Oct. 19, 2015, © Leeham Co. Bombardier is dominating the aerospace news lately, given the reports of talks with Airbus about selling a stake of the CSeries program to the European company; a report that it planned to approach Embraer for a business tie-up; and on Friday, a long analysis by Reuters about BBD’s financial challenges.
Last week I chronicled Bombardier’s history predicament of how it got to where it is today, a very deep hole that the new management—which only got on the scene last February and which has spent much of the year reorganizing the company and hiring a new team—has to dig out of. It’s not an easy task and it won’t come overnight.
Let’s take yet another look at things, given the continued headlines last week.
Tying up with competitors
The talks with Airbus were a long-shot to success. I don’t have any sense as to how serious or how far advanced the talks were, or whether they were just exploratory. I certainly could make a case that the CSeries could fill a hole in the Airbus line: the A319neo clearly isn’t going anywhere and I’m not at all sure the airplane will ever be built in anything but the ACJ. The same is true for Boeing and the 737-7; I doubt the airplane will ever be built.
There is no indication so far that BBD and Boeing have had any talks, but Boeing being Boeing, I would not be at all surprised if the company hasn’t at least looked at the prospect of buying into the CSeries.
Then there was the report BBD was going to approach Embraer about a tie up.
EMB was quick to issue a statement:
“Embraer has not been approached by Bombardier regarding a partnership on the C-Series and remains fully committed to the development of its E-Jets E2 family of aircraft, estimated at US$ 1.7 billion and which EIS of the first model (E190-E2) is planned for the 1H 2018,” a spokesman said last week.
One word assessment of tie-ups
But with all the speculation over any business arrangement between BBD and its competitors, there is a one-word answer that more than likely kills any prospect:
There’s more overlap with Embraer than with Airbus or Boeing, in my view. The E-190/195 remains an active program with which the CS100 competes. While the CS300 competes with the A319neo and 737-7, the likelihood (as I see it) these models won’t be built, or will have such a miniscule market share, is so great as to enable an argument that anti-trust concerns are less with Airbus and Boeing than with Embraer.
But that doesn’t mean these wouldn’t exist. Regulators would look at the prospect of the 160-seat, high density CS300, which lands squarely in the lower end of the A320/737-8 territory (if similarly configured) and the prospect of the oft-talked about CS500 and raise concerns.
Airbus is concerned about an emerging competitor who will creep up from the 100-149 seat sector and hasn’t been shy about saying so publicly, so regulator concerns already have this as a basis from which to proceed.
For Boeing, buying into the CSeries program would be a repeat of the merger with McDonnell Douglas and the acquisition of the MD-95: a good airplane that is an orphan. Boeing didn’t do anything with the MD-95 except change the name and it probably wouldn’t do anything with the CSeries.
At least with McDonnell Douglas, Boeing got a then-decent defense business to make it worthwhile for the pain and agony of clearing regulator approval of anti-trust issues. There is no such “greater good” in a CSeries tie-up.
The Reuters article pinpoints a problem that has to be addressed: the continued control of the Beaudoin family. As LNC reported some time ago, Canadian investment analysts pointed to this issue as one stopping some investors from pursuing a minority stake in the Transportation (rail) unit IPO that is needed to raise cash.
The Beaudoins have to decide whether their ego and pride is worth more than the benefit to the company, shareholders, employees and customers. They currently have 54% voting control. They need to give this up to a minority position.
There’s a saying in the US that’s quite apt: Having 50% of something is better than 100% of nothing.
The Beaudoins need to take this saying to heart.
My money’s on BBD not being able to get sufficient orders or cash to turn the CSeries around, followed by a Chinese company buying the assets, taking it to market and doing well with it.
The Quebec and Canadian governments have already stated that they would provide any needed cash. Do you really think the Canadian government is going to let this company and the industry around it be taken over by a Chinese company which is just an operating arm of the Chinese government?
