefore I expect it to be handed over to Preflight soon. It may actually take part into the flight test campaign later on. It looks like several birds will be idled for a while since the first customer is not scheduled to take delivery of the first aircraft until 12 months from now. Since flight testing seems to be doing quite well right now, it makes me believe that at the start of next Fall it will have received its ticket. What are they going to do in the remaining six months? I suggest they tour the world like Airbus did with the A300 to make it known to the rest of the world that a new player had entered the arena. And as they say, the rest is history. 😉
They have said ENTRY INTO SERVICE in 1st half of 2016. You don’t pick up an aeroplane and start flying revenue service the next day. Especially an all new type like Cseries. If you look at Qatar they took 2 weeks to initiate A350 services, but the A350 is very familiar to all Airbus pilots. 787 took about 1 months to enter service and that was also with familiar Boeing flight deck. Cseries will take probably 1-2 months at a min. So that means the first delivery will be anywhere from January 2016 on.
It was off the assembly line 6 Mar. If it is not flying now it will be shortly.
From 6 Mar article:
“Taking advantage of the work already completed on the CS100, the CS300 entered flight testing in the latest build standard. “We have six build standards, mostly related to software, and FTV7 flew in Build 5, which is [entry-into-service] EIS-ready,” says Dewar, adding the final Build 6 will incorporate any changes that emerge from the remaining tests. One of the CS100s, FTV3, is also at Build 5, along with the first production CSeries, P1, which is off the assembly line in Mirabel and scheduled to fly this summer. …the three aircraft on the final-assembly line in the new building at Mirabel: second CS300 test aircraft FTV8 and production CS100s P2 and P3.”
This is an excellent review of the Bombardier/Embraer latest financial results. It is factual and clear, and gives a very balanced overall assessment of these two surprisingly successful companies.
“The backlog for CRJ stands at 90 aircraft which is 18 months production and for Q series at 52 aircraft which is close to two years production.”
The production rate of the Q series appears to be considerably slower than for the CRJ. Does this have to do with the backlog that is smaller for the Q series and BBD feels the need to stretch it?
“…the development of the top of the line Global 7000 and 8000 are almost as important to Bombardier as the CSeries.”
I totally agree with that statement. The 7000/8000 will come a bit later than the CSeries but will be profitable earlier. It was less costly to design and is already in production with its almost identical predecessor, the 5000/6000. And the margins are far superior on the Global than they will ever be on the CSeries. Most analysts explain the current dip in Global deliveries as a consequence of a market shift. But I would prefer to explain this with the fact that the latest Global will arrive on the market much later than its Gulfstream rival. So it’s only normal that at this stage potential Global customers would want to wait for the newer version, or buy a Gulfstream in the meantime.
“Embraer does separate its business segments for revenue but not for profits.”
Following the split of Bombardier Aerospace into three separate entities it was the first time that Bombardier reported revenues/profits for Commercial, Business and Engineering Services separately. It makes it easier for analysts and followers to assess the situation.
“Embraer might be the world’s third largest producer of civil airliners but the civil aeronautical sector is less than half as large as Bombardier’s.”
I cannot blame Embraer for saying that it is the third largest commercial aircraft manufacturer. First of all it’s true, thanks to the very successful E-Jet. But this does not reflect the overall strength of the company. If we look at the global civil aerospace sector BBD is still considerably bigger. Embraer has a 20.9 billion backlog whereas BBD has a 35.9 backlog. And if we include the Transportation division the backlog rises to 65.8 billion. I don’t know what the military division would add to the Embraer backlog but it would be considerably less, while being more uncertain because less stable.
Things have not been converging well for Bombardier lately (I see the same thing happening at Boeing in future years). The Learjet 85 was a costly mistake; the Global 7000/8000 will arrive much later on the market than its rival; the CRJ and Q400 need to be revamped urgently; and the CSeries is very costly to develop for a relatively small company like BBD (that is why when they launched the CSeries John Leahy said that Bombardier were very brave).
Speaking of the CSeries, we all expect it to make a flashy appearance at the coming Paris Air Show. The CS300 will probably be there alongside the CS100. But in what colour will the CS100 be? The latter did not fly at all in April. Is it being prepared for Paris? I heard it was scheduled to make an appearance in Frankfurt after the show. Could all this be associated with a Swiss Air Lines marketing campaign?
By the way Swiss will indeed be the first customer to take delivery of the aircraft. But they asked Bombardier to postpone delivery until May 2016. This will remove a bit of pressure on the certification programme but it looks like there will be a big gap of about six months between the two events. This will give plenty of time to both parties to get prepared though.
One parting shot: Did you hear about the Freudian slip that was reported by John Ostrower? Apparently Alain Bellemare said that Swiss will be the first customer for the CS500… 🙂
A bit of history. Swiss regional Crossair, who eventually become the current Swiss International were supposed to be the first operator of the E170 with 30 on order. That was back in 2001.
