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Analysis

Can Bombardier Bounce Back?

Thu, 12/01/2016 - 14:56

The dark clouds hovering over Canada’s Bombardier showed some signs of clearing in 2016, thanks partly to a provincial government bailout, but uncertainty remains amid the bumpy rollout of the manufacturer’s first new aircraft program in 30 years, the C Series.

Bombardier's C Series is a family of narrow body jets with a capacity for 110 to 135 passengers, depending on the aircraft. According to the manufacturer, this is its first completely new aircraft program in over 30 years. Launched to break the duopoly of Airbus and Boeing commercial aircraft, the C Series faced many problems over the years. While it was initially launched in 2004, it was dropped two years later to be relaunched in 2008. Two years behind schedule, the program incurred cost overruns calculated at US$2 billion. This situation led Bombardier to offer Airbus a majority stake in the C Series project in 2015. Airbus rejected the proposal.

The OEM closed 2015 with a loss of US$5.3 billion and a US$10 billion reduction in orders, causing the company to slash its 70,900-strong workforce by 7,000 and leading the Canadian province of Quebec, the company’s home base, to provide a US$1 billion safety net. Similar aid talks with the federal government remained deadlocked in mid-September. After the many setbacks, the C series project finally appears ready to take flight. The first CS100, the 110-seat model, entered service in mid-2016 with Swiss Global Air Lines, a subsidiary of Swiss International Air Lines. The first CS300, the 135-seat model, will be the second of this family to enter service in late 2016 when airBaltic begins flying the plane.

Orders are still a problem, however. By August 2016, there were only 123 orders for the CS100 and 235 for the CS300 and only two aircraft delivered. In comparison, by September 2016 Airbus had a total of 6,749 pending orders. In June 2016, the CS100 was certified by the FAA and the European Aviation Safety Agency (EASA). Bombardier said in its 2016 second-quarter report that the C Series is transitioning from a development phase to a revenue-generating phase. The manufacturer also reported an 8 percent rise in revenue at its commercial aircraft division, to US$764 million from US$598 million. On April 28, Bombardier announced the successful agreement between Bombardier and Delta Airlines for the acquisition of 75 CS100 aircraft valued at US$5.6 billion, with an option for an additional 50, making Delta Airlines the largest customer for this series.

While its commercial airplanes division faces problems, Bombardier has a strong business jet area, although here, too, there are headwinds. The division produces industry staples the Learjet, Challenger and Global. During the first quarter of 2016, Bombardier managed a book-to-bill ratio close to 1. By August 2016, the Canadian company had received 70 orders and delivered 73, of which 39 belonged to the Challenger family, 28 to the Global and six to the Learjet.

The company manufactures the Learjet 70 and 75 for the light business jet market segment. The Learjet 70 incorporates two Honeywell TFE731-40BR engines that provide takeoff thrust of 17.1kN and a 3,815km range. The Learjet 75 has a range of 3,778km and can fly at an altitude of almost 51,000ft. It has carbon brakes that allow the aircraft to use shorter runways. The Challenger family targets the midsize business jet market and includes the 350 and the 650. Bombardier says the Challenger 350 has the lowest direct operating costs in its class. This aircraft uses two Honeywell HTF7350 engines, which give it the fastest time-to-climb in business aviation. The Challenger 650 uses two GE CF34-3B MTO engines for a range of 7,408km with six passengers onboard. It also offers the widest and highest cabin in its class. For the large business jets segment, Bombardier has the Global family, which includes the 5000, 6000, 7000 and 8000. Global jets have the longest range among Bombardier’s aircraft and can be used for transatlantic flights.

Although the business aircraft division is Bombardier Aerospace’s most profitable, it also is facing problems. In September 2016, the manufacturer announced it would halt completion work for the Global 5000 and 6000 at some point during 2017 due to weaker than expected demand from China, Latin America and Russia. Bombardier’s business jets division reported a 3 percent loss in revenue in 2015 in comparison to the previous year. The year 2016 also has proved challenging as the company reported a 19 percent loss in revenue in the second quarter of the year compared to the same 2015 period.

The company’s stock price has provided some respite from the gloom, although that too has been a rocky ride. Ahead of its earnings report in February, the stock tumbled to a year low of CA$0.78 in February from CA$1.34 to start the year. Since then it has climbed as high as CA$2.16 and in early October was trading around CA$1.73. Analysts polled by Reuters in early October produced a consensus hold recommendation on the stock. The manufacturer’s long-term debt load stands at around US$9 billion.

These past few years have proven tricky for the Canadian manufacturer but with the launch of the C Series and a strong business division, the company hopes to find opportunities to turn this trend around.