How would the financial injection sit with the WTO? As for Chinese companies, I don’t share your opinion and don’t see them wanting to move manufacturing etc wholesale to China. Probably set up another line in China, but retain the line (and jobs etc.) that is already there.
Are any existing orders for CS from China ?
Didnt think so, and yet they build the main part of the fuselage ( which led to considerable delays as doing it to full western standards was beyond them.)
A Chinese company doing well with it? Their track record of production of other peoples designs hasnt got ‘doing well’ written on it. Its unusual situation, but building airliners is something they just dont get. They are well behind Brazil in going from a niche operation to reaching substantial success. Considering their resources and internal market most likely they havent put resources into it. The high speed trains is an example of when they have gone all out.
Rest assured the C Series will be very successful. Ignore the cash-flow situation for a moment and look at the product…it is best in class for airlines, flight crews and of course, passengers. The Neo and Max are dead. As soon as one airline adds the C Series to their fleet in a region, it makes for an uneven playing field in that region, other airlines will have to follow to stay competitive until an equally competitive product comes to market.
As one of the largest employers in Canada the government will not let this company or industry slide.
I was under the impression the a319neo is currently in flight test. Correct me if I am wrong.
I claim prescience re possible merger/ takeover talks suggesting it was a good ‘out, for BBD and would give Boeing a great small NB allowing them to concentrate squarely on the a321 with some version of the MOM. An optimised A319/320 competitor and a future A321/322 competitor.
The A320 is, but Airbus is experiencing problems with the engines…in particular in the middle east where the aircraft is undergoing environmental testing and the engines are not doing well in the heat.
Dominic Gates also quoted Ted Piepenbrock extensively. Dr. Piepenbrock heads the International Institute for Strategic Leadership (IISL).
On the home page of IISL, there’s a link to the piece by Mr. Gates:
Here’s a 6 month old tweet from Mr. Gates:
The 787 no doubt has had its share of problems but it has sold well in the market and no doubt is a “game changer”.
Seriously, how much stock do you want to put into an ivory tower intellectual who uses terms like “the evolution of business ecosystems”? Academic drivel in my humble opinion.
Ok, the “game-changing” 787 is barely better than the A330neo on fuel consumption, but apparently not on CASK – and the cost of achieving such a ridiculously small improvement in “game-changing” performance is the story of one of the world’s biggest business failures. A failure that IMJ has severely hampered Boeing in developing new competitive platforms. Instead, Boeing has had to resort to what they seem to know best – or what looks like the path of least resistance when they were being forced to move reactively with the 748, 737MAX and 777X – instead of developing all new products (i.e. Y1 and Y3). IMJ, the 777X, for example, is extremely vulnerable to an all new, composite Airbus mega twin. If launched, I’d not be surprised if current 777X-customers would start abandoning the programme – similar to how the A346 simply stopped selling shortly after the EIS of the 77W.
Do you really believe that Qatar Airways, for example, would not ditch the 777X if Airbus were to offer “a significant step over the 777-9X – something that would bigger and better than the 777-9X (Akbar Al Baker).*
As for “academic drivel”, do you actually understand the concept, metaphorically speaking?
Oh boy I knew that post would stir the 380 fanboy extraordinaire into a lather!
Ahh, isn’t it typical for the notorious A380 bashers to be rambling on about it (negatively) – at every possible available opportunity – or trying to pin the fanboy label on anyone with a different opinion on the A380 to that of the A380/Airbus bashers.
” or trying to pin the fanboy label on anyone with a different opinion ”
Like you do all the time. Hypocrite.
” with a different opinion on the A380 to that of the A380/Airbus bashers.”
Coming from a fanatical Boeing basher that is rich!
By the way when was the last order for that white elephant 380? Hmm?
Yeah keep pontificating about what a bright future it has like it hasn’t already dragged Airbus down a 30 billion dollar hole. Man talk about deluded…
Not surprising at all that you resort to contextomy.
Here’s what I said, “……or trying to pin the fanboy label on anyone with a different opinion on the A380 to that of the A380/Airbus bashers.”
