Bombardier: Our turnaround plan is gaining traction

Alain Bellemare, CEO of Bombardier. CTV photo via Google images.

April 28, 2016: “Our turnaround plan is gaining traction,” said Alain Bellemare, BBD CEO, to lead off the first quarter earnings report for Bombardier.

“This is a big win for Bombardier,” he said. “This is a strong endorsement for the C Series.” He said BBD is finalizing the agreement with Air Canada for 45 firm orders and 30 options for the CS300. “We significantly improved the quality of the backlog list.

“Looking ahead, we are seeing increased customer interest in C Series,” Bellemare said.

The Air Canada, Air Baltic and Delta orders will result in a 2Q2016 charge of $500m, or nearly $4m per aircraft, BBD announced in its press release. This means the aircraft were sold at a loss, but the gain of these blue chip customers were needed. This is about the learning curve and unit accounting (see below).

Delta deliveries begin in 2018.

Belleman said the C Series will be the largest driver of future growth for BBD.

The CRJ and Q400 saw soft orders in the first quarter. Bellemare sees a stronger second quarter. He vowed increased attention by management this year.

John Di Bert, CFO, said BBD is performing to the Transformation Plan, but more work lies ahead. Commercial deliveries in 1Q were 20 aircraft vs 23 a year earlier. year.

  • The first quarter financial presentation is here.

“EBIT is a work in progress in 2016,” Di Bert said. “Benefit from our actions will begin happening in the second half.” Di Bert said BBD is starting to see improvements in margins. There was a small margin on existing commercial programs, but C Series pushed EBIT to a $66m loss. This will widen this year as C Series production ramp up takes place, as previously forecast, Di Bert said.

Di Bert expects the Quebec government investment of $1bn to close by the end of the second quarter. The forward plan doesn’t not factor in a federal government investment, with which negotiations for another $1bn investment have been difficult.

Bellemare said the Transportation Plan was constructed without assuming the federal investment, but getting it will allow flexibility and future investment. Bellemare largely ducked a question from analyst Rob Spingarn of Credit Suisse whether the investment could use the money to develop a larger CS500. The focus today is on execution and business aircraft, Bellemare said.

Another analysts later returned to the topic. Bellemare repeated his answer, focus on today’s challenges. “I feel very good about where we are today. We have the only new aircraft in the 100-150 seat market, so for the time being” the focus is on this market.

Di Bert said the $500m charge is about the learning curve. “A lot of these aircraft are in the early stages of the learning curve.” Under the accounting rules BBD follows–ie, unit cost accounting rather than program account followed by Boeing–BBD takes the charge now. This will be a non-cash charge.

Di Bert said the per-aircraft loss of the charge will be a moving number and not necessarily a loss of $4m per aircraft. This is because of the learning curve improvements. If Delta exercises options, these will be outside the learning curve charges, he said.

Bellemare declined to speculate on the future of the orders with Russia’s Ilyushin Finance Corp, which is hampered by international sanctions on Russia, and bankrupt Republic Airways Holdings, which is expected to reject the C Series contract during the bankruptcy process.

BBD sees 15 deliveries this year, double this next year and gradual ramp up to 120 by 2020.

Initial analyst take:

Goldman Sachs (Neutral)

Bombardier (Neutral; C$1.26 12-month price target) reported weaker-than-expected 1Q16 operational results. Adjusted EBIT in the quarter was 19% below our estimate, with margin downside in Commercial Aircraft and Aerostructures and Engineering Services. Free cash flow was a larger use of cash than we expected. However, the company also announced that Delta Airlines has placed a firm order for 75 CS100 aircraft with options for additional 50 aircraft. This is a critical order for the CSeries program that was otherwise lacking major network customers and general demand momentum. 2016 guidance is unchanged. The closing of the Quebec investment is expected to occur in 2Q16.

JP Morgan (Neutral)

Though widely anticipated, we still expect a positive reaction to Bombardier’s order for 75 C Series aircraft from Delta with an additional 50 options. Moreover, Q1 was solid, with better than expected EBIT and cash flow, a 1.3x bizjets book to bill, and unchanged guidance.

