Weekly analysts report: Reaction to CSeries delivery delays

Bombardier CSeries: new delivery delays, but this time not BBD's fault. Photo via Google images.

Bombardier CSeries: new delivery delays, but this time not BBD’s fault. Photo via Google images.

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.

  • Cutting the anticipated deliveries for the Bombardier CSeries was not a surprise to Credit Suisse, but the reason (PW GTF delays) was.
  • Goldman Sachs pretty much yawned at BBD’s news.
  • Bernstein Research takes another of its periodic looks at the Airbus v Boeing competition, this time for narrow-bodies.
  • The sale of CIT Aerospace, one of the world’s largest lessors (and with sizeable orders from Airbus and Boeing), will likely go to a Chinese firm, predicts FBR & Co.. FBR focuses on the lessor industry.

Bernstein Research

Sept 6, 2016

Periodic Industry Update

Airbus (Outperform)

Boeing (Outperform)

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.

Credit Suisse

Sept. 6, 2016

Bombardier (Outperform)

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.

 FBR & Co.

Sept. 6, 2016

Industry Update

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.

Goldman Sachs

Sept. 6, 2016.

Bombardier (Neutral)

What’s changed
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.

Implications
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.

 

16 Comments on “Weekly analysts report: Reaction to CSeries delivery delays

  1. If one supplier is late everyone else can just hide behind them.A slower ramp up is pobably not a bad thing for BBD. As you can’t fly a plane without engines, the C series is actually early, not two years late.

  2. @grubbie

    Before this new delay the C Series was already more than two years late. But the situation had stabilized and things were going quite well until P&W announced that they were unable to deliver the engines at the required rate. At this point the C Series was actually ahead of the learning curve in terms of production output and that is why BBD’s predictions and those of Crédit Suisse differ. While the C Series is considerably larger it requires half as many people to put together as the CRJ, which is built next door. That is because on the C Series BBD makes extensive use of robots for manufacturing and assembly of the aircraft.

    That being said, they still don’t have a proper Final Assembly Line (FAL). For now this is not a major problem because the output is low. But if they want to reach 120 aircraft per year by 2020 they will have to build a new hangar before that time. This new building will have a moving line à la 737. The Pratt & Whitney Engine Integration Hall is already built right beside this still non-existant FAL. This implies that for the time being the dressed engines, already attached to their respective wing pylon, would have to be towed across the tarmac before they can be hanged underneath the wings. When the FAL will have been built this operation will take place side by side at the last station of the moving line, before the aircraft goes out for testing.

    • Ok, I’ll bite. How monumentally stupid is Bombardier and its (past?) executive management–if this is true. Billions of dollars spent on the CSeries, two years’ delay on it, company almost bankrupted, and they still don’t have a proper FAL building? This company, then, deserved to fail. The only good news then, beyond finally now having a credible product and a now, somewhat reasonable backlog, is they would arguably have time to build the FAL building. As I recall, it took Boeing 18 months to build its 787 assembly building in Charleston. (I’m assuming they’ve got the $100 million or so needed for the building, related infrastructure, and tooling move in the till?) This still boogles my mind.

      • Its of no consequence not to have ‘the perfect assembly building’. It happens, ask Boeing about their 737 final assembly process over the years.

  3. If you need bigger than MAX9 now, then you go with A321.

    Maybe shift to all Airbus.

  4. @MontanaOsprey

    BBD are preserving cash as much as they can and construction of the FAL is not absolutely required at this stage. For they have space in the CRJ building which they had previously used to develop the C Series. However, long before flight testing was completed they had already built what everyone wrongly calls the C Series FAL. The fact of the matter is that I enjoy being facetious here and this may lead people to think that BBD is not ready. It is certainly not the case. Au contraire monsieur.

    This new building accommodates two lines in parallel with three stations on each line. And each station can accommodate either a CS100, a CS300 or a CS500. This new building is directly connected to the Bombardier Commercial Aircraft administrative building via the engineering facility that was erected at the same time. What is missing is the manufacturing extension to that building that will accommodate the FAL moving line.

    This FAL that I was talking about in my previous post is not essential at this stage because the output is still very low. If it was already an impediment the C Series production would not be ahead of the curve as it was before the announcement was made. Because they are on a tight budget BBD play it tight accordingly. They will wait until the last minute to start building the real FAL when it will have become absolutely necessary to move the aircraft over there for completion.