BTW, I’m not aware of any blogs that are very pro Airbus, but I could name a few that are very pro Boeing and exceedingly hostile towards Airbus at the same time:
Hence, pinning the Boeing fanboi label on these blog owners and on some of their most rabid followers, does not seem to be totally inappropriate – IMO.
I’m on record as being highly critical of Boeing’s strategic planning for the last two decades – starting with the 737NG. That has nothing to do with Boeing bashing.
I’m also on record saying that the hugely expensive 777X is vulnerable to an all new Airbus super twin. Furthermore, the 787 development and production imbroglio has IMJ severely hampered Boeing in developing all new platforms that would be competitive over the long term – not just for half a decade, or so, which I fear might be the case with the 777X.
If Boeing had chosen, on the other hand, to go for an all new larger WB family, instead of upgrading the 777, then Airbus IMO would have found themselves in a much tougher position as Boeing would have had a first-mover advantage and effectively have owned the large WB market segment between the A350-1000 and the A380-800. Since the A330neo seems to be able quite effectively to compete with the 787 – and due to the fact that it won’t cost Airbus too much in financial and engineering resources – Airbus should be quite well positioned and have the resources necessary in order to launch an all new super twin family by the end of the decade.
IMO, Boeing should have decided to go for a larger 787-11X and a 787-12X using an A350-sized wing (i.e. 20 percent larger in area than the current 787 wing), instead of the 777X programme. That is in addition to an all new super twin family that would have replaced the 777. The 787-11X/-12X would then have been designed to compete with the A350-900 and the A350-1000.
On the stock chart, that doesn’t strike me as serious scholarship. The choice of the start date April 7th 2003 (???) looks highly suspect. Could one possibly find a better date for one’s argument?
See the stock charts available via Google and if you use January 1, 2000 as the start date, you will reach an entirely different conclusion.
Boeing’s stock price didn’t crater as much as the Airbus stock price after 9/11 because Mulally cut back sharply on production. Airbus in a European labor environment could not cut back as aggressively (or at all?) due to a less flexible environment in Europe.
Unsophisticated analysts can be snookered by these type of charts. If the underlying management theory was really sound this type of chart would hold up with different start dates.
April, 2003 – Does the Iraq War ring a bell with you?
PeterWo: “Boeing’s stock price didn’t crater as much as the Airbus stock price after 9/11 because Mulally cut back sharply on production. Airbus in a European labor environment could not cut back as aggressively (or at all?) due to a less flexible environment in Europe.”
Ahh, more myths about Airbus. Wouldn’t “serious scholarship” mean that you’d be looking first at the decline in passenger traffic in the US vs. the rest of the world – post 9/11 – and two, taking into account the massive market share lead held by Boeing in the US market prior to 9/11. Due to the fact that Boeing was much more exposed to the downturn in the US market, post 9/11 – and that Boeing was delivering aircraft at a rate some 70 percent higher than Airbus prior to 9/11 (i.e. 500 + units vs. 300) – it’s really not much of a surprise that Boeing was forced to significantly reduce production post 9/11, while Airbus was able to maintain a flat production output during 2001, 2002 and 2003.
As for Boeing’s stock price not “cratering as much” – has it occurred to you that Boeing profited immensely on 9/11?
On the Qatar article, I wouldn’t be surprised to see Airbus try to play the paper airplane card as Boeing continues to rack up orders for the 787 and 777X. That’s not much of a strategy though.
I am not sure how convincing a double stretch of the A350 will be, especially given the already questionable performance of the A350-1000.
Sales on the A330NEO have not exactly been a barn burner. Especially the A330-800NEO. With sale to date of only ten units, I have to wonder if that airplane will ever be built.
The -900NEO may fare better. It at least has an anchor tenant with Delta although admittedly a bottom feeder. Hard to imagine Airbus is making much of a profit there. May end up being a niche market like the A340-600.
“The Beaudoins have to decide whether their ego and pride is worth more than the benefit to the company, shareholders, employees and customers. They currently have 54% voting control. They need to give this up to a minority position.”
