Bombardier Lags 67% Behind Order Goal on Delayed CSeriesFrederic Tomesco
Bombardier Inc., already late on the first flight of its CSeries jet, is running behind sales and customer targets as the maker of planes and trains struggles to restore investor confidence in the $3.5 billion program.
Four years after winning the first purchase, Bombardier has sold only 180 planes and would need a 67 percent increase in its order book to meet a goal of 300 by mid-2014 that the finance chief reiterated yesterday. The company is as much as 57 percent short of its target of 20 to 30 operators by the time the plane enters service.
Investors are tracking Bombardier’s initial foray into the single-aisle jetliner market because continued slow sales would imperil its forecast for as much as $8 billion in annual CSeries revenue later this decade. The planemaker plans to host a briefing on the jet tomorrow, the first since saying Nov. 7 that the maiden flight would be delayed six months, until June.
“They have a lot of work to do to build up their order book,” said Brandon Snow, a fund manager with CI Investments Inc.’s Cambridge Advisors unit in Toronto, who doesn’t own any Bombardier shares. “The CSeries is a new format, it’s a new plane and Bombardier is not a typical seller. There are a lot of question marks all around the product.”
Challenges with the aircraft’s development have helped drag Montreal-based Bombardier’s stock to a 41 percent discount from the benchmark Standard & Poor’s/Toronto Stock Exchange Composite Index.
Aerospace sales, including regional and business jets as well as turboprops, accounted for 51 percent of the company’s $16.8 billion in revenue last year. The CSeries is Bombardier’s biggest plane ever, and takes aim at the largest part of the global airliner market -- one dominated by a Boeing Co.-Airbus SAS duopoly.
While the planemaker has rallied 10 percent to C$3.96 since the delay was announced, it still trades at discounts to its larger rivals.
U.S. competitor Boeing commands a 68 percent premium, and Airbus parent European Aeronautic Defence & Space Co. trades at more than double Bombardier’s price-earnings ratio. The company’s stock has a buy rating from at least 13 analysts, compared with nine holds and two sells, according to data compiled by Bloomberg.
The CSeries is on schedule to make its first flight by the end of June, Chief Financial Officer Pierre Alary said yesterday at a JPMorgan Chase & Co. transportation conference in New York.
“We’re quite confident,” he said. “We are reviewing with the suppliers on a regular basis. It is progressing, and we are basically on schedule.”
Slated to enter service in mid-2014, the plane will compete against the smallest variants of Boeing’s 737 and Airbus’s A320. Both manufacturers are developing reworked versions of the narrow-body planes, the 737 Max and the A320neo, which will be powered by more fuel-efficient engines.
Bombardier says the CSeries will cost about 15 percent less to operate and burn about 20 percent less fuel than existing competitors. The plane will feature composite materials and the new geared turbofan engine from United Technologies Corp.’s Pratt & Whitney.
The CSeries is one of three new jets that Bombardier is developing between now and 2017, a strategy that’s costing $2 billion in development spending for a second straight year, Bombardier said in a February earnings call.
“Stockholders have a lot riding on the success of the CSeries,” Snow said in a telephone interview. “If it’s not successful, it’s a pretty big hit to cash flow and future profitability. The CSeries really has to come around for them.”
Bombardier’s most recent sale was Feb. 20, when Russian leasing company Ilyushin Finance Co. converted a letter of intent into an order valued at about $2.56 billion at catalog prices. Besides the 180 firm orders, Bombardier also has commitments for at least 200 CSeries jetliners.
The company said last year it expects 6,900 aircraft seating 100 to 149 people will be delivered globally between 2012 and 2031. It predicts the CSeries will capture about half of deliveries in the segment.
So far, though, Bombardier is falling short of its targets for customer breadth. As of yesterday, 13 customers -- only eight of which Bombardier has identified -- have placed firm orders for the jet.
Some of Bombardier’s struggles may be due to its unwillingness to offer large discounts, said Richard Aboulafia, an analyst at Teal Group, an aerospace research firm based in Fairfax, Virginia.
The smaller CS100 model, with 100 to 125 seats, sells for a list price of $62 million, while the CS300, which will carry 120 to 145 people, sells for $71 million, though airlines typically negotiate discounts.
“They have underestimated the resources required to break into this market,” Aboulafia said in a telephone interview. “If you want to enter somebody else’s turf, even with an exciting new product, you need to be very aggressive on terms -- whether it’s walk-away rights, residual value guarantees, discounts or financing.”
CSeries orders may accelerate once test flights begin, said Cameron Doerksen, who covers Bombardier for National Bank Financial in Montreal.
“First flight is a key risk milestone and risk-mitigating event, and we expect that the stock will react positively if the target is met,” Doerksen said in a Feb. 21 note to customers.
Qatar Airways Ltd. is still considering the CSeries -- though the Doha-based carrier is “too busy” with the grounded Boeing 787 and A320neo to order the Bombardier jets, Chief Executive Officer Akbar Al Baker told journalists today in Berlin.
Bombardier is in talks with a number of major airlines and leasing companies globally on CSeries orders that may exceed 20 planes, Mike Arcamone, president of the company’s commercial aerospace division, said in November.
In addition to Qatar, potential buyers include Air China Ltd., All Nippon Airways Co., Delta Air Lines Inc., EasyJet Plc, Japan Airlines Co., JetBlue Airways Corp., Southwest Airlines Co. and Turkish Airlines, David Newman, an analyst at Cormark Securities Inc. in Toronto, said in a Feb. 22 note to clients.
Orders for the CSeries pale in comparison with those of new jet programs by Airbus and Boeing in recent years. Boeing had sold 840 of its $200 million 787 Dreamliners by the model’s maiden flight in December 2009, while Airbus’s A350, which is due for its maiden flight this summer, had 592 firm orders through the end of January.
Reworked models being developed by Boeing and Airbus are also proving more popular. Boeing has already sold 1,180 of its 737 Max planes, which are due to enter service in 2017, while Airbus had 1,864 firm orders for the A320neo, which is due for a 2015 debut.
“The Neo and the Max are mainstream type aircraft, whereas the CSeries is not,” said Jacques Kavafian, an aerospace analyst at Toll Cross Securities Inc. in Toronto. “It’s a niche product. The addressable market is smaller.”