Mark Collins – Bombardier Loss-Leads CSeries to Delta–Big Time (plus Canadian politics)

One does wonder when the jetliner might ever be profitable in a serious capitalist sense; and the company still wants/needs fed funds in spite of this big deal:

1) Globe and Mail:

Bombardier gets major boost with Delta order for 75 C Series jets

With its multibillion-dollar order from Delta Air Lines Inc., Canadian plane maker Bombardier Inc. has finally broken into the mainline aircraft duopoly held by Boeing Co. and Airbus Group SE.

But what it took to get there hasn’t come cheap. And for a company still battling to regain investor trust and win market legitimacy under a $9-billion debt, the future may hold as many pitfalls as the past.

It was a high-spirited Alain Bellemare [Bombardier’s CEO] who met employees and the news media at Bombardier’s Mirabel, Que., production site on Thursday [April 28] to confirm officially that the plane maker struck a deal with Atlanta-based Delta for 75 C Series planes and options on 50 more. It is the biggest plane order in Bombardier’s history and the biggest C Series order to date – one that will carry the previously struggling plane program well into 2021…

When Bombardier was facing questions about its liquidity position last year, and the very survival of the company was being evoked by rivals to scare away potential customers, it turned to the Quebec government for help. Quebec obliged with a $1-billion (U.S.) investment in the C Series program, reassuring the market that it would not let Bombardier fail.

“It’s because we were there that this transaction happened,” Quebec Premier Philippe Couillard said Thursday. Fred Cromer, Bombardier’s commercial aerospace chief, put it another way: “It took an issue off the table. To sell an airplane, the last thing you want to do is have to start the conversation with the financial health of the company.”

With Delta reassured that Bombardier was going to be around to support the C Series program in the long term, negotiations then turned to the nitty-gritty of cost and other considerations. In the end, Bombardier made a significant concession on pricing – one Mr. Bellemare acknowledged it had to do to win an early marquée customer like Delta…

One industry source familiar with fleet purchases said Delta is believed to be paying about $25-million (U.S.) for the CS100 planes, representing a discount of about 65 per cent from the $72-million list price [emphasis added]. “I’m sure they got a good deal,” another industry source said.

For Delta, it’s about more than just price, however, said one senior executive at a competing airline. “They view this as good for the industry,” the executive said. “If there’s a third competitive player, it will keep the industry more healthy.”

With firm orders for 370 C Series planes [Air Canada order not yet “firm”, see below], enough for the first five years of production, Bombardier faces the challenge of making sure the airliners arrive on time for all customers and turning the Delta endorsement into additional orders from other airlines. More importantly, with a net debt to EBITDA ratio of 8.1 times, Bombardier has limited financial resources to deal with any significant manufacturing or production problem that may yet arise…

One industry analyst said he would bet on an even larger CS500 version of the plane within five years [see “Bombardier: A Justification For Feds Giving Company Money it Says Doesn’t Need“]. That would allow Delta to replace all of its older single-aisle planes with one family from one airplane supplier, reducing the costs of training, maintenance and spare parts…

2) CBC:

Bombardier bailout likely still needed despite Delta deal

With Bombardier’s deal to sell its new C-Series jets to Delta Air Lines, one might think that the aerospace manufacturer no longer needs the billion dollars it is seeking from the federal government.

The Montreal-based company announced on Thursday that it had received an order from Delta for 75 CS100 aircraft with options for an additional 50 — a deal, at list prices, potentially worth $5.6 billion.

Delta buying 75 Bombardier CSeries jets, with options for 50 more
Bombardier deal with Delta renews Quebec calls for Ottawa bailout 
ANALYSIS | Is Bombardier a no-brainer investment for Ottawa or a house of cards?

It also comes as the Liberal government considers a request from Bombardier for [US] $1 billion in funding, the same amount the Quebec government has already pledged.

But the Delta deal doesn’t necessarily mean Bombardier, which is about two years behind schedule on the CSeries and at least $2 billion US over budget, will be rescinding its request to Ottawa any time soon.

“They will not get [the Delta deal money] today, tomorrow, or in three years or five years,” said Konark Gupta, an equity research analyst at Macquarie Group. “They will get it over many years as they deliver the plane. So that money is scattered over the long term.”..

3) Aviation Week and Space Technology:

Delta’s C Series Order May Change Narrowbody Market

When Airbus decided last fall it would not invest in Bombardier’s C Series [see from October 2015: “CSeries Jetliner: Bombardier Desperate“], a few analysts starting calculating what would be more expensive: stopping or continuing Bombardier’s ambitious mainline aircraft program. But with investment from the Province of Quebec in place and Delta Air Lines’ order for up to 125 of the aircraft signed, the outlook has changed dramatically.

For Bombardier, the Delta order could mark the much sought-after market breakthrough for the C Series among major, legacy airlines. It is the first firm order from a major North American carrier—a large Air Canada commitment announced earlier this year has not yet been converted into a firm contract [see April 29: “Air Canada to firm up Bombardier C Series order ‘soon’”]…

Delta plans to introduce the Bombardier CS100 in the spring of 2018. Credit: Bombardier

The Delta deal is “obviously huge for Bombardier” as it provides “a much-needed stamp of credibility for the program,” Kevin Michaels, vice president of ICF International’s aerospace and MRO practice, says. But he expects “Bombardier will lose lots of money on this deal.” RBC Capital Markets analyst Walter Spracklin wrote in a note that the order is “a much-needed boost to the long-term viability of the C Series aircraft and will likely help pave the way for follow-on orders.”