The Beaudoin family has been extremely successful.
They INVENTED the Snowmobile and JetSki Industry and they went on to create the largest “trains and planes” company in the world.
They are number 3 in terms of commercial jet aircraft manufacturers and number 1 in terms of trains!
Lets stop second guessing the Beaudoin family!
Simple – they put Pierre in charge.
He can have all the hand me downs from daddy on his CV, including being on various boards. But, that doesn’t mean he was up to the job of running a big player in the civil and commercial aerospace markets.
Big mis-steps on his watch:
– Launch of CRJ1000
– Launch of Lear85
– Running Global7k, Lear85 and CS100 parallel
– Not making CS300 first
What they should have done was:
– Build a 2+3 fuse and put it onto the CRJ wing. = what the CRJ1000 could have been.
– Adapt that fuselage to the Global wing = Global+ giving a bigger (if not quite as long ranged) step from the 5000/6000.
– Adapt that 2+3 fuselage to a new wing with underslung engines = CSeries
– Adapt that fuselage to a new Global+ wing = gives the Global+ the range of the delayed 7000.
– Adapt the same Global+ wing to the existing Global 5000 2+2 fuse format to be the Global7000 ULR bizjet.
– Leave Lear45 alone. Maybe re-engine and re-system if the demand is there but don’t touch the airframe.
Commonality is key. Not reinventing the wheel several times.
I agree with you Kevin that it has little to do with ego and pride. And I would add that even money is not that important for them (they have plenty enough for what they need). But they are terribly ambitious. They have a long term vision for the company and they need a free hand to take it where they think it should go. The main advantage I see in the current share structure is that it prevents a hostile takeover in hard times.
The answer to that is ‘take it completely private then’. But you need investors to do that, maybe vulture funds could be interested?
The family may have created the ‘auto-neige’ but as for aircraft they just concentrated existing Canadian aviation infrastructure, with a lot of help from the provincial and national governments.
A critical problem for Bombardier is that the current value of the whole company (C$3.76 billion) is less than the value of the CSeries ($5.4 billion + $1-2 billion deferred production cost).
I can’t imagine Airbus have much to lose in waiting for a better or more ‘arrrggghhhh – help us’ approach from BBD at a later date.
I do hope the C-series succeeds… it really looks to be a beautiful and well optimized aircraft for 1-3hr hops between hubs and to act a hub feeders in a jet age i.e. UK regional to DUB for EI trans Atlantic connections up-sizing from ATRs.
Airbus should probably be ready to step in if it comes down to BBD’s assets being targeted by Chinese companies as mentioned by @Woody above. BBD is well experienced in the aerospace industry with a lot of technical expertise, but just lacks cash. China would certainly love to get hold of it to boost their aerospace industry, something Airbus (or even Boeing) would really want to avert.
I think China wants to build aircraft themselves. Financing others has low priority.
I don’t see this is about ‘financing’ BBD. It is about accessing skillsets and networks to bootstrap their own airliner manufacturing and selling industry.
I think the Chinese may also be interested in the rail ops and think they’d also be an interesting fit with Airbus and Boeing.
What the Chinese achieved in high speed rail over the last 10 years is mindblowing IMO.
The technical expertise is with their Tier 1/2 suppliers …
I’m not sure I follow you here. Are you trying to say that OEMs like Airbus, Boeing or BBD don’t have technical expertise in their business of designing, testing and manufacturing aircraft?
You would be surprised in the case of BBD. They have pushed the Risk Sharing Partnership concept to the limit.
The issue is much complicated by the success of the rail half (third? two-thirds?) of the company. There is much talk of selling it off to subsidise the aviation component but there is a decent argument for doing the opposite.
