Challenging economy biggest obstacle for Bombardier CSeries

When Tony Fernandes, director of AirAsia Berhad announced that his airline was in preliminary talks with Montreal-based plane-maker Bombardier to buy 100 of Bombardier’s potential 160 seat CSeries aircraft, it ended the recently concluded Farnborough Airshow on a relative high note for Bombardier. During an air show that was tabbed as a referendum on the beleaguered CSeries programme, Bombardier managed relative success, winning 25 new commitments to the CSeries; 5 commitments to the 120-seat CS100 and 10 commitments to the 140 seat CS300 from an unidentified customer plus 10 commitments with 10 purchase options for Riga-based low-cost carrier (LCC) airBaltic.

The commitments brought the total order book for the CSeries to 183 orders from 13 customers, of which 138 orders are firm. Thus an order from AirAsia would grow the CSeries order book by more than 50% and provide a critical boost to the plane-maker at a time when orders and backlogs for Bombardier Aerospace’s traditional cash cow the Canadair Regional Jet (CRJ) series of aircraft continue to dry up.

Image Courtesy of Bombardier

Meeting performance targets more important than meeting schedule
Beyond the sales of the CSeries itself, this year’s Farnborough Airshow was also notable because of two big pieces of news on the manufacture and progress of the CSeries programme. The first was that Bombardier has decided to dual-source early production of the centre fuselage barrel parts on the CSeries with producers outside of China, especially Berantavilla-based Aeronova, which already builds horizontal and vertical stabilisers for the CRJ700 and CRJ900 regional jets as well as building the first 40 composite and titanium centre wing boxes, which are then shipped to Shenyang Aircraft Corporation (SAC), best known for manufacturing Chinese reverse-engineered versions of Russian fighter aircraft, which will construct the centre fuselage.

While Bombardier maintains that the long-term selection of Shenyang Aircraft Corporation (SAC) to build the centre fuselage, Guy Hachey, president and chief operating officer (COO) of Bombardier Aerospace, stated that a few of the first shipsets have been sent to external suppliers in an effort to mitigate the risk of delays as Shenyang continues to gain experience with the advanced materials used on the CSeries.

However, even more concerning for Bombardier is the potential delay on delivery of the fly-by-wire flight controls for the CSeries from Parker Hannifin and subcontractor BAE Systems. At the moment, the flight controls are actually more of a concern for Bombardier, said Hachey, though he maintains that Bombardier will meet its deadline for the first flight of the CSeries, currently scheduled for December 2012, as well as for the entry into service (EIS) of the aircraft in late 2013. However, numerous analysts view that it would be more prudent for Bombardier to accept delays in order to meet performance targets for the aircraft.

“We suspect that a three- to six-month delay would not come as a shock to anyone who is following the programme closely given that the company has been suggesting that the schedule is very challenging,” said BMO Capital Markets in a research note last week.

Aspire Aviation too thinks that it would be smart for Bombardier to accept a 3-4 months delay in the EIS of the CSeries, primarily because there are significant risks on the CSeries. For Bombardier, the CSeries represents a particular challenge because not only is the aircraft in an entirely new class for Bombardier, as the CRJ1000 seats just 104 passengers in standard single class configuration whereas the CSeries seats 120-145, but it also makes heavy use of advanced materials (almost 70%) such as composites (46% of the aircraft) and aluminium-lithium alloys (Al-Li makes up around 24% of the aircraft). Boeing ran into troubles with its use of advanced materials on the perennially delayed 787 programme, which culminated with an aircraft that was still several tonnes overweight and 6% short on its fuel burn reduction promises at EIS (“Boeing eyes 787 improvements along with production ramp-up“, 11th Jan, 12).

For Bombardier the risk is even more prevalent, as Shenyang is almost entirely new to large scale production of composite parts for commercial programmes and other new technologies such as the variable area fan nozzle (VAFN), which expands on take-off to increase the airflow bypassing the core of the engine, thus reducing noise and increasing velocity and fuel efficiency on the Pratt & Whitney PW1500G engine that will be used to power the CSeries are still relatively unproven. As with any new technologies, there is the threat that parts will come in overweight, not fully functional, or even that manufacturing troubles will cause a performance shortfall for early aircraft off of the CSeries production.

