Pontifications: Storm warnings ahead

By Scott Hamiltn

By Scott Hamilton

Aug. 17, 2015 (c) Leeham Co: Sometimes I never know what’s going to exercise readers. Sometimes it’s obvious. Last week it wasn’t.

Our post last week about the formidable challenges still facing Bombardier for the CSeries brought some surprising reaction, particularly on Twitter. And I didn’t see it coming.

The story was behind the paywall, but Canada’s National Post saw the public portion and called to get more information. The Post published some comments from an interview and with permission recreated a chart that was behind the paywall.

We’ve been doing risk assessments of “skyline” quality for a couple of years now, including Bombardier, which is why the reaction to last week’s post came as a surprise.

Our risk assessment has taken a couple of forms. For Bombardier, it’s a Green-Yellow-Red assessment, the meaning of which really doesn’t mean any explanation for anyone who drives a car or, in the aerospace industry, has ever seen Boeing’s Green-Yellow-Red assessment of access to aircraft financing it does every year.

The other symbolic method we use is nautical: Storm Warning Flags, looking at the top 10 narrow- and wide-body customers of Airbus and Boeing and raising a Storm Warning Flag about how solid the order is. We do this annually and the most recent time for Airbus and Boeing customers is here, also behind our paywall.

For Bombardier and the CSeries, which has 600 orders and commitments for the CSeries, of which 243 are actually firm orders, there is an inordinate amount of country and region risk to the orders and commitments. Russia, Ukraine and the war zone of Iraq are Red in our Risk Assessment. Republic Airways Holdings is Red because its intended use for the CSeries, Frontier Airlines, was sold, the CEO Bryan Bedford has said several times the airplanes don’t fit in the business plans of the remaining carriers owned by Republic and now a pilot shortage means reducing operations, not expanding them. Since our CSeries post, Cowen & Co suggests that Republic Airways might be heading for bankruptcy unless its long-running issues with its pilots are resolved, currently a dim prospect. If Republic seeks Chapter 11, the CSeries orders are gone.

Yellow is assigned to any start-up carrier, the Middle East and all Letters of Intent. BBD has so far a poor track record of converting LOIs to firm orders and LOIs don’t mean much when it comes to the bottom line. I have faith in the new management team and “get” that obtaining new orders from blue chip customers takes time, but LOIs still haven’t been converted. So they are Yellow in our Risk Assessment.

Bombardier’s spokeswoman told The National Post it had no indication of cancellations or deferrals from those customers on our Risk Assessment Yellow-Red list. We didn’t suggest it did. We merely see the prospect of trouble coming. It’s important to note, as did The National Post in my interview with the paper, that these risky customers also present an opportunity for BBD to resell these positions potentially made available from deferrals or cancellations to better quality, blue chip customers looking for earlier delivery slots than can be offered by Airbus and Boeing.

I know from talking with BBD this is exactly the thought process.

Over at Airbus and Boeing, Boeing likes to boast its customer quality skyline is better than Airbus and our Storm Warning Flag assessment generally agrees. Airbus is willing to take riskier bets than Boeing and, as a consequence, overbooks its single aisle orders a bit more than Boeing and tends to have somewhat higher cancellations than Boeing. In the past we’ve tagged Airbus customers Air Asia, Air Asia X and Norwegian Air Shuttle as carriers to watch for over-ordering airplanes and growing too fast. LionAir and Norwegian also fall onto the Boeing list of Storm Warning flags, for the same reason.

Stock Price Jan-Aug 2015

The stock market hasn’t been patient with Bombardier since Pierre Beaudoin stepped down as CEO. Click on Image to enlarge.

We said many times that the CSeries and the CS300 has better economics than the baby Airbus and Boeing airplanes. This has not changed. But some blue chip customers who aren’t in war zones would be nice to have, and so would converting LOIs to firm orders–and soon. Investors aren’t happy at with the company since Pierre Beaudoin stepped down in February as CEO. There have been a couple of stock downgrades from long-term hold-outs. The stock price has gone down steadily since February, closing Friday at a low.