The whole order was later cancelled. I’d be keeping my fingers crossed if I was Bombardier
I think Swiss was expecting the CSeries much earlier to replace its aging BAe 146. After The CSeries had accumulated delay after delay Swiss had to lease some Embraer to take over the BAe 146, if I am not mistaken. If Swiss has obligations on its current leases it could explain why they cannot take delivery of the CSeries earlier than May 2016, otherwise they would incur penalties.
“I heard it was scheduled to make an appearance in Frankfurt after the show.” Sorry, I meant Zurich.
Global 7000 will be less costly to develop then Cseries that is true, partly because it is a stretch of the Global 6000, but also because all the high tech FBW and flight deck are all paid for by the Cseries program. The new Globals will be very, very nice aeroplanes if you have the means I would HIGHLY recommend them. Yes BBD should have launched them earlier as they are probably of greater short term importance then Cseries. But C has the potential do for BBD what the A320 did for Airbus.. i.e transform the industry from the big two to the big 3. That will play out over the next 20 years.
“The new Globals will be very, very nice aeroplanes if you have the means I would HIGHLY recommend them.” Yes I know. I actually own one of the earlier models when it was still called the Global Express. But I had to assemble it myself. It looks great on my desk though! 🙂
“The production rate of the Q series appears to be considerably slower than for the CRJ.”
In fact, the production rate of the Q400 was but by half comparatively to previous years.
Other than being involved in Aviation, there is not much one to one comparison ad BBD does not compete directly in most Embraer categories and has its other divisions Embraer does not.
Q series no direct or even prop product (ATR of course)
C series is Airbus
The Challengers no product equal
Only in smaller to mid size business jets
Flip side BBD has no tactical transports
I have growing apples and oranges feeling comparing BBD Aerospace and Embraer. Because they are competing less with each other than e.g. with ATR, Gulfstream, Cessna and Airbus/ Boeing.
A strongpoint I see for Embraer is their continued unchallenged dominance in the 100-120 segment where their bread and butter E190 is sold.
Embraer is a new entrant into the Business aircraft category. It was only natural for them to do so, for all they had to do was to adapt an existing commercial platform. Bombardier had taken a similar route, but in reverse. They adapted a business jet platform (Challenger) to make a commercial aircraft (CRJ).
Today Bombardier is the largest business aircraft manufacturer and offers the widest product range. After introducing the G650 Gulfstream briefly occupied the first spot, but after the introduction of the Global 7000/8000 Bombardier will distance itself from the others.
Another major difference between the Small Two is that Embraer has a military division. In spite of its name Bombardier got rid of its last military division recently. Incidentally, that division once bought a large order of Embraer Tucano, but had to cancel the order when an ill-advised Embraer sued BBD over illegal subsidies. Like Boeing, Embraer made a fool of themselves in the process.
Instead of a military division Bombardier has a Transportation division (tramways and trains). Like the military divisions of its competitors this business has different cycles, and one can compensate for the other in down cycles. Without BT Bombardier would not have been able to launch the CSeries.
I disagree with you when you say that the CSeries does not compete with the ERJ, especially the new E2 variant. For many operators the CSeries will be slightly too big, and in many cases it is going to be a tough decision. That being said, many customers who find the A320/737 a little too big might also find the ERJ a little too small. The CSeries happens to fit perfectly between these two categories. In fact the CSeries is alone in that market segment. In that sense we could say that the CSeries has no competition. But is does at the lower and upper ends of that segment. That is why many people view it as a ‘bastard’ segment.
But overall you are right to say that Bombardier and Embraer are entirely different companies in terms of the product they offer. Also, BBD remains almost three times the size of Embraer and is slowly, very slowly, making its way into the Big Three.
While cogitating on the six-month gap between certification and EIS, the following thought occurred to me. The CS300 is expected to be certified approximately six months after the CS100. Since the CS100 will be ‘on hold’ for six months before EIS it means both models could theoretically enter service almost at the same time. Interesting. 😉
Why do you assume the CS100 will not enter service until May or June?
Apparently it was revealed during the last quarterly report. I have read, and also heard on TV, that Swiss had requested BBD to postpone delivery until May 2016. My reasoning is that Swiss had to lease some Embraers to replace its aging fleet of BAe 146. I assume that this lease would expire in May 2016. Since this is my own speculation please take it with a grain of salt.
Sad to hear the news that a A400m has crashed in Spain..
Bombardier is thinking about a CS500 but this model will probably not be launch very soon. For example, Bombardier still doesn’t know if it will need to redesign the wing. So it seems that the margin is not that big.
“Mr. Cromer indicated Bombardier needs to get through testing the first two models to determine if there is an opportunity for a CS500 that might use the same wings…”
“He said it is too soon to discuss potential specification or capacity for a new model”