Bombardier says it will record a $500 million “onerous contract provision” in the second quarter that is covering expected losses from the Delta, Air Canada and Air Baltic orders. The $500 million are part of the $2 billion Bombardier believes it still needs to make the C Series program cash-flow positive in 2020 [emphasis added]. It consumed $200 million in cash in the first quarter and plans are to use $1 billion through year-end as production ramps up and the larger CS300 is certified…

Bellemare avoided a firm statement on whether Bombardier could look at a stretched CS500 that some observers and airlines have proposed as an attractive addition to the C Series family. “Right now we are focused on the program that we have,” he said. “And we have to stick to our 2020 plan.” He also pointed out that “our plan does not include government investment” although such an agreement “would add flexibility.” Talks with the federal government continue, but “we have not found the right solution yet.”

Delta is now the single largest C Series customer, boosting the program’s credibility.

ICF’s Kevin Michaels suggested an investment deal involving the Canadian federal government could come as part of a decision to launch the CS500 [emphasis added]….

While Bombardier likes to point out that the C Series does not directly vie with Airbus and Boeing models [CS500 would], recent airline competitions have proven otherwise. And if the Delta order stands at the beginning of a broader trend, the civil aircraft market in the 120-150-seat category may soon no longer be the duopoly to which Airbus and Boeing have become accustomed since the end of legacy McDonnell Douglas civil aircraft production. Analysts point out that while Bombardier is likely to control only a small portion of the market, the two incumbents still will feel more pricing pressure for the smallest versions of their narrowbody A320neo and 737 MAX families…

And one imagines they will fight and price-cut like hell–with much bigger pockets–to beat down Bombardier.

Then there’s Canadian politics (“national unity’s” ugly head)–from March 1:

Pipeline politics intensify as Notley, Wall strike back at Quebec over Energy East

ANALYSIS: Alienation, whether it will be of eastern or western Canada, seems inevitable.

When Prime Minister Justin Trudeau sits down with Canada’s provincial leaders in Vancouver this week, he will need to walk an almost impossibly thin line to appease increasingly disparate regional demands.

Quebec will no doubt be pushing for Ottawa to approve a US$1-billion cash injection into Bombardier’s beleaguered CSeries program. Alberta and Saskatchewan, meanwhile, will demand equal treatment for their own economic interests; namely the proposed Energy East pipeline [from April 8: “Canadian Oil Industry Heartbreak“].

Opposition to the $15-billion plan for Calgary-based TransCanada (TRP.TO) to convert one third of its pre-existing Canada-spanning natural gas pipeline to crude oil service has reached a fever pitch in the heart of French Canada…

…Quebec is clearly…anxious for Ottawa to accept or reject a bailout of Bombardier with CSeries deliveries expected to begin later this year, but if Trudeau were to do so while continuing to avoid answering calls to support Energy East, many in the west would decry the move as unfair.

“If the federal government is considering a $1-billion bailout to address 2,830 Canadian job losses at Bombardier, what about the tens of thousands of job losses in Canada’s energy sector,” asked Saskatchewan premier Brad Wall in a recent Facebook post. “We could start with Energy East maybe.”..

Poor PM. He also likely faces an 800 lb General Motors Oshawa plant gorilla in the room, something our media don’t seem to have noticed. From last November:

If Feds Bail Out Bombardier, Can Ontario Auto Sector be Far Behind?

On verra.

Mark Collins, a prolific Ottawa blogger, is a Fellow at the Canadian Global Affairs Institute; he tweets @Mark3Ds


12 thoughts on “Mark Collins – Bombardier Loss-Leads CSeries to Delta–Big Time (plus Canadian politics)”

    1. More on those Ontario auto plant gorillas in the subsidy room:

      Magna urges government support for assembly plants

      The federal and Ontario governments should focus their auto investment efforts on making sure Canada retains the assembly plants that are already here, says the chief executive officer of the country’s largest auto parts maker.

      That means making sure Fiat Chrysler Automobiles NV (FCA), Ford Motor Co., General Motors Co., Honda Motor Co. Ltd. and Toyota Motor Corp. keep making vehicles in Canada, Don Walker said after Magna International Inc.’s annual meeting in Toronto Thursday [May 5].

      The facilities in most danger are GM assembly plants in Oshawa, Ont., and an FCA large-car factory in Brampton, Ont.

      “Government should be putting a full-court press [on those auto makers] as long as it’s going to get payback and I’m sure it will,” Mr. Walker said.

      The futures of the plants are in doubt for different reasons. The Brampton factory is the only assembly plant that makes FCA’s full-sized Chrysler 300, Dodge Challenger and Dodge Charger cars, but it needs a new paint shop, which would cost about $500-million and lead to a shutdown of the plant for at least six months.

      The GM Oshawa plants, meanwhile, have no new vehicles allocated to them later this decade. General Motors of Canada Ltd. president Steve Carlisle has said allocation of new vehicles depends on negotiations with unionized workers represented by Unifor – scheduled for later this year – and on discussions with governments.

      Those talks will kick off this summer.

      “There’s no damn way we’re going to let anybody close our Oshawa facility,” Unifor president Jerry Dias said Thursday.

      Unifor represents about 3,000 workers at the FCA plant and about the same number at the two GM plants in Oshawa.’

      Mark Collins

  1. AvWeek affiliate opinion piece–but when will Bombardier make money?

    “Winners and losers from Delta’s CSeries order

    There are aircraft orders, and there are aircraft orders. Even with the valuable assets involved in commercial aircraft transactions—planes worth tens of millions of dollars or more—most orders are relatively routine. But a handful can rightly be described as “game changing” with wide reverberations. Last week, one of those kinds of aircraft orders came along when Delta Air Lines placed a firm order for 75 Bombardier CS100 aircraft plus 50 options. Here are the winners and losers from the deal…”

    Despite all my doubts it certainly would be good for Canada if the CSeries is a true success. Without endless drips of the people’s money.

    Mark Collins

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s