The new CEO, Alain Bellemare, has been in charge for only six months. He’s made a number of changes in key personnel in the commercial and business aerospace divisions. (I don’t follow trains.) It’s taken years for the prior management to dig the hole BBD is in and it’s unfair to expect Bellemare to dig out of the hole in six months. But the market, notoriously impatient in the best of times, certainly has shown its displeasure that no firm sales of the CSeries have been made this year.

They’re going to have to wait longer, if carriers are standing by for entry-into-service before jumping. EIS is now scheduled for 1H2016 (hopefully 1Q) with Swiss. That’s a long time form investors to wait. They need to see some LOIs converted this year and want to see some new orders as well. There remains a confidence issue and new sales will be the only thing to shore this up.


31 Comments on “Pontifications: Storm warnings ahead

      • It is also more than the total orders for the A320 when it was introduced. And the 737 for that matter.

        • 30 and 50 years respectively have passed since then though.
          This is a whole different era.

          • In the early days Boeing were seriously considering shutting down the 737 line permanently while Douglas had sold more DC-9s than they could produce. As for Airbus the A320 was EIS in 1988, which is not that long ago, and had only one competitor.

            The C Series is an excellent aircraft, but the way it was designed makes it an unacceptable threat to Boeing and Airbus. And if they decide the C Series is not going anywhere then the C Series goes nowhere. If and when the CS500 is introduced Boeing and Airbus will have nothing to compete and they know it. So you can imagine what is going on behind the scenes to make sure that the C Series finds no customers. People say yes it’s a pretty good aircraft but it’s too small and there is no market for it. That’s pure baloney. A CS500 would likely have the same number of seats as an A320, Airbus’ best seller.

            So if the C Series is not wanted it is not by the airlines, but by the existing suppliers of those airlines. This is not an aircraft war but a business war. And in the kind of theatre they are operating the main weapon is money; something Bombardier may not have in sufficient quantity to defend themselves.

  1. I would add Macquarie to the yellow category personally.
    They are scheduled to receive 13 frames in 2017 and another 15 in 2018 only IF they have customers for them.

    • Macquarie leasing have a long customer list, with a lot of blue chip airlines. I dont see any real problems as their customers seem to be doing well, but thats the risk they take in the musical chairs business

      • Sure they have a lot of customers. But for OTHER aircraft, not the CSeries.
        Those blue chip customers need to be convinced to lease it and so far no deals have been announced.

        • Being unable to find a lease end user is different to being unable to take delivery as per their contract.
          “Bombardier Commercial Aircraft announced today that a wholly owned affiliate of Macquarie AirFinance has signed a firm purchase agreement for 40 CS300 jetliners and has taken options on an additional 10 CS300 aircraft.”-BBD 2014.
          Macquarie are stuck with them, even if they just park them in the desert.

          • Macquarie can simply defer deliveries until it has customers for said frames.
            So it wont be them paying for aircraft and parking them in Nevada.
            It would be BBD IF it cant sell these slots to someone else and decides to produce white tales anyway.

          • As the statement goes: “a signed a firm purchase agreement for 40 CS300 jetliners ”

            Delaying delivery may be possible, but the order itself sound pretty well sealed to me , and thus is not in doubt. You gave possible delivery of 13 in 2017, so you have to be putting money down soon and sorting things out like possible seats and interior config.
            You would be surprised how many the stored aircraft are leased and waiting for a new operator.

  2. Let’s be honest (and we all like the CS)

    – Network: How many 100-130 seat operation require 3000NM range, but without cargo? Will that ever be more than a niche?

    – Weight; an E jet tube a few rows longer is still lighter/cheaper then a CS100.

    – Comfort; any volunteers for the CS middle seat?

