Sept. 7, 2016: The news that Bombardier is halving its projected deliveries of the CSeries this year because of engine delays from Pratt & Whitney drew commentary from a couple of the analysts whose reports LNC receives.
Sept 6, 2016
Periodic Industry Update
Narrowbodies remain in high demand, with the Airbus A320 and Boeing 737 largely sold out through 2020. 737 and A320 deliveries through 2020 are effectively even, as planned production rates are nearly identical. Longer term, A320neo orders exceed those for the 737MAX, even considering the later MAX entry into service. Post-2020, this could lead to a market share and/or pricing edge for Airbus, although we do not expect a major shift. More orders should come, as many airlines have not yet ordered either the NEO or the MAX.
When ordering the new models, nearly all A320ceo airlines have chosen the A320neo, while nearly all 737NG airlines have chosen the 737MAX for commonality. But, growth in large mixed-fleet airlines now makes roughly one-third of global airlines open to purchasing either the NEO or the MAX. Mixed fleet airlines have appeared largely through mergers, while the number of unaligned airlines (with neither A320ceos nor 737NGs) has shrunk to less than 10% of the fleet. So far, mixed fleet airlines have split evenly between the NEO and MAX.
The A321neo has better per-seat economics than the 737MAX-9, while the 737MAX-8 has better per seat economics than the A320neo, simply by virtue of their relative sizes. The aircraft preference will depend on the gauge of an airline’s route structure. There has been a progression toward larger narrow-bodies over time. But, we see the main advantage for Airbus as with airlines seeking a wider mix of aircraft sizes with commonality.
Sept. 6, 2016
P&W engine delays to impact 2016 CSeries deliveries: We are not particularly surprised by Bombardier’s reduced 2016 CSeries delivery guidance today, though the reason is a bit unexpected. It always seemed to us that the prospect of 15 deliveries looked a bit optimistic, and we have been modeling 12. Given delays in engine shipments from Pratt & Whitney, BBD is now targeting 7 deliveries this year. As per BBD, Pratt’s delay is related to capacity rather than a technical problem. We would note that the engine has met its performance expectations in service thus far. Also in today’s release, Bombardier reiterated its production goal of 90-120 CSeries per year by 2020, and we target 96. Reiterate Outperform and C$2.56 TP.
Delays to impact 2016 revenue and cash; EBIT impact not material: While Bombardier retained its full-year revenue guidance, the delivery of 8 fewer CSeries means it now expects to be at the low-end of its $16.5-17.5B sales range. There is some impact to FCF, and Bombardier has adjusted its guidance downwards by $150M, to a usage of $1.15-1.45B (from a usage of $1.00-1.30B). However, this is simply related to the revenue timing, with Bombardier recouping this missing cash when the delayed aircraft deliver. It is unclear at this stage whether there will be penalty payments, either to Bombardier from Pratt or to the CSeries customers because of the delays.
Sept. 6, 2016
A Reuters story on September 6 indicates that Avolon Holdings may be near a deal to purchase CIT’s aircraft leasing business for $3B–$4B. We note that the Wall Street Journal in mid-August indicated that first-round bids exceeded $4B, so we think the price is likely at the higher end of this range. CIT currently has a fleet of 380 aircraft and has a further 132 on order. We think this sale process is approaching the end game. We expect a sale to an Asian buyer at a 1.5x+ premium to tangible book as the most likely outcome, but we note any sale valuation would need to overcome tax issues that a sale would generate for CIT, which would otherwise be avoided in a spin-out. We think either a sale at a premium or a spin-off would be a general positive for the aircraft leasing group. Our top pick in the aircraft leasing space remains AL.
Sept. 6, 2016.
Bombardier announced today it has reduced its 2016 CSeries delivery forecast to 7 from 15, which it attributes to engine delivery delays from Pratt & Whitney. Bombardier stated that it remains confident in its longer term ramp-up plan, including its ability to produce 90-120 aircraft in 2020. We remain Neutral on BBD. Key end markets remain weak; though the CSeries has gained demand traction. Balance sheet and cash flow risks remain; though recent infusions bolster medium term liquidity.
We revise our model to incorporate lower CSeries deliveries. Our 2016/2017E EPS is now $(0.43)/$0.03 from $(0.46)/$0.02. Fewer CSeries deliveries reduces Commercial Aircraft revenue, but it increases EBIT as CSeries deliveries are currently loss making. In terms of guidance, BBD stated it expects to be at the low end of prior 2016 revenue guidance, but the high end of prior EBIT guidance. It now expects 2016 free cash flow to be a use of $1.15-1.45bn vs. $1.00-1.30bn prior.