Leeham News and Analysis
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Leeham News and Analysis
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Airbus-C Series closing a “positive catalyst,” say analysts
June 13, 2018, © Leeham News: The news Friday that Airbus and Bombardier concluded the deal in which Airbus takes a 50.01% ownership in the C Series program was greeted favorably by two analyst reports LNC saw.
Credit Suisse and JP Morgan each called the approval by all regulatory authorities and closing the deal—well ahead of schedule—as positive catalysts for the C Series.
A synopsis of the two research notes are below.
The partnership becomes effective July 1, just two weeks ahead of the Farnborough Air Show.
Air show orders?
Will there be any orders at the air show from the Airbus influence?
Given the short time between the deal’s closing and the FAS, it seems aggressive to think Airbus will have any of its own deals to announce. Until the deal is effective, anti-trust laws prevents Airbus and Bombardier from coordinating sales campaigns or Airbus from pursuing its own sales and marketing.
But residual sales efforts by Bombardier may be announced at the show. Several campaigns were underway—Ethiopian Airlines and Kenya Airways were two publicly acknowledged competitions.
Other airlines that are known to be reviewing the CS300 are US carriers JetBlue and Spirit Airlines. The former said a decision will be coming this year, but it’s unlikely to be in time for the air show. Spirit’s timeline hasn’t been revealed.
A US start-up airline called Moxy secured order positions for 60 CS300s, according to Airfinance Journal yesterday. A purchase contract may be signed in the third quarter this year—in which the FAS falls, as it happens.
A rebranding of the C Series is believed likely and it’s possible this could be announced at the air show.
Analyst notes
Here is what two analysts had to say about last week’s news.
Credit Suisse (Outperform)
- CSeries deal is done: Bombardier announced on Friday that it will close the Airbus partnership ahead of schedule, with CSeries results set to deconsolidate beginning on July 1, 2018. We view today’s long-awaited conclusion of the Airbus/BBD JV as a positive catalyst, as it cements Airbus’ commitment to the CSeries program. While the JV does not become effective until July 1, we see this timing as primarily for clean accounting purposes; the ink is dry, and there are no remaining hurdles. That said, while we do see this as a catalyst for orders, we suspect that customers will wait until after July 1 (possibly until mid-July’s Farnborough Air Show) to avoid any perceived ambiguity in placing an order during this interim period. BBD remains our top pick across all of A&D, and we reiterate Outperform.
- Guidance Update: The deconsolidation of CSeries drove a decline in ‘18 revenue guidance to $16.5B – $17.0B (from $17.0 – $17.5B), reflecting migration of program sales, partially offset by the reversal of eliminations at Aerostructures. As CSeries is loss-making, EBIT guidance was increased to a range of $900M-$1.0B (from $800M-$900M). Note that this EBIT guidance includes the effects of BBD’s pickup of CSeries losses, which are expected to be on the magnitude of ~$84M for BBD in the second half (~$200M for the JV). FCF guidance was reiterated at breakeven +/- $150M, as CSeries was always expected to be CF neutral in 2H’18 (on w/c timing). Mgmt’s 2020 objectives were reiterated as the deconsolidation had already been factored in.
- Future C Series funding: Future cash contributions to the CSeries JV will be included in investing activities and excluded from the definition of FCF as consideration in the form of JV shares will be received. BBD’s funding requirements to the JV remain capped at $225M for 2H ‘18, $350M for FY’19, and $350M in aggregate over FY’20 and ’21. Although unexpected, any cash requirements beyond that will be split proportionately between Airbus and BBD (not Quebec).
JP Morgan (Overweight)
Bombardier offered some guidance updates for the planned close of the C Series partnership with Airbus on July 1. The timing is as expected. Details are below but big picture, the C Series benefits BBD/B shareholders if Airbus/Bombardier can produce it profitably and at an acceptable rate over time. By supporting demand, the Airbus partnership is critical to ensuring this occurs. Closing the deal is, therefore, a step forward but one that has been expected, The next potential positive catalyst for C Series, in our view, would be new order announcements.