    – Commonality; who can dream up with a CS advantage over the 737, A320 and E-jets?

    CS300/ CS500 look better.

    • 1- The CS100 is interesting as a high-performance aircraft that can answer specific requirements in terms of take-off distance, high altitude airports and hot weather operations.

      2- The CS100 is also interesting if you have the CS300, and eventually the CS500, in your fleet (commonality). The CSeries will become a family of aircraft in its own right when larger variants are introduced.

      3- The CS100 alone is only interesting if you have long range requirements.

      4- As for cargo, the 737 does not have much more than the CSeries and has been doing just fine.

    • Keesje.

      Considering all the hoopla people make about the “18inch seat” on certain Airbus aircraft, I’m sure no one should have a problem with the even wider middle seat on the C-series. Right?


      • Well if you absolutely want that middle seat, you should definately avoid those Embraers, that’s for sure.


        Good thing is you won’t have much problem claiming that middle seat at a CS.

        BTW, flew a soft, wide, newish 767-400, 2-3-2 seat economy friday on a TATL night flight, but the experience was totally ruined by the tight pitch, moving seatbottom and seatbox 🙁

        Comfort always is sold out. I’m 1.92m..

    • If my choices are a middle in a 737 or a CS, I’d take the CS in a nanosecond. But with 2-3 seating, that extra wide middle seat is half as statistically likely as the (terrible) 737 middle seat pax experience.

    • That’s why I believe the CS500 is the right aircraft for Southwest. It is actually wide enough to fit the average customer, and the 737 is clearly obsolete in that regard.

  3. “It was always clear a further stretch was required to make it successful.”

    I cannot argue with that statement because I always thought so myself. It can indeed be argued that Bombardier should have started with the CS300 followed by the CS500 instead of the CS100 and CS300.

    1. Where would they be today if they had done so?
    2. I am sure they have considered doing so, but why is it they have not?
    3. What did they have in mind and what was their plan?
    4. They launched the C Series in 2008; how do they evaluate their strategy today?
    5. Do they think they have made a mistake or do they have a plan that we don’t know about?
    6. What has changed since 2008?
    7. What do they intend to do now?

    We might only find out the answers to these questions when someone in the know will write a book about the C Series.

  4. The CSeries seams like its based on a technology solid platform, is a modern, efficient and advanced aircraft. Brand new design, light, modern engines and with an airframe made of advanced composites materials.

    So why isn’t it selling? Bombardier doesn’t have the financial strength to get things going. They need to sell the aircraft with a loss the first few years until the production line is streamlined, volume increases and costs a cut.

    Bombardier doesn’t have a established customer base in this size segment. This is the largest aircraft they ever made, and the first time they compete directly with both Boeing and Airbus. Maybe they need to lower their prices but can’t afford to?

    Could it be that Bombardier doesn’t have a sufficient production capability? Ramp up time etc., so any new customer actually has to wait several years for first delivery, and then only get two or three aircraft per year thereafter? With a totally new aircraft like this there needs to be some volume. Maybe airliners isn’t convinced Bombardier can pull it off and that makes it to uncertain to count on aircraft from them you need them.

    Boeing needs a new single aisle aircraft. Maybe a fast way to get there is to buy the complete design and certified aircraft from Bombardier? With Boeings know how, customer base and other strengths this program could be quite successful. With the CS100, CS300 and a later CS500 that market segment is well covered, leaving Boeings engineers to focus on a brand new MOM aircraft. That could be a large long range single aisle or maybe a small twin aisle that also competes with the A321. Just a thought… 🙂

  5. “Could it be that Bombardier doesn’t have a sufficient production capability? Ramp up time etc., so any new customer actually has to wait several years for first delivery.”

    No, production of the C Series will not be a problem. BBD actually have more modern facilities and equipment than A&B. Aircraft availability is a problem for Airbus and Boeing, not Bombardier.

