Bombardier Slumps as CSeries Orders Too Few, Too SmallFrederic Tomesco
Bombardier Inc. has a flight-test schedule and debut date for its newest, biggest plane. What the CSeries jet still lacks are orders and big-name airline support.
The stock is suffering because CSeries customers so far are too few and too small to reassure investors that the aircraft will be able to boost revenue and profit as Bombardier has promised, said David Tyerman, an analyst at Canaccord Genuity in Toronto. Bombardier is the worst performer among Canadian industrial stocks in the 21st century.
While Boeing Co. and Airbus Group NV book orders for their single-aisle jets by the hundreds, Bombardier’s CSeries tally is just 203. Only one of the 12 named customers, Deutsche Lufthansa AG, ranks among the world’s top 20 by passenger traffic. The next-largest buyer, Korean Air Lines Co., ranked 31st in 2012, according to an International Air Transport Association study.
“They’ll get the plane done, but the problem here is really the orders,” Tyerman said. “It’s still somewhat distressing what the order book looks like, in terms of who’s in it.”
That lack of commitment contrasts with the wide acceptance of new jets like the 737 Max from Boeing and the A320neo from Airbus, whose stranglehold on the large narrow-body market Bombardier is trying to crack.
Bombardier Aerospace President Guy Hachey said last week that a steady stream of would-be buyers to the company’s test facility in Mirabel, Quebec, will eventually result in sales.
Bombardier executives are entertaining “two to three clients” a week in Mirabel for briefings on the CSeries, Hachey said May 1. “We’re constantly with clients,” he told reporters after the company’s annual meeting. “There’s a lot more enthusiasm regarding the plane.”
There is less enthusiasm for the stock, which has lost 11 percent of its value this year while Canada’s benchmark Standard & Poor’s/TSX Composite Index has gained 6.8 percent. Today the shares fell 1.7 percent to C$4.11 in Toronto. Bombardier is the fourth-worst performer this year in the sub-index of 26 Canadian industrial stocks.
Most of the jets have been snapped up by smaller airlines and lessors or startups. Bombardier’s client roster for the CSeries includes Odyssey Airlines, a closely held U.K. carrier that is due to start operating in 2016; Iraqi Airways; Sweden’s Braathens Aviation; Switzerland’s PrivatAir; and Russia’s Ilyushin Finance Co.
Republic Airways Holdings Inc. of the U.S. is the biggest buyer, with a firm order for 40 of the larger CS300 models that was announced in 2010. Scott Thien, a spokesman for Republic, couldn’t immediately comment on the status of the order.
Chief Executive Officer Pierre Beaudoin predicts the CSeries will contribute $5 billion to $8 billion a year in new revenue later this decade. Bombardier’s revenue amounted to $18.2 billion last year.
Beaudoin expects to capture 50 percent of the market for 100- to 149-seat airliners, a market “not properly addressed by our competitors,” he told shareholders May 1.
Beaudoin said he feels “very confident” that Bombardier will reach its goal of 300 CSeries orders by the time it enters commercial service next year, pointing to the 244 additional “commitments” the company has from buyers -- a figure that includes options and conditional agreements.
Bombardier told investors Jan. 16 it would postpone the commercial debut of the CSeries, a single-aisle airliner designed to seat 108 to 160 people, to the second half of 2015, saying it required more time to complete flight tests.
Bombardier later revised the estimated costs to develop the two versions of the jet to $4.4 billion -- $1 billion more than targeted when the company decided to proceed in 2008. The costs represent about two-thirds of the company’s market value of C$7.2 billion ($6.7 billion).
“They’re betting the company on the CSeries,” said Bob Decker, a fund manager and founding partner at Aurion Capital Management Inc. in Toronto, who doesn’t own the stock because “it’s too risky. There is a lack of financial flexibility at Bombardier.” Aurion oversees about C$6.6 billion in Toronto.
Before revenue can start flowing in, Bombardier must complete 2,400 hours of test flights for the CSeries. As of May 1, the company had logged about 280 hours of flight tests, or about 12 percent of the planned total, Beaudoin said.
Bombardier has said the CSeries, which features the new geared turbofan engine from United Technologies Corp.’s Pratt & Whitney unit, will cost about 15 percent less to operate, cut fuel burn by about 20 percent and produce less noise.
Until flight tests are sufficiently advanced, Bombardier can’t guarantee would-be buyers that the CSeries will meet the advertised targets. Still, final performance results will likely be “very close” to preliminary estimates, Hachey said.
For now, “there are a few larger campaigns that would like to see the CSeries data before signing off on new narrow-body orders,” Peter Arment, an analyst at Sterne, Agee & Leach Inc. in New York, said April 30 in a note to clients. He predicts orders for the jets at the Farnborough Air Show in July.
“The slow trickle of orders adds to the perception that Bombardier will fail to break the narrow-body duopoly,” Kevin Chiang, an analyst at CIBC World Markets in Toronto, said in a note to clients April 20. With Airbus and Boeing “publicly questioning the market demand for a 100-150 seat aircraft, the only real way Bombardier can prove them wrong is by continuing to win at its sales campaigns.”
Air Canada, which wants to decide on its next narrow-body order in the first half of this year, is studying the CSeries, CEO Calin Rovinescu said in January.
The CSeries “will be a very good airplane no matter what,” Rovinescu told reporters after a Jan. 27 speech in Montreal. “The delays in and of themselves are not something that is a factor for us. This is an analysis that has about 150 different drivers for us. It’s not just about getting a good deal.”
Walter Spracklin, an analyst at RBC Capital Markets in Toronto, predicts Air Canada will order more than 20 CSeries jets.
Bombardier’s dependence on the CSeries for future revenue “makes it a very difficult company to analyze,” Canaccord Genuity’s Tyerman said. “With other companies the bets are smaller. If it’s a huge success they’ll be set for 20 years. If it’s a failure, the company will be seriously impacted. For now, we’re just sitting here waiting.”
(An earlier version of this story corrected the year-to-date gain for the Standard & Poor’s/TSX Composite Index.)