But for Bombardier, meeting CSeries performance promises, including 15% fuel burn reduction versus the current competitors in its class and significantly lower maintenance costs, is more important than sticking to an absolute first flight and first delivery target. Even though the CSeries is promised to be much more fuel efficient with lower operating costs than the current competitors in its class – the E-Jets for the CS100 and Boeing 737-700 and Airbus A319 for the CS300 while having its EIS 4-5 years before the re-engined versions of those 3 competing products, it has still struggled to win orders, even in comparison to the existing aircraft from those programmes. Ultimately, Bombardier is chasing a new frontier with the CSeries, and this leaves customers uncertain whether Bombardier can meet its guarantees in practice. As Hachey put it, “Right now we’re [Bombardier] still fighting a little bit of ‘Oh, this [CSeries] is a paper plane, it’s unproven.” As it attempts to break the duopoly held by Boeing and Airbus on the large narrowbody market, the CSeries must absolutely meet, if not exceed, its promised performance improvements.

At that point, the uncertainty will shift instead to the A319neo and 737 MAX 7, both of which possess less modern technology and a less optimised fuselage and wings than the CSeries, leaving the CSeries free to capitalise on the 1-2 year gap between the point where Bombardier is sold out till summer 2016 under current plans and the en-masse EIS of Boeing and Airbus’ competing products and play a role in narrowbody request for proposals (RFPs) still up for grabs such as at United Airlines, most of China’s carriers, and Qatar Airways amongst others. If on the other hand, the CSeries underperforms at the beginning of its lifetime, then it is likely to lose sales momentum and validate the sceptics who claim that Bombardier lacks the experience and technical knowhow to build a large narrowbody product on the level of Airbus or Boeing.

Image Courtesy of Financial Post

CSeries sales growth remains slow, small market size with fierce competition
Many industry observers and analysts have expressed disappointment in the relatively slow sales pace for the CSeries, with the aircraft adding around 50 new orders per annum whic is often surpassed by Boeing and Airbus in a single orders). But this relatively slow sales growth trend belies an underlying point: that the entire narrowbody market between 100 and 150 seats is undoubtedly smaller than it was in the last round of narrowbody purchases, the one that begets the 737-700 and A319.

Comparing the orderbooks for the next generation of products from all four major manufacturers in the segment (Boeing, Airbus, Embraer, and Bombardier), with the Brazilian airframer not winning any firm orders for its E-190/E-195s, as well as for its re-engined E-Jets, Bombardier in fact has a sizeable orders lead over its 3 nearest competitors and many of the E-Jet sales occurred prior to the formal launch of the CSeries – since then the CSeries has outsold the E-Jets, including at Farnborough 2012 where Embraer won orders for just 5 E-190s from China’s Heibei Airlines. While Aspire Aviation cautions that many of the orders that were placed for the 737 MAX and A320neo are easily convertible into different variants of the family, the fact that the CSeries has outsold its competitors is a very positive sign. At the same time, even though there are more than 2,500 737-700s and A319s in operation today, the cumulative size of the market for the next round of replacements is likely to be closer to 1,500 aircraft, as the new market reality of fuel prices above US$70 per barrel (West Texas Intermediate measure) has forced many airlines to elect for replacement aircraft in the 150-seat plus 737-800 and A320 range.

Given the CSeries’ advantage over its less optimised competitors, there is little shock that it has outsold all competing types. Already, numerous airlines have expressed interest in the CSeries, which in addition to double-digit maintenance cost reductions, is also priced more cheaply by 10%-30% versus Boeing and Airbus’ re-engined products.

The following table is a comparison of selected fuel burn figures for the CS300, CS100, and their comparable products. The data was compiled using a mixture of data publicly available from the companies, Aspire Aviation’s sources at the original equipment manufacturers (OEMs), US Department of Transportation (DOT) Form 41 data, Aspire Aviation’s sources at various airlines, and Aspire Aviation’s own economic models. This data represents an “apples-to-apples” comparison for the aircraft types on singular missions. All CSeries, 737 MAX, and A320neo data are estimates, and has an accuracy range of 3%.

 

Aircraft Type (Seats)

Fuel Burn on 250 mi flight (gal.)

Fuel Burn on 500 mi flight (gal.)

Fuel Burn on 750 mi flight (gal.)