If it were possible, I believe Bombardier would have divested the aviation component already. It is threatening Bombardier’s very existence. Some speculate that China might potentially be a taker, but people in the know view it as a very remote possibility. Officially, BBD claim that they will see their programs through regardless of cost, but analysts view this as unrealistic. They have cash for less than a year, so something needs to happen quickly. I believe the Canadian government will probably be a part in the solution, for instance mandating major restructuring/divestments while providing bridge funding. From a sober point of view, it’s quite easy really; save and develop the healthy parts (rail & business jets) and let go of the unhealthy parts (commercial aviation).
“A crisis is the realization that the old way is no longer sustainable.”
I agree, a self fulfilling prophecy, the company is considered an insolvency risk and therefore it is.
Does anyone really think that the Canadian Gov’t will pick up the tab? So we have a limited and wobbly order book and ramp up to contend with. This will gobble a billion or two even if the eventual product is successful. Note the slow and unsteady sales of the A320 on EIS.
I can see a Bandaid solution but this is a medium term issue (at least 5 years) and most gov’ts can’t look beyond their noses.
So who can afford them? Even at a knockdown price there will be few takers. Chinese funny money, Airbus Euros or Boeing dollars? I take the point posted elsewhere that Boeing would be crucified by their investors if they even sniffed at anything that damaged short-term FCF. China maybe, I think Airbus may be back once the price has halved or even just to pick up the choice assets from the rubble.
The CSeries looks like an optimized design for the 120-160 segment.
– For an A320-321 operator is it more practical than a A319 (MRO, Crews, Containers)?
– For a carrier already operating E-jets is a gap left between those and NB’s.
Same goes for a 737 operator. A, B, E jet operators are 90% of the market.
It seems everybody is focusing at what’s in a partnership for BBD. More practical would to see what’s in it for Airbus, Boeing, Embraer, LM or UTC..
What the reason Bombardier didn’t ask Boeing?
It amazes me that after writing a detailed article of how Boeing, the legendary company, with 100% public control, made an utter HASH of the 787, people would point to BBDs share structure as the issue. Bombardier is a Canadian icon and the lynch pin of Canada’s entire aerospace industry. The US govt would NEVER allow Boeing to go under, and Bombardier is 100x more important to Canada then Boeing. They are too big and too important to fail. The Beauduins are well connected to the govt and have to a large extent, assisted the Canadian and Quebec govt to execute their aerospace policy. That is a 2 way street. Bombardier will get the help it needs and Cseries is coming.
“…people would point to BBDs share structure as the issue.”
At least with the current share structure we know who is running the show. Yes they have made a number of mistakes, like for example launching the Learjet 85 more or less at the same time as the C Series. The former was not an absolute necessity as the Global 7000/8000 were and which were launched too late because the Learjet 85 was already putting a drain on the company’s finances and ressources.
The Beaudoins have an impressive track record. After creating a whole new recreational industry with the snowmobile (Skidoo) they have built from scratch the largest transportation company in the world. That is quite a feat because it was done over a relatively short period of time by acquiring the copyrights for various technologies from the United States, Japan and Europe. And in the middle of it they built again from scratch the third largest civilian aerospace company. And they did it over a period of less than seven years. But their most audacious and successful move was to launch the C Series, knowing they would be invading A&B’s turf and would have to face the consequences. And the predicament they find themselves in today is indeed attributable to this war they have ignited, plus a number of mistakes and weaknesses that have now been addressed and corrected. But harm was done in the process and it looks like it will take “divine intervention” to save them.
Even if we know who is running the show today we still don’t know who will save it.
Please dont say ‘built from scratch’ when its far from it. A conglomerate which has bought together existing assets and mostly existing designs.
Steve Jobs built Apple from scratch, the Beaudoins the snowmobile, but the remaining businesses were built by others.
All this national pride, playimg major league and too important to fail reminds me of Fokker Aircraft 20 years ago.
Boeing had 900 or so orders before certification for the 787 program that it made an ‘utter hash’ of.
Bombardier hasnt enough orders!