    “Maybe airliners isn’t convinced Bombardier can pull it off and that makes it to uncertain to count on aircraft from them you need them.”

    That’s a valid point, but for the wrong reasons. What potential customers are afraid of is not the availability aircraft but the solvency of the company. In other words will Bombardier still be alive when the war is over? And if they come out alive will they be in sufficiently good health to be able to respond to the demands of the market?

    “Boeing needs a new single aisle aircraft. Maybe a fast way to get there is to buy the complete design and certified aircraft from Bombardier?”

    I think Airbus would lend money to Bombardier before the C Series moved over to Renton.

  6. The CSeries, even CS500 would be significantly smaller and less capable than the 737 and A320 series.

    If Boeing designs the NSA to start at A320 level and top the A321, the CS would fit right under there.

    Disadvantage is that the CS (but also 737) can’t carry containers / pallets. While this isn’t the standard in US (737/MD80/757 fleets heritage), Asia and Europe are adopting it.

    The efforts Boeing has to do to keep the MAX at 40% marketshare (the 31 undisclosed MAX customers are a testament to that) make a larger MoM an unlikely priority in Chicago.

    The A321 NEO with GTF’s can be rolled out any moment.

    Without Lionair (how solid?) and UA (will they really skip the 321?) the 737-9MAX is non existent. Even financially dependent Air Canada is sneakingly adding A321s instead of 737s.

    • Boeing first testing the market for a composite A320 and then pull EIS forward is the likely scenarion for the next few years.

      “It will be slightly bigger, there will be new engines. The current look of the planes (shape) won’t change dramatically,” McNerney said.


      “Boeing has nearly 100 years of aircraft experience and “we cannot give up that advantage because competing on costs alone would be difficult,” he said”

      You have to love this guy 😀

      • “Boeing first testing the market for a composite A320.”

        I thought only Airbus could do that. Or perhaps this was a Freudian slip induced by a slight bias towards European designs. 😉

    • “Even financially dependent Air Canada is sneakingly adding A321s instead of 737s”

      Could you elaborate on that last intriguing sentence?

      financially dependent?
      adding A321s instead of 737s?

      With its 787 and 737 orders, I was under the impression that AC would be moving to an all-Boeing fleet.

      • Bernard, Air Canada is already an A321 operator; so they would not be starting from scratch and “moving back” to Airbus. It would be more like a continuity. I agree that it would make sense for Air Canada to have either an all-Boeing or all-Airbus fleet to avoid commonality problems. But because of their experience with the A321 it would be an acceptable compromise. Especially in view of the fact that the A321neo is a much better airplane than the the 737-9, which suffers from inherent design limitations. What is more questionable though is Air Canada’s decision to move away from Airbus, with a clear intent to have an all-Boeing fleet. But that was more a financial decision than a technical one. And the idea was originated while they were operating under bankruptcy protection and were ‘persuaded’ by their bankers to move towards a fleet of aircraft equipped with GE engines: i.e., Boeing.

      • Air Canada has indeed been totally Boeing committed since they half bankruptly ordered a pile of new 777s/787 replacing their newish Airbus fleet (and Boeing taking care of the A330/A340s..).

        Lately AC seems to do well, and their AC/Rouge A321 fleet seems to be growing. New / used A321s drip in, despite having large 737 MAX commitments (Boeing will buy 20 E190s as part of th deal).


        Ex AirFrance A321s are brought in too: https://flic.kr/p/rDsPVg

        Frankly I can’t see Air Canada/Rouge replacing transcon LD-45 carrying A321s with 737-9s.. Regardless of what they announced so far. Operational & revenue mngt people have influence too in an airline.

  7. @ keesje

    “The CSeries, even CS500 would be significantly smaller and less capable than the 737 and A320 series.”

