Bombardier CSeries Suffers Blow as Air Canada Opts Out

Bombardier Inc. (BBD/B) suffered a setback for its newest and biggest jet family, the CSeries, as Air Canada said it will keep 25 Embraer SA planes instead of replacing them with new narrow-body aircraft.

The Embraer E190s, a portion of Air Canada’s current fleet of the planes, will stay in service as the company works to keep a lid on spending. Air Canada, the country’s biggest airline, has 45 of the 97-seat Embraers, the first of which entered service in late 2005.

Air Canada’s decision today to retain some of the E190s erased a potential buyer for the CSeries, a model beset by delays and cost overruns that so far has failed to attract many big-name airlines. Bombardier is counting on a boost in revenue and profit from the CSeries, which the planemaker expects will cost $4.4 billion to develop.

“I, and I suspect other analysts and investors, are still looking for more brand-name customers for the CSeries,” said David Tyerman, an analyst at Canaccord Genuity Inc., in an e-mailed response to questions. “Air Canada would have been one of those and I think a lot of analysts/investors felt this was a high probability sale.”

Bombardier fell 7.1 percent to C$3.90 at the close in Toronto, its biggest single-day drop since Feb. 13. Montreal-based Air Canada declined 3.8 percent to C$7.91 while the Standard & Poor’s/TSX Composite Index dropped 0.6 percent.

Review Options

Air Canada had been evaluating the CSeries as a replacement for its Embraer jets since announcing in December an order to buy Boeing Co. 737 Max planes valued at $6.5 billion. The agreement called for Boeing to buy as many as 20 of Air Canada’s E190s, with the airline leasing larger, narrow-body aircraft until taking delivery of the 737s.

At the time, Air Canada said it would review various options for the remaining 25 E190s, “including continuing to operate them or replacing them with a yet to be determined number of aircraft in the 100 to 150 seat range.”

“We had considered that if AC was going to renew its E190 fleet, that the CSeries was a shoo-in as a replacement aircraft,” Walter Spracklin, an analyst at RBC Capital Markets, wrote in a note to investors. “What we had not anticipated was that the company would elect not to replace them at all. We consider this decision a material negative for Bombardier.”

Spracklin rates both companies outperform, while Tyerman has a buy rating on Air Canada and a hold rating on Bombardier.

Valued Customer

“Air Canada is a valued customer of ours, and we still believe the CSeries is the perfect aircraft for them,” said Marianella de la Barrera, a spokeswoman for Montreal-based Bombardier. “We’re just going to wait, and when they are ready to move forward, we will be there. The plane is well suited for the North American landscape. We are fairly optimistic that when the time is right, we will restart discussions.”

Bombardier is in talks with “quite a few clients” regarding potential CSeries orders, de la Barrera said.

Replacing the E190s with larger narrow-body aircraft will allow Air Canada to reduce costs per available seat mile, the company said. Expenses will decline even more when the 10 leased aircraft are replaced with 737 Max planes, the airline said.

Another Chance

“The up-gauging of aircraft should be highly accretive to Air Canada’s cost structure given the larger size and improved fuel efficiency,” Helane Becker, an analyst at Cowen & Co. in New York, said today in a note to clients. She has an outperform rating on Air Canada.

Air Canada could eventually consider the CSeries again when it looks to replace its E190s and Airbus Group NV A319s as they near the end of their useful life, Chief Executive Officer Calin Rovinescu told reporters today after the company’s annual meeting in Montreal. Air Canada flies 76 of the Airbus A319, A320 and A321 jets, while its Rouge leisure carrier operates 13.

“That’s not a tomorrow decision,” Rovinescu said. “This is several years away. It’s more than a couple of years.”

Asked whether Bombardier’s new jet would meet Air Canada (AC/A)’s needs, the CEO said: “The CSeries is a great airplane. It’s a question of cost and benefit. It’s as simple as that.”

Separately, Air Canada said today it plans to convert 12 Boeing 777-300ER and six Boeing 777-200LR aircraft into a “more competitive configuration” that includes a premium economy cabin and a refurbished International Business Class section. The reconfiguration project will probably start in late 2015 and be completed in the second half of 2016.

Payback Period

Work on the jets will cost about C$300 million ($276 million), with an expected payback period of less than three years, Rovinescu said. The work will involve adding 51 seats to each of the 777-300s, and 30 seats to each of the 777-200s, Chief Financial Officer Michael Rousseau said.

Air Canada also reported today that its first-quarter loss excluding some items narrowed to C$132 million, or 46 cents a share, beating the 48-cent average estimate. Revenue rose to C$3.07 billion.

The improved earnings reflect Rovinescu’s efforts to cut costs.

Citing lower aircraft maintenance and depreciation, amortization and impairment expenses, Air Canada increased its cost-savings target for all of 2014. Adjusted costs per available seat mile, a widely watched measure of airline efficiency, will drop by 3 percent to 4 percent from their 2013 level, the company said. Last month, Air Canada had projected a decline of 2.5 percent to 3.5 percent.

On that basis, Air Canada said today costs will fall 3.5 percent to 4.5 percent in the second quarter compared with a year earlier.

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net Molly Schuetz, John Lear

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