Fuel Cost/ Aircraft Mile

Fuel Cost on 500 mi flight ($)

Fuel Cost on 750 mi flight ($)

CS300 (130)

Datum

Datum

Datum

Datum

Datum

Datum

737-700WL (136)

+17.2%

+19.1%

+19.7%

+12.0%

+13.9%

+14.4%

A319
(127)

+20.3%

+21.9%

+22.2%

+23.2%

+24.8%

+25.1%

A319neo
(127)

+7.1%

+8.0%

+8.1%

+9.6%

+10.6%

+10.6%

737 MAX 7
(136)

+8.5%

+9.6%

+9.5%

+3.8%

+4.8%

+4.7%




 

 

 

 

CS100
(110)

Datum

Datum

Datum

Datum

Datum

Datum

CRJ1000
(100)

+9.0%

+10.2%

+9.8%

+20.9%

+21.2%

+20.8%

E-190 (98)

+12.3%

+12.3%

+12.3%

+26.0%

+26.1%

+26.0%

E-195 (108)

+18.8%

+18.7%

+18.6%

+20.7%

+20.9%

+20.8%

Notes: Fuel price at US$3.25/gallon

As the table indicates, the CS300 has a major advantage in fuel burn over both the Boeing 737 MAX and the Airbus A320neo while simultaneously possessing much lower maintenance costs and a roughly US$20 million cheaper price tag. Some of the advantage in operating cost is mitigated by Airbus and Boeing discounts and financing, and some of the fuel burn advantage will be negated as Airbus, Boeing, CFM, and Pratt & Whitney continue to refine their various products. But all indications are that the CSeries will have between a 3.5%-5% advantage in seat-mile costs (cost per available seat mile, CASM – subject to the variability of pricing on the part of Airbus and Boeing), which is right at the margin where the benefits of commonality are outweighed by the superior efficiency of the all-new product. Especially for smaller customers of the 737-700 and A319 such as those with less than 20 of the type in their fleets whose orders will likely not have enough critical mass with Airbus or Boeing to secure attractive enough pricing to overcome the CASM disadvantage, the CSeries will be the frontrunner to win many of these orders.

At the lower end, the CSeries has an even more pronounced advantage, and between it and the CRJ1000, Bombardier has the two best products in the 90-110 seat market from an operating cost perspective. The CRJ1000 has become much more competitive in recent years, winning a recent head-to-head battle against the E-190 for an order for 18 frames from Garuda Indonesia. With current operators Brit Air and Air Nostrum both stating that CRJ1000 cost figures are coming in even better than Bombardier’s promised numbers, of which the figures that Aspire Aviation’s models are closest to given that Aspire Aviation is unable to substantiate the claims from Air Nostrum/Brit Air, Bombardier now has an opportunity to “tag-team” customers by offering them a limited number of CRJ1000s for interim lift, then selling them CS100s for 2016 and beyond. This would also allow Bombardier to maintain CRJ production as it waits on further orders from the coming round of 50-seat jet replacement at the major US airlines.

What this analysis also confirms is that Air Lease Corporation head and respected aviation industry veteran Steven Udvar-Hazy was correct back at the International Society of Transport Aircraft Trading (ISTAT) conference in March 2012 in stating that Embraer should not only re-engine and re-wing the E-Jets, but also stretch the fuselage of the aircraft. He revealed to flightglobal that, “Air Lease is advising Embraer, which recently visited its Los Angeles headquarters, to offer a one-row, four-seat stretch to the E-190 and a two- or three-row, eight-to-12-seat boost on the larger E-195, providing an overall 15%-17% fuel burn improvement, says Hazy, whose Air Lease has ordered 30 E-Jets.”

As of right now, the CSeries blows the current E-Jets out of the water, which will still possess a 5%-6% cost per available seat mile (CASM) advantage over the re-engined E-Jets per Aspire Aviation’s estimates, and will hold a 3-4 year lead in entry into service (EIS) as Bombardier can feasibly deliver another 350-500 CSeries before Embraer delivers the first re-engined E-Jet.

However, adding the extra seats to the E-Jets would essentially close the cost per available seat mile (CASM) difference, making the re-engined E-195 competitive with the CS300, and bringing the E-190 closer to parity with the CS100. Once commonality with current E-Jet’s is factored into the equation, this would make the re-engined E-Jet a very powerful competitor, in fact very likely the market leader in the 90-140 seat market, though the CSeries will retain its unique performance edge including superior short-field capabilities and a range that will allow transatlantic flights, as well as lower cash operating cost (COC). Of course the downside risk is that stretching the aircraft would likely delay the current planned entry into service (EIS) of the re-engined E-190/195 and E-170/E175 past the current planned dates of 2018 and 2019 respectively, thereby giving Bombardier an even larger lead-in time for the CSeries. But the risk to Embraer in not enlarging the E-Jets is in Aspire Aviation’s opinion much more serious given the likely cost disparity with the CSeries.