    For the new building has only been built to put the aircraft together by assembling the different sections to make something that looks like an airplane, before sending it to the moving line for completion. The future FAL is designed to take the aircraft only when it will have its landing gear installed so that it can be rolled on the moving line. Right now the CRJ hangar is doing the same thing in lieu of this future FAL, but without a moving line. Anyway, the output is still too low to justify a moving line. As things stand right now, when the aircraft has been put together in the new building it is rolled to the CRJ line for completion instead of this future FAL, which will be equipped with a moving line. But saturation in this temporary FAL (the CRJ building) is inevitable, and construction of the new FAL, adjacent to the new building that everyone calls the C Series FAL, will have to start soon.

    Management is perfectly aware of this situation and Alain Bellemare, the CEO of BBD, has mentioned it during the last shareholder assembly. What everyone needs to know is that the manufacturing process devised by Bombardier for the C Series is absolutely state of the art and we are already seeing the results of this meticulous planning and execution.

  5. Thanks for this “clarifying” post, Mr. Hamel. It’s still mighty strange–if the original plan was to have a proper FAL for 100 to 120 aircraft per year production–that construction on the FAL building and infrastructure didn’t start, say, at least FOUR YEARS ago!

  6. @MontanaOsprey

    There is nothing strange about this. First, there has never been any intention to build a FAL, nor any other building for the C Series, until they were required. And so far production has not been hampered by a lack of adequate facilities. We have to keep in mind that with the C Series BBD is starting from scratch and has to bring production from 0 to 120 in four years. This is equivalent to a car doing 0 to 12o km/h in four seconds. Sort of…

    So there was a plan from the beginning that had been devised by Gary Scott who had been working for Boeing as General Manager of the 737/757 programme. BBD benefited greatly from Scott’s experience, which allowed them to set up a production schedule that they have refined over the years. Production is just starting and they already have a very good idea where they are going and where they should be at any time. And I can assure you that the FAL with a moving line would bring very little in terms of productivity at this stage. This FAL is the only infrastructure missing and it will be built just in time to be available when they will need it most.

    That being said, it would indeed make things a little easier if the FAL was already operational. But the output would remain the same because it is only after a certain level that it becomes necessary to complete the aircraft in a dedicated facility that can better sustain higher rates of production. But they have not reached that point yet. For this year they were planning to deliver 15 aircraft. Next year they were planning to produce about 35, IIRC, and perhaps double that the year after, until they would reach 90 to 120 in 2020. What’s interesting is that with the EXISTING facilities they were already ahead of schedule, the so-called learning curve. In my opinion this level of maturity is due to the high level of automation, the quality of the manpower and extreme diligence at the management level.

    They are now planning to produce not 120 but 150 aircraft per year beyond 2020. And when they will have doubled the facilities, that is 2 Assembly Halls plus 2 Final Assembly Lines, they should be able to produce 300 aircraft per year instead of the originally planned 240 per year. This is still only half of what Boeing can produce with the 737, but it is an extremely promising start for a brand new project that had no antecedent within the company.

    • Normand: I think we need to keep this in perspective.

      So far its possibilities, lets be amazed when it begins to happen if it does.

      To quote the ill famed Greenspan, lets not get carried away with excessive exuberance.

      I would give them a B grade right now.

      Contrast with a very low F to Boeing on the 787 though its now a C – (probably an A for current mfg but the average is a C- for the whole program.

      • “So far its possibilities, lets be amazed when it begins to happen if it does.”

        It already has. They can produce more planes TODAY than they had anticipated they would at this stage. In other words the production system they have put in place works better than anticipated and they can make projections into the future. Some may think that it is little optimistic, while others will say it is unrealistic. I just say it’s possible.

  7. Until the federal aid package dries up, the hemorrhaging shall continue. After that, who knows?

    • Are you a troll? Just checking.

      It is impossible for the federal aid to dry up because it never materialized. I suggest you inform yourself before you go fishing.

          • Archie Leach was also the character’s name of John Cleese’s barrister in A Fish Called Wanda. It was a tribute to Cary Grant.

          • Admittedly I am out of it in old Pop Culture (grin) . heard of FCW but never saw it.

            On the other hand, at age 7 or so we did get to call BS on a Stewardess between Chicago and Milwaukee when we pointed out that the rivets were coming out of the engine cover and it had a nasty oil leak!

            Oh its fine.

            Mam, we have been flying in these since we were babies, that is NOT normal. You better have them fix it.

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