It makes all the difference
“At least with McDonnell Douglas, Boeing got a then-decent defense business to make it worthwhile for the pain and agony”
don’t you mean “At least with Boeing, McDonnell Doulas got a then decent commercial jet business and better name recognition by changing their name to Boeing all for the cost of zero dollars by buying Boeing with Boeing’s own money”?
and, frankly, I would call the McBoeing merger the worst thing to happen to the American aerospace industry in the history of ever.
Amen to that. There once was a lot of competition between american companies and technologies evolved at a much faster pace. Now that competition is stiffled, progress has stiffled. And the way things are, it is next to impossible to enter the game (ask BBD). The only dent BBD was able to make so far is to force the big two to re-engine their planes. So Boeing and Airbus took their hands from below their butts, re-engined their planes, sold them for 50% off and killed the competion, problem solved. Next time, everyone take note, do not even try to enter the land of lethargic progress; don’t make us take our hands from beneath our butts or else…
Investment wouldn’t be an issue if the Beaudoins are willing to give up the majority voting position. BBD is too big to be controlled by a single family. Time to move on!
I do not recount MD developping anything real new after the DC10 in the early seventies. Correct me if I’m wrong.
Even the stretch of the DC10, the MD11 couldnt meet its estimates, so required expensive fixes and delays. Then it was the wrong plane for 90s as the twins came along, but that part is hindsight.
I was all ways struck by Swissairs ‘bad luck’ in long range aircraft orders. First they got MD11’s but didnt keep them long, then it was A340s , which werent much better, only now are they getting B777-300ER with a bankruptcy in between. You have to think its all connected.
I can imagine the problem for Airbus or Boeing would be that the CSeries neither acts like an Airbus or a Boeing aircraft. So I can imagine a huge additional investment would be neccesarry to make the CSeries feel like other OEM products.
Therefore a big difference between Bombardiers need for cash and OEM line up. A pilot had to perform a type rating from CSeries to A320 or 737 quickly. Best would be a type rating like A330 and A350. The CSeries is not a Turboprop like the ATR-42.
Open talks with Boeing would be a devasting signal to Wall Street for Boeing.
Having periodically switched on and off with the Bombardier C series saga, has anyone quoted a number for the cash required?
It seems to be generally accepted as being a plane for its time, and that a healthy market would exist with more consumer confidence.
Perhaps a UK style repayable loan based on a return on sales without a time limit could work?
Although the terms have been re-negotiated, the A320 has rewarded the government agencies who gave launch aid to that programme a pretty healthy return on the investment, which if I recall was based on just a few hundred frames..
BBD should start an airline with the CS100 and CS300 and then take the profits and develop the CS500.
I think that they will make more money as an airline rather as an aircraft manufacturer.
My two cents: The CSeries promises to be a great smaller mainstream plane. Bombardier faces two problems. Airbus and Boeing can offer larger A320’s and 737-8’s, which are also very efficient, for a relatively reasonable price. Airlines are tempted to upguage. Airlines have plenty of newish A319’s and 737-700’s to keep them going for the smaller sizes.
So it’s a waiting game for Bombardier until the A319’s and 737-700’s retire out of the system. Bombardier doesn’t have time on its side. There is a risk of rivals bringing new smaller models coming onto the market before they have had a chance to establish their dominance of it.
Hope new Lib gov. will back BBD.b to thé same extent that Airbus, Boeing and Embraer got from their goverments. (one way could be EDC offering garanted minimum resale values at end of lease agreements).
“Bombardier faces two problems. Airbus and Boeing”
“There is a risk of rivals bringing new smaller models coming onto the market before they have had a chance to establish their dominance of it.”
Larger models from Embraer, Mitsubishi, Sukhoi, Comac seem at least as big a problem for exports worldwide.
Boeing claims they will average $35 million profit per aircraft for 900 o them.
Does this figure include the money owed to their risk sharing partners or would this be pure profit for Boeing alone?
The money owed to risk sharing partners, at least those they haven’t bought out yet, seems to be overlooked and I am wondering why that is.
lower fuel costs negate the biggest cseries cost advantage. if fuel costs remain low for several years this could be problem