Image Courtesy of Mitsubishi Aircraft Corporation

Skywest’s MRJ purchase puts pressure on Bombardier
The largest order in volume terms at the Farnborough Airshow besides United Airlines’ order for 150 Boeing 737s was actually US regional operator SkyWest’s order for 100 Mitsubishi Regional Jets (MRJs). The order allows for SkyWest to split the 100 aircraft in a ratio of its choosing between the 60-78 seat MRJ-70 that is roughly comparable to a CRJ700 or E-170 and the 80-90 seat MRJ-90 that is roughly comparable to the E-175 and the CRJ900. The order represented a major coup for Mitsubishi, whose MRJ had come under increasing fire for possessing an order book of just 65 MRJs – 15 from Japan’s All Nippon Airways (ANA), 50 from US-based regional operator Trans States Airlines, while announcing a 1-year delay in planned entry into service (EIS) from 2014 to summer 2015 or between Oct 2015 – Mar 2016, as well as delaying the aircraft’s first flight from the second quarter of 2012 to between Oct-Dec 2013.

While aircraft delays have become common practice with the slew of new airliners coming to the marketplace since Boeing launched the latest step-change in technology with its 787 Dreamliner, numerous industry analysts saw the combination of perennial delays and a dearth of orders as a death-knell for the MRJ, which faced established competitors Bombardier and Embraer as well as competition on the lower-end from Commercial Aircraft Corporation of China (COMAC) ARJ21 regional jet, with its built-in customer base of rapidly expanding Chinese airlines. But the SkyWest order reversed that sentiment, and the discussion has now shifted to consider the MRJ’s role in the next round of regional replacement in the US and Europe to a lesser degree.

“SkyWest remains committed to providing innovative leadership within the regional airline industry,” SkyWest, Inc. president Bradford Rich said. “This agreement is the product of a co-operative partnership that we are confident will create long-term value for both parties. We look forward to the continued development of a long-term relationship with Mitsubishi Aircraft.”

There is no question that the regional aircraft providers are in for a big bonanza in the 60-110 seat jet market in the United States. Delta Air Lines’ recently concluded pilot’s contract negotiations ended with the Atlanta-based airline stating that it would shed 218 50-seat regional jets whose economics have deteriorated rapidly in the persistently high oil price in the past five years and replace these with a combination of 88 second-hand Boeing 717s from low-cost carrier (LCC) Southwest Airlines and 70 new 76-seat regional jets. Meanwhile, fellow full-service carrier US Airways has also signalled its preference for substituting larger regional jets for smaller ones.

“If we could tear them [our capacity purchase agreements] up and start over we wouldn’t have as many 50-seaters,” US Airways chief executive Doug Parker said in a speech last week at the National Press Club in Washington D.C. “We’d like some larger regional jets to offset some of those 50-seaters.”

While the situation at American Airlines (AA), currently operating under Chapter 11 bankruptcy protection, is more tenuous, either a standalone American Airlines or an American/US Airways tie-up is likely to grow its fleet of 70+ seat regional jets given Parker’s stated objective and the relaxed scope clause that American is asking for in its restructuring plan.

The situation at United Airlines is currently in flux thanks to that carrier’s recently consummated merger with Continental Airlines. While pre-merger United had a large number of 70+ seat jets, pre-merger Continental had a highly restrictive scope clause that restricted its contract operations to operating regional jets with just up to 50 seats. Once the labour integration issues are solved however, all indications are that United will replace its 50-seat jets with 70 seaters as well. Factor in the potential for new orders from other US low cost carriers (LCCs) and startups such as Carlsbad, California-based California Pacific Airlines, which took delivery of its first Embraer E-170 last week and has rapid growth plans from its home base in the San Diego area, and it all adds up to a mass of new regional jet orders in the US over the next few years.