  • $750 mn FCF use not as bad as feared. The cash from ops outflow of ~$450 mn was slightly below our forecast but capex of $300 mn was ~$200 mn better than we had forecast, mainly because of an abrupt decline in C Series capex that we had expected to taper off more gradually through the year. Cash flow guidance for a $1.0-1.3 bn outflow for the year was unchanged, as was the expectation for ~$1 bn of C Series cash burn.
  • Liquidity at quarter end, pro forma for the closing of the Quebec investment, was $5,447mn which compares to $6,530mn (pro forma Quebec and CDPQ investment) in 4Q15. This was driven by FCF usage in the quarter as well as a $350mn decrease in the size of one of BBD’s revolving credit facilities from $750mn to $400mn due to BBD’s “current cash position and the anticipated investment from the Government of Quebec.” The company also extended the maturity of this facility to June 2019 and the maturity of its €500mn Transportation revolving credit facility to October 2018.
  • DAL order a positive for C Series but there will be a $500mn charge in Q2. DAL’s order is for CS100s but there is an ability to shift some to CS300s later and deliveries will begin in 2018. We have noted that pricing would have to be very aggressive to win this order and management announced that there will be a $500 mn “onerous contract” charge in 2Q16 for the Delta and Air Canada orders. Nevertheless, management still expects C Series to reach breakeven in 2020. Meanwhile, Bombardier still expects the Quebec investment in C Series to close in 2Q16, though there have been some slippage in receiving cash, and there was no update on the status of a potential Federal investment in the program.


40 Comments on “Bombardier: Our turnaround plan is gaining traction

  1. Ah, I guess an average $4M loss per plane really puts an end to any discussion about going after Boeing for its reputed $22M (plus “other considerations”) per plane sale price on Boeing’s recent 73-7 sale to United? And, also, when will Delta start crowing about how it took Bombardier “to the woodshed” on this deal’s pricing? (Or is that type boasting just reserved for Boeing? In any case, maybe it’ll abate as Anderson recedes, lol.)

  2. Pricing is irrelevant all companies ‘drop their pants’ to get the big order from time to time. Working in the Automotive industry we see this all the time to secure a new customer. The deal is done and there will be a lot of CSeries flying for Delta in the future. I cannot wait to fly on them.

    Nice decision Ed.

    • To those talking about BBD pricing to DL and a loss, BBD explained that this is part of the learning curve and a requirement under its accounting rules for unit accounting instead of program accounting followed by Boeing. Go back to the post and read about this. Remember the 787 would be in a loss position were it not for program accounting.

      • Agree Scott!

        All part of the curve to play with the big boys….

        With all the delivery slots getting filled with Delta and Air Canada the price and margins will improve…

        I think the problem now will be to be able to produce enough of the CS100/300. They will need a new manufacturing space for the CS500

        • But we are talking about a company that just got a government bailout. The rest of their product line, the CRJ and the Q400 are on life support. The Embraer E series is far outselling the CRJ’s and the warmed over Dash-8 known as the Q400 is just not an airliner in demand.
          Boeing and Airbus will not just watch market share fade away, they have a much larger product line and can produce frames in much larger numbers. Time will tell if the gamble will pay off or not.

          • Its almost always a mistake to plaster the family name over a conglomerate and then run the business with family members.
            Warren Buffet has avoided that and leaves the many companies to be run by good managers

    • @NAK

      Well put. An OEM in the aerospace industry needs to take a long-term strategic view due to the high capital cost, low volume and long gestation period of a new product entering into a market segment with well established players.

      Airbus Industrie, for example, nearly folded just a few years after the consortium was established.

      With soaring fuel prices, it was the worst time for a new airplane. Airbus logged a dribble of orders in 1975, followed by a 16-month drought. From the end of 1975 until April 1977, not one aircraft was sold, and “white tails” —airplanes without customers—began to appear on the Toulouse ramp.

      In the dark days of 1976, Thomas recalls, “we had a meeting of 25 or 30 people, with this gentleman I had never seen before.” Bernard Lathiere was a graduate of the Ecole Nationale d’Administration, where France trains its elite, and he had been sent on a mission: Step in as president, replacing Ziegler, and either kill Airbus or save it. A sharp contrast to his immediate subordinates, the lean, ascetic Beteille and Kracht, Lathiere was a florid glad-hander, a natural speaker who became Airbus’ chief salesman.

      One light gleamed: Western Airlines had ordered eight airplanes, with an option for four more. It was the first time a U.S. airline had bought a European jet since 1964. But at the end of January 1977, Western announced it had ordered 727s instead. Airbus canceled orders for long-lead items—parts that would be needed for aircraft delivered in 1979. It was close to the end.

  3. I am not into actual seating, would I be right that this is in reality a 100 seat (C100) and a 120 seat (C300) set of Models?

    And its the first medium range optimized 150 seat (C500 if I have that right) in its class now.

    And at typical shorter ranges I would assume its fuel burn is even better than the 10% listed.

    Well done Bombardier! I thought this had a future if they could get traction, they have it now me thinks.