    That is a preposterous statement, to say the least. Especially in view of the fact that on numerous times you have yourself said the exact opposite. And also in view of the fact that we now know that the C Series offers better performances that expected. Frankly keesje, I am completely taken aback by your statement, even if I know that you occasionally take a negative posture towards the C Series.

    As you know keesje the C Series was designed around the CS300. In a standard dual-class configuration (38″) the CS300 has room for 130 passengers (the fuselage was stretched shortly before the detailed design phase was closed, and allowed one row to be added). That is already only 20 passengers less than an A320 in the same configuration. The CS100 also happens to have 20 seats less than the CS300; so it would only be natural for the CS500 to have 20 seats more, which would give it 150 seats in a dual-class configuration (38″): the exact same as the A320. And I don’t think this is a coincidence. It is more likely part of a well thought-out plan. And that is what makes Airbus, and their followers, so nervous. As for performances I am not sure what you mean exactly. All I know is that in terms of take-off distances and restrictive operations the C Series is unbeatable. And if you had range in mind the C Series has better performances than the 737NG and similar performances to the MAX. It also has similar range to the A320, but it does have somewhat less range, perhaps 500nm, than the A320neo.

    keesje, when you said that “the CS500 would be significantly smaller and less capable than the 737 and A320 series” only displayed your unrepentant bias towards Airbus and a lack of objectivity on your part. What I can say for sure though, and which would be supported by research conducted by Leeham, is that the CS500 would have significantly better fuel burn than the A320 and 737 by virtue of the fact that it is a lighter and more modern aircraft.

  8. “The CSeries, even CS500, would be significantly smaller and less capable than the 737 and A320 series.”

    Normand, being smaller and less capable is not a disqualification. It could be ligter and more efficient too for some operations. But even a CS500 would not be able to carry 180-200 people and tonnes of freight / containers transcon. It’s too small / light. Not even taking A321 (LR), 737-8 200 and 737-9 into comparison.

    Bombardier says so. The CSeries is a great aircraft, but not large.

    Operators looking for 100-150 seats look at the CSeries, with future growth potential towards 170.

  9. From Abu Dhabi.

    “Boeing has sketched out plans to develop an all-new aircraft, with new engines and likely a composite structure, to replace its 737 MAX jetliner by 2030, Chief Executive Officer Jim McNerney said on Wednesday.”

    I am afraid this might be too little too late. Too little because that design is not likely to offer considerably better performances than the expected larger variants of the C Series, which by 2030 will be much cheaper than the NSA (or whatever they will call it). And too late because the extraordinary window of opportunity offered by the the launch of the A320neo is now closed.

    “The airplane will be slightly larger than the 737.”

    They have no choice, for the 737 is already too narrow compared to the A320 and C Series, and does not offer the same level of comfort.

    “The push for the new aircraft was being driven by competition from China and elsewhere.”

    How convenient it is to say this! It avoids the real issue: Airbus with the A320neo family and Bombardier with its soon to be expanded C Series family.

    “Boeing has nearly 100 years of aircraft experience and “we cannot give up that advantage because competing on costs alone would be difficult.”

    It will not only be difficult, it will probably be impossible. For the A320 still has considerable mileage left in its design and will continue to be manufactured cheaply for a number of years. Whereas the C Series from Bombardier already offers a design that Boeing can only equal but not surpass by a significant margin, but at a considerably higher price tag and with much smaller margins.

    “Boeing had considered designing a completely new “clean-sheet” design as a successor to the 737 at the start of the decade but abandoned the plan.”

    And that was the single biggest mistake this company has ever done in its one hundred year history.

    “The 737 MAX is a “renovation” of the current 737.”

    That is the most inappropriate misnomer I have ever heard coming from Boeing, a company who’s marketing department normally likes to indulge in hyperbolic statements. But the sad truth is that this is more or less what the 737 Max is in relation to the NG: a simple renovation. But instead of a new kitchen it will boast new engines. But while they are at it they might as well renovate the whole company, for it badly needs a new makeup.


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