Image Courtesy of Embraer

Embraer has certainly caught the wind of these changes. “We estimate that in the next few years there will be 400-500 [regional] aircraft that will have to be acquired by these major airlines in the United States,” Embraer president for commercial aviation Paulo Cesar Silva said, adding that there is “huge opportunity that we [Embraer] see now in the U.S. market.”

Bombardier too announced at the Farnborough Airshow that it was in talks with SkyWest for a regional jet order that could include “hundreds of planes.” Marc Duchesne, a Bombardier spokesperson, said that, “For us [Bombardier] the CRJ is the ideal plane for SkyWest. It’s already part of their fleet. It’s an existing plane that we can deliver in the coming quarters.”

At the same time, both the MRJ and the re-engined E-170/175, currently scheduled for entry into service (EIS) in 2018 appear to be the leaders for any such orders. The MRJ in particular, with its utilisation of the same Pratt & Whitney geared turbofan (GTF) technology used on the CSeries and A320neo families, will offer double-digit fuel burn reductions over the CRJ700/900 and E-170/175 families.

Meanwhile, Bomardier continues to offer its older CRJ product line, which has marginally superior economics versus the E-Jets but offers a much lower degree of comfort. When faced with the MRJ’s unique blend of superior comfort thanks to a larger fuselage and excellent economics, it is hard to see the CRJ winning any major regional replacement competitions in 5 years’ time. What this points to is either a further upgrade of the turboprop Q400’s speed capabilities to make it competitive with regional jets, or a re-engining of the CRJ family which would at least keep Bombardier in contention to win regional jet orders from existing CRJ customers. A more daring option would be to launch an all-new regional jet product line, using the fuselage of one of Bombardier’s myriad business jets as the baseline for an updated regional jet that utilises some of the technology for the CSeries. However, it is Aspire Aviation’s opinion that Bombardier currently does not have the engineering resources available for such a move, and would not before 2015 at the earliest, too late for the aircraft to be time-competitive with the MRJ and re-engined E-Jets.

Still, the regional aircraft replacement frenzy has only just begun, and both Bombardier and Embraer remain positioned to win new business from US airlines. Bombardier only needs 100-150 additional orders for the CRJ series as a way of maintaining cash flow in the transition to CSeries production, and with CRJ700/900 backlogs down to 20 aircraft, 44 for the E-170/175, they are ready to deliver new CRJs at the drop of a hat.

Bombardier’s other regional product, the Q400 turboprop, could play a role in regional jet replacement as well. While the Q400 still trails the ATR72 significantly in terms of overall order book with a backlog of just 33 airframes at the conclusion of the Farnborough Airshow where Bombardier announced an order for 6 Q400s from Chorus Aviation – to be operated as Air Canada Jazz, it has become much more competitive recently, winning several head-to-head battles with the ATR72 and actually holding a sales edge over the ATR72 in 2012, with 41 frames sold versus 39. Recent orders from Ethiopian Airlines, EuroLot, as well as the conversion of options by Horizon Air, the regional feeder for Alaska Airlines and Air Canada Jazz signal a reversal of fortunes for the Q400. The order from Canadian low-cost carrier (LCC) WestJet was an even bigger win for the Q400, which could grab up to 45 orders from the deal – 20 firm for now, 25 purchase options. In short, it looks like Bombardier will be able to muddle through on the Q400 programme, maintaining a smaller backlog in production throughout 2012 and 2013.

Image Courtesy of Bombardier

Conclusion
There is no question that Bombardier has a well designed product lineup that provides comprehensive coverage for each market segment. Add in its recently announced partnership on the Comac C919 jet which competes directly with Boeing and Airbus, larger 737-800 and A320 types while this jet is often dismissed in the West, both Ryanair and British Airways parent International Airlines Group (IAG) have expressed interest in the type, and Bombardier truly provides an aircraft to serve all of an airline’s short-haul and in certain cases long-haul needs.

But all of this will not help sales if the world economy does not improve materially, which is muddling along in a tepid economic recovery. Growth slowdowns are already hitting the so-called BRIC countries (Brazil, India, Russia, and China) hard, with Indian growth in particular showing signs of heavy weakness. Europe has slipped into a debt-fuelled recession, and the US economy appears to have stagnated yet again despite the positive news from the moribund housing sector. While oil prices have thankfully stabilised, the broader trend nevertheless points to significant global economic uncertainty. That, more than anything, will hurt Bombardier’s chances to win firm orders going forward.

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