    • In standard two-class configuration the CS100 can take 108 passengers and the CS300 can take 130 passengers. The first two digits of CS100 stand for 100 + 10; for the CS300 the first two digits stand for 100 + 30; and for the CS500 the first two digits stand for 100 + 50. If the CS500 was to carry 160 passengers they would have to call it the CS600. But I believe the CS500 will probably carry only 150 passengers in order to maintain a continental range. The CS300 carries 20 more passengers than the CS100 and I am of the opinion that the CS500 should carry 20 more passengers than the CS300. That would represent an additional four rows of five seats in both cases. Anything beyond that will require a new wing. It is important to understand that the CS300 has double-exit doors on each side and is certified to carry up to 160 passengers. I do not have access to the paying side of the wall but it is my understanding that LNC thinks the CS500 will be a 160-seat aircraft. Anyway, there is a pretty good chance that we will find out more about the CS500 at the upcoming Farnborough Airshow.

      • Thank you, I am more into engines, airframe and the tech end.

        Seating confuses me.

        I hate max seating, unless its the same as realistic then its meaningless (which Leeham has made a point on more than once as I recall) .

        • “Seating confuses me.”

          The reason it is so confusing is because the seat pitch is not always specified and that can make a huge difference. For example I can say that the CS300 is a 160 passenger aircraft and it would not be technically false, for the CS300 is indeed certified to carry that many. But the seat pitch would have to be reduced to a ridiculously low figure. But it’s done and some operators have no scruples over this. The same goes with range: Bombardier uses a figure of 225 lbs per passenger/luggage to specify the distance the aircraft can fly whereas Boeing uses a reference of 195 lbs. If someone does not pay attention to this sort of thing it is possible to arrive at an erroneous conclusion.

    • And congratulations to Delta as well for acquiring the C Series. This purchase will give them a very sharp competitive edge. The average American people are not small like average Asian people are and will therefore appreciate the new level of comfort offered by the C Series. Wether it is an MD-90, 737 or A320 the C Series beats them all in terms of comfort. And it is also more friendly towards the environment.

      • Normand yes you highlight a big point of the CSeries… With the lavs and oversize center seat the plane will be more comfortable to fly. I am Platinum Delta cannot wait to fly this plane as many of my flights occur on legs that fit the CSeries.

        2018 cannot come soon enough.

        I just hope Delta orders more and push to get the CS500 going. This would make the bottom end of their fleet amazing. Sad to say goodbye B717, MD88, MD90 and A319.

        I will wait for the Delta Tech Ops to become the primary maintenance supplier for North America.

        • I share your feelings about the B717, MD88 and MD90. I am myself a long-time fan of the DC-9. It is comforting though to think that the C Series was directly inspired by this legendary aircraft. The Douglas Aircraft Company is dead, long live Bombardier, the new King of the 100-150 seat segment!

          • Thats right , its usually forgotten the 5 across DC9 had more cabin space per passenger than the later 6 across jets like 737

          • And it had a scary tiny wing!

            At leas the MD series had big engines.

  4. Some people try but cannot stop the progress! It was high time to treat us passengers decently. I hope Delta gets the preference of the flying public (provided they do not “sardinize” the thing).

    • I think in general at this point Delta has decent seating. 2-3-2 on 767 is ok (although I had bad pitch/seatbox recently..) 777 is still 3-3-3, A330 is 2-4-2 and wide, so the A330Neo and probably A350 will both be ok. No 9 abreast 787 and 10 abreast 777 on Delta so far. Lets hope they keep it that way. They’re free to advertise their fleet wide seatwidth. 747 and 737 must be their narrowest?

    • Re-read, it does say CFM not LEAP so OEO.

      Still does not make sense, A320 or even 737 would fill that slot.


      • Deltas existing A321 are 192 seaters with 2+ classes.

        You have to be thinking 15+ years ahead

    • I believe all of DL’s A321 orders are for ceo (please correct me if I’m wrong)

      For certain slot-restricted airport pairs at peak times I can certainly see the A321 being a sensible upguage to MD88. Otherwise DL will likely use aircraft freed up from the CS100/130 to replace the MD88.

  5. I think Delta is upgauging all its models rings now. Regional jets are replaced by the CS100 and MD-88 by the A321. I suppose they are confident in the future. When the airplanes fly empty they carry a lot of dead weight but when they are full they make a lot of money. Trip Cost versus CASM. Delta and Bombardier have one thing in common: audacity. That reminds me of the old Boeing.

  6. Bjorn.
    Wouldn’t your CS500 in service by early ’20’s with ~175 single class seats at 32″ pitch beat a 737-8 MAX with single class seats at same pitch by a huge 12-15% fuel burned and carbon generated at ranges under say 2400 nm ? Bombardier could add another seat row or two at same TOGW and drop down to 2200 or so range. The CS500/600 would have engine upgrades by that time.