- BBD/B will de-consolidate the C Series program. Bombardier had disclosed plans to do this, and so it is no surprise to us that 2018 sales guidance is down. The reduction to the range is $500mn, and it consists of not recognizing delivery of perhaps 25 C Series in 2H, partially offset by no longer eliminating internal C Series sales out of the Structures business. (These sales are now to the C Series JV, technically an external entity.) The range for EBIT is up $100mn since Bombardier will recognize fewer C Series early production losses, though Bombardier’s share of C Series losses still show up in BCA.
- 2018 cash flow guidance unchanged at breakeven +/-$150mn. Bombardier will no longer count C Series payments in FCF because these are now investments that increase its stake in the JV. This should not matter for 2H, however, with C Series cash likely to be about breakeven as deliveries offset production losses.
- We do not see much change BBD’s required C Series investment. Technically, Bombardier is “on the hook” for an additional $225mn in 2H and the time period for Bombardier’s cumulative $700mn of investment over three years begins at year-end, not at close. However, Bombardier’s apparent additional cash requirement reflects an earlier than initially expected close and without these adjustments, we assume Airbus would have stalled. Plus, repaying advances to Pratt & Whitney should drive most of the 2H spending (i.e. most of the $225mn) and these inflows were never part of Bombardier’s FCF.
- 2018 C Series delivery guidance down to ~34 from ~40. Initial delivery guidance had been ~40 aircraft but now deliveries are expected to “double” from last year’s 17. We believe this reflects a desire to support customers by not disrupting the pace at which they want to induct new aircraft with a delivery schedule that is weighted heavily toward 2H. We are not particularly focused on near-term deliveries: the key for C Series, in our view, is to win more orders and be profitable beyond 2020.
- 2Q charges will be part of adj. EPS. In Q2, Bombardier will take two roughly equal charges totaling ~$500mn after tax related to the C Series closing: both are non-cash and neither is meaningful to our outlook. One charge reflects the warrants associated with the Airbus deal and it is so large because of the increase in Bombardier’s share price. The second reflects the difference between the 2% dividend on Bombardier’s C Series investment and a hypothetical return on that capital.
Thanks Scott. Do Airbus have options to increase their share in the CS-program? If so will it be by capital investment and the other 2 partners dilute if not contributing and/or buying of “shares” (cash)?
Airbus has call option to buy all of the CS program after 5 years.
Thanks Tuan.
Actually it 7 years
I read the agreement in principle when it was announced and you are right: It’s 7 years. The buyout of Bombardier’s and Investissement Québec’s share by Airbus is supposed to be at “fair market value,” a term that should then lead to healthy discussions…
Yeah, 2025 and my mind shortens it to “5”!
Well, that’s a bit of a turnaround. The lesson, the city dosnt support long term investment, governments have to do it and according to Boeing the only legal method is bloating defence expenditure.
Focus in the short term should be gearing up to increase production, this in itself will generate sales an have spins offs in units costs that could snow ball into further sales.
Was wondering if some airlines will consider doing conversions from 320’s to CS300 (will be tricky accounting?) if there are shorter lead times to delivery and/or stimulate launching the CS500. Can however see the CS500 only materialize after AB has a bigger slice of the cake.
From Airbus’s perspective they have control and will buy out the remainder of the programme as and when the call option comes into play or earlier. They have little cash invested in the decision and this makes it very interesting.
Surely they will take a leaf out of Boeing’s playbook and push sales hard accepting minimal or negative margins. This will gain them a thousand orders over the next 5 years. They can ramp to 200+ a year and toy at least with a C500/A250.
This gives them an opportunity to focus on the A320 replacement by 2025. The A319/320 are covered by the Cseries so the replacement or re-engineering of the A320 will focus more on the A321/322 space with a view to limiting the NMA market. New CFRP wings using a Cseries tech and whatever else they feel necessary to counter the NMA at the bottom end. Allow the A321 to be the cash cow and profit driver that keeps giving for another 15 years
I think the bottom line is that AB has now a “new” and very competent aircraft base in the 100-150 seat category and can now focus their attentions to further strengthen their position in the 150-225 seat single aisle sector such as the long talked about new CFRP wing.
