Bombardier Delays CSeries Again as Debut Moves to 2015
Bombardier Inc. (BBD/B) delayed its CSeries jetliner for a fourth time, saying the aircraft won’t enter commercial service until late next year instead of 2014 because it needs more time for flight tests.
The smaller CS100 model is now set to debut in the second half of 2015, with the larger CS300 to follow six months later, Bombardier said today in a statement. The timeline erased plans for a CS100 introduction about a year after the first flight, which came Sept. 16, and the stock fell the most since Oct. 31.
Bombardier’s move confirmed predictions by analysts including Canaccord Genuity’s David Tyerman, who said last year that a postponement was inevitable. The maiden flight of the biggest-ever jet for the Montreal-based company was pushed back three times, bad weather has slowed trials and program costs have climbed to $3.9 billion, 15 percent more than projected.
“No one really expected entry into service 12 months after the first flight, but this is obviously a significant event and a big negative,” Tyerman said today in a telephone interview from Toronto. “Unless they can find some cost reduction offsets, the budget is likely to go up.”
Spending on the program may rise by more than $1 billion, Peter Arment, a Sterne, Agee & Leach Inc. analyst in New York, said in a note to clients. Bombardier uses about $200 million of cash on the CSeries every quarter, Arment said.
Bombardier’s earlier goal of 2014 already reflected the effect of previous delays, after the company missed its plan to have the plane in service in late 2013.
The widely traded Class B shares dropped 7.7 percent to C$4.17 in Toronto, the lowest closing price since May 3. Arment rates the stock as neutral, while Tyerman has a buy recommendation.
The cost of hedging against losses on Bombardier’s debt also climbed. Five-year credit-default swap contracts on Bombardier debt widened by 12 basis points to about 301 basis points, the biggest increase among members of Canada’s benchmark Standard & Poor’s/TSX Composite Index, according to data compiled by Bloomberg.
Bombardier is targeting the CSeries to compete with the smallest Airbus Group NV (AIR) and Boeing Co. (BA) single-aisle models, the workhorses of the global airline fleet. Seating capacity on the CSeries will range from 108 to 160, a step up in size for the planemaker whose regional jets are its signature commercial aircraft.
Bombardier is still evaluating the impact of the delay on its program costs and can’t comment further, Marc Duchesne, a spokesman for the company, said by telephone. Executives may provide an update on costs when Bombardier reports fourth-quarter results February 13, Benoit Poirier, an analyst at Desjardins Capital Markets in Montreal, said in a note. He recommends buying the shares.
Mike Arcamone, president of Bombardier’s commercial aircraft unit, said no major design changes in the CSeries have been identified, and “this gives us confidence that we will meet our performance targets.”
The delays may be linked to “issues with the avionics and fly-by-wire systems,” part of the cockpit controls, said Walter Spracklin, an analyst at RBC Dominion Securities based in Toronto. He has an outperform rating on the shares. The latest setback is “likely to push program costs north of $4 billion,” he wrote in a note.
Bombardier is planning 2,400 hours of test flights for the CSeries, with more than 20 flights completed so far, Duchesne said. The jet’s second prototype took off for the first time on Jan. 3, Bombardier said today.
Chief Executive Officer Pierre Beaudoin is betting the CSeries can generate $5 billion to $8 billion of additional annual revenue by the end of the decade and help the company almost double sales. He hinted Oct. 31 that the year-from-first-flight timetable might change, saying the company was reviewing its plans and would provide an update “in the coming months.”
Customers were briefed on the news ahead of the announcement and Bombardier isn’t expecting any order cancellations, Duchesne also said. Bombardier also shared preliminary flight-test data with buyers of the plane, he said.
“Nobody is happy about the postponement, but customers understand this is necessary to ensure that there are no issues once the plane enters service,” said Duchesne.
Sales have been slow to take off. Even after announcing a firm order today for 16 CSeries jets from Saudi Arabia’s Al Qahtani Group, Bombardier is still 102 units short of a target of 300 firm purchases by the time that the jet enters service.
Bombardier has typically unveiled purchases in smaller batches than those for Airbus’s A320 and Boeing’s 737. The larger companies’ single-aisle models have routinely sold by the dozens or even hundreds of aircraft at a time.
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