    Hard to see how Boeing beats this by enough in any single aisle NSA of 150-200 single class passengers and 3000 nm range. in service in 2025-2026

    • Jim, I like your post very much because it challenges my own simplistic assumptions, which goes like this:

      At 32″ the CS100 holds 110 seats and the CS300 holds 135 seats. If I extrapolate that to the CS500 it gives me 160 seats for 32 rows at 32″. Your figure of 175 seats is good for the 737 MAX 8, but for the CS500 I would say it’s a little optimistic because it would necessitate an eight row extension over the CS300. My personal point of view on this is that the CS500 should add no more than five or six rows (160/165 seats@32″) in order to preserve its transcontinental range and it’s performances (runway length/temperature/altitude). But many people think that range and performance should be sacrificed for capacity. Frankly I don’t have a definite opinion on this. I would let the market decide, like Bombardier will most likely do. My understanding is that the CS100, CS300 and CS500 would share the same wing. Please note that I did not read Bjorn’s post because I do not have access (suggestion to LNC: unlock after a month).

      • Someone must be interested in single class configurations as the CS300 I walked through yesterday was set up with 30 rows/150 seats. If the CS500 adds 5 rows then Jim would be correct at saying 175 seats in a single class. My wife did say that she thought the 150 seats were too close together.

        • The CS300 cannot possibly hold 150 seats with a pitch of 32″. What you saw yesterday was obviously a high-density version, probably at 29″ or 30″ as with a 28″ pitch the CS300 can hold 160 seats. That being said, the more I think about the CS500 the more sense 175 passengers at 32″ in single class makes sense. The wing of the CS100/300 would apparently be good enough to do the job while still maintaining a respectable range, perhaps not transcontinental but within most average distances. The 737 MAX 8 would still beat it on range while offering inferior economics. But I am not sure if the C Series would still be able to retain its advantage in terms of performance (take-off distance, airport altitude and temperature).

          • Bjorn’s CS500 analysis, as I recall, had 178 passenger single class seating with 31″ slim line seats, the equivalent of 32′ pitch, he said. That was a 4 frame extension. At his TOGW the range dropped to around 2400 nm. I suggest 5-6 frames at same TOGW and a range more like 2100. I like MD 88 range and max fuel and carbon savings for CS500/600s. Capacity will be a lot more important than 3000-3500 range in domestic markets such as N America, Europe, China, and later India. Carbon savings will be “10x” more important in the 20’s, 30’s and 40’s than they seem to airlines today. The public and governments will demand them. Over 95% of 737/A320 missions are under 2000 nm We will have plenty of airplanes which can fly transcon — including CS300 and MAXs and NEOs.

          • Thanks Jim for this most insightful post. You make me look into the future. Wasn’t Bombardier’s initial slogan for the C Series “NOW IS THE FUTURE.” 😉

  7. @jim krebs, Trooper

    In light of what we have been discussing I have checked the official literature and I came up with the following figures, including my own rough extrapolations:

    The first figure represents the number of seats in a two-class configuration and the second is for single-class (@32″).

    CS100 = 108/120
    CS300 = 130/140
    CS500 = 150/165
    CS600 = 160/175
    CS700 = 170/185
    B737-8 = 160/175

    Clearly Bombardier must skip the CS500 and go directly to the CS600. But they may want to call the latter the CS700 in order to maintain a neat odd-number nomenclature. I am still not sold to a real CS700 with the existing wing but I would probably change my mind if that is what the customers want. I don’t believe Boeing are seriously considering to do a 737-7.5 but if they are they might be chasing a ghost.

    • 170 seats single class in 5 abreast gives 34 rows, Did you look at that problem.
      Bombardier isnt financially strong enough to be thinking about new models at all.

  8. It has been established that Thompson Aeroseats’ Cozy Suite staggered 6 abreast seating can be installed in the C Series, say with a pitch of 34″ so with 6 abreast staggered you can install 135″/5 = 27 rows x 32″ = cabin lenght 864″/34″ = 25 rows x 6 =150 seats or with tighter pitch (32″), possibly 27 rows or 162 seats in the CS300. Maybe this requires to modify the emergency exits and recertify the Exit Limit ? It also has an impact upon overhead stowage volume per pax which drops to the Airbus A320 Series “enhanced” interior levels … also ground rotations would be adversely affected.

      • “…the CS300 was a bit shorter then and named C150.”

        Perhaps this is just a typo but the CS300 was named C130 then, not C150, while the CS100 was named C110. Those numbers initially reflected the seat count for a standard two-class configuration. The reason it was changed is because “C130” was already taken up by a very famous military aircraft: the Hercules. With the new nomenclature it is the first two digits that reflect the seat count:

        CS100 stands for 10 +100
        CS300 stands for 30 + 100
        CS500 stands for 50 + 100

  9. I think we have to be feet back on the ground on the CSeries. First priorities are to reduce cost and deliver / ramp up. One loss making order doesn’t make anyone taking over a segment.

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