2025 for A320neo replacement is way to soon.
Airbus doesnt expect new technologies – which means mainly engines before mid 2020, so we do see a new SA design somewhat end of the 20ties.
With 4000+ orders and 60 per month – 520 a year, so a 8 year backlog brings you into 2026/27, with some options way beyond to 2030.
Airbus has a nice SA position and different tasks. In SA it’s to ramp up production and be able to bring the sales advantage into $$$ – outproduce Boeing.
Also, it’s the question if it’s possible to widen the product range – CS500 and A322neo are the speculation.
I would not be suprised to see CS orders now at the Airshows.
Max and Neo are hard to get with decent slots,
CS is the most modern SA and due to Airbus taking command many of the issues are resolved.
LH is a potential customer, they already have the CS in the group at Swiss, they have a lot of A319 and Embraer 190/195, and they need aircrafts.
The fourth Hamburg A320 production line will start producing Thursday 14th, 2018. A lot of new assembly equipment will be used.
The 190E2 is a competent aircraft that could give the CS100 big competition in seat mile costs and purchase price for example. For me the CS300 is the obvious choice compared to the 195E2 in many respects.
Won’t be surprized to see in future some airlines/groups operating a mix of E190’s and CS300’s?
dear sir,
i have a thought about fuel economy. some small changes give smart electric flight.the engine position move to top of the wing.and add a wind turbine on the tail wing (size of the turbine is fit to the wing)the outcoming air is going to hit the turbine.the turbine start to produce electric power.save the energy to batteries and use.turbines design is entirely different from natural turbines
perpetual motion is hard.
we could fill the tanks with Helium so it hardly has any weight.And sell the Helium upon arrival to pay the crew.the business model would be entirely different from other aircraft
Hi Vineeth,
Unfortunately that won’t work.
The additional drag caused by the turbine will mean you need to burn more fuel to make the engine move the plane forward.
It will ***always*** use more fuel than electricity generated due to many complex reasons.
To the more technical minded; this is summed up by “entropy is a bi|ch”.
Agree with you about the “entropy” part, that’s what I said about physical chemistry when I studied it at University. It was ~40 years ago an remember something like pDpV=nRT
dear sir,
thank u for the comment.i know normal turbine blade has been block the air that is make difficult to move.but this is entirely diffrent from that.it’s help to move the flight smoothly forward. i will share you it’s sketch if u r intrested.my email id:hunter.vineeth@gmail.com .please give test mail
Do higher production rates of the c-serise impact suppliers on the A32x side. P&W seems the obvious potential conflict, does producing more of the PW1500G reduce the supply of the PW1100G?
Hi jbeeko, I am not the right one to answer but can recall reading that the PW1100 is assembled in the US and PW1500 in Canada? Suppliers of parts/components for these engines could potentially create bottle necks considering that 190E2’s production with PW1900’s has also started.
On a side note, NZ is working on replacing its 777-200 fleet, the quote is giving us the future replacement for the 777-300 fleet.
You can assume that whatever is chosen will likely be common to the next one, ergo, A350, or a combo of 787 and 777x.
Also will be the first data of what a dedicated operator feels about RR in the future.
A350 choice would be clear, 787 would leave it open until the engine choice was made clear.
NZ has a lot of time with GE on the 777 for a pretty clear view.
Am I the only one, who finds the name to this operation confusing?
You call yourself by your only product the “C Series Aircraft Limited Partnership” and then your first action is to rename it…
LOL!!!!
Has the momentum started? Looks like “JetBlue LCC” to order 60 CS300’s.
http://c.newsnow.co.uk/A/942708485?-303:3665:3
I’ve read a couple articles about Moxy Airlines buying the CSeries, and I’m not sure if this is actually connected to JetBlue or if would be a new operation that would compete with JetBlue and the rest of the industry.
Addendum: The following article in the last paragraph, seems to imply Moxy is a separate entity from JetBlue.
https://www.flightglobal.com/news/articles/neelemans-reported-us-start-up-could-shake-up-us-in-449544/