- Small Airbus, Boeing models rack up almost 1,000 sales, leases
- `Fancy technology that saves you fuel' loses some appeal
Bombardier Inc. packed the CSeries airliner with new features to help carriers cut operating costs. What it didn’t count on was cheap jet kerosene giving new life to older fuel guzzlers.
Secondhand Airbus Group SE and Boeing Co. planes are being snapped up by airlines, crimping Bombardier’s efforts to stir demand for its marquee $5.4 billion program. Data compiled for Bloomberg by Flightglobal’s Ascend Fleets show almost 1,000 sales and leases of used A319s and 737-700s since the start of 2011 -- about four times as many as the CSeries’s firm orders ever.
“Lower oil prices are not conducive to selling fancy technology that saves you fuel,” said Adam Pilarski, senior vice president for aerospace consultant Avitas Inc.
The Ascend Fleets tally exposes the pressure on the CSeries from 130-seat jets in the used-aircraft market. Mired in a CSeries sales drought dating to September 2014, Bombardier is bleeding cash because of development delays and has Canada’s worst-performing industrial stock of 2015.
Bombardier unveiled the CSeries a month after oil’s $145-a-barrel peak in 2008, touting advances such as a composite fuselage and a first-of-its-kind engine. The company offers two versions, with as many as 160 seats, at prices topping out at $82 million.
There was sales trouble from the start as airlines chose bigger, more-efficient Airbus and Boeing models over the CSeries, said Richard Aboulafia, an analyst with consultant Teal Group. Buyers made room for those planes by dumping older A319s and 737-700s, crushing prices in the niche targeted by Bombardier.
Capital costs fell so low for the used models that lessors and airlines judged them to be less expensive to own and operate than the CSeries even at $100-a-barrel crude. Now, with oil plunging to about a third of its record, carriers have even less incentive to pick the newer, cutting-edge option over older jets.
“It will be a while before we start to see those retired,” said George Dimitroff, head of valuations at consultant Ascend Worldwide. “It has definitely hurt early sales of the CSeries.”
Buyers scouting the aerospace industry’s bargain bin aren’t just cash-strapped startups. When United Airlines sought more small single-aisle planes earlier this year, it opted to lease 11 used A319s from AerCap Holdings NV and said it was considering 14 more.
The CSeries is a pillar of the growth strategy at Montreal-based Bombardier, which predicted last year the model would produce as much as $8 billion in new annual revenue by decade’s end. While firm orders are stuck at 243, Bombardier is seeing “fresh momentum,” Commercial Aircraft President Fred Cromer said last week, reaffirming a target of 300 by the the time the jet enters service next year.
“Some discussions are maybe a little bit slower” because of the slump in fuel prices, Cromer said in an interview. “But most planning departments are looking at these decisions for the long term.”
Cromer is among the leaders brought in by new Chief Executive Officer Alain Bellemare, who took over in February. He reorganized his management team and set in motion an initial public offering for the rail unit to help bolster cash holdings drained by at least $2 billion in overruns on the CSeries. But even after a rally last week that was the most in Bloomberg data dating to 1988, the Class B shares were down 59 percent this year through Wednesday.
For some buyers, Bombardier’s promise of fuel savings over current jet models may be too small at current prices to overcome the significantly lower capital or lease costs for used jets, Dimitroff said.
A 10-year-old Airbus A319 now leases for $155,000 a month, compared with the “very high $200,000s or low $300,000s” for a CSeries, Dimitroff said. A customer that opted to buy on the secondhand market would also pay about half as much, he said. Technical advances make the CSeries a good aircraft with long-term sales potential, but it came to market at an “unfortunate” time, Dimitroff said.
“All eyes will be focused on the introduction, how well it goes, how well the initial dispatch reliability is,” said John Plueger, president of Air Lease Corp., the jet lessor he co-founded with Steven Udvar-Hazy.
“That’s the first major component,” Plueger said. “The second is a few more significant, large-scale orders with significant airline customers. If both of those things happen, the CSeries will be under way. If one or more of those things does not happen, the CSeries is a great airplane, but there’s more of a wait-and-see attitude.”