Evaluating Bombardier’s CSeries Strategy for Success

The new management team at Bombardier appears to be on a mission to secure as many orders for the CSeries as possible, to build both backlog and momentum for the program. While these orders may come at lower prices, as rumored with the Air Canada and Delta deals, Bombardier recognizes that it needs “critical mass” to enable it to achieve scale economies that will enable the aircraft to be profitable with lower margins. In a nutshell, the new strategy at Bombardier can be summarized in two words - "all in". Airbus and Boeing have been taking turns beating up on Bombardier in recent campaigns, from EasyJet to Vueling to United, the prices we’re hearing in the market certainly don’t match what economic theorists would expect from a duopoly. Classic economic theory would have Airbus and Boeing raising prices, and pouncing only on competitors that are a direct threat. Bombardier, with its 110 and 130 seat CS100 and CS300 aren’t a threat to the best-selling A320 and 737-8 products that are larger. So why all the fuss? Bombardier has a “nice little airplane” according to John Leahy at Airbus. But that nice little airplane lends itself well to a stretch or two, potentially bringing the nice little airplane in direct competition with the bread and butter models at Airbus and Boeing, the A320neo and 737MAX8. So rather than take the risk, Airbus and Boeing would like to see the CSeries program fail and never get to that point. The CS100 is pretty safe, facing competition from Embraer and potentially from Mitsubishi and Sukhoi. Airbus and Boeing have dropped their “double shrink” A318 and 737-600 models, which didn’t sell due to their inferior economics. But the CS300 competes directly with two models that do exist, the A319neo and the 737 MAX7. While neither model from Airbus and Boeing are selling well (CS300 has more orders than both combined), the baseline CS300 has the potential to be stretched quite easily. And that’s what they are afraid of. Bombardier’s Canadair Regional Jet provides the prologue. This aircraft started life as a business jet, the Canadair Challenger, and morphed into a 50 seat regional aircraft. That aircraft was later stretched to 70, 90, and 100 seats. Bombardier appear to be magicians -- stretching a business jet design into a 100 seat commercial jet. Bombardier also secured the trademarks for CS500 and CS700 when it trademarked the CS100 and CS300. So you know they are thinking about the potential. The All-In Strategy Unlike the prior management team at Bombardier, the new team realizes that they are at war with the big two, whether they like it or not, and whether they perceive themselves as competitors or not. Even if Bombardier promised to stay away from the mainstream market, that’s likely to be perceived as too large a risk to take by the big two, who would rather have Bombardier out of the way. When Bombardier was in financial difficulties, they had discussions with Airbus regarding the CSeries. It would not be too difficult to imagine a Chinese joint-venture producing the CS500 and CS700 for the Asian and world markets, and opening a new competitive front against Airbus and Boeing. Of course, China might lose face as its competing C919 program is years behind schedule, but it could quickly gain the technology to become a world player, while Bombardier gains the capital it needs to ramp-up production to levels that provide stronger economies of scale. If egos and politics weren’t in the way, a JV with Russia for Q400s would be in place, and more interesting discussions regarding CSeries would be occurring. Economic Realities The reality is that scale economies for commercial aircraft can be achieved at production levels of 10-12 aircraft per month, and except for writing off fixed costs over a larger base, a nimble competitor can stay in the game financially. The team at Bombardier now recognizes those facts, and are hunting for orders and critical mass. The orders from Air Canada and Delta earlier this year sent a message to the industry that Bombardier is now serious about competing for orders, and is gearing up for a major push. And having written off the excess development costs for the program, that impact on pricing has been eliminated. In the near term, Bombardier has an advantage in that it can increase capacity to deliver airplanes more quickly than Boeing or Airbus, whose backlogs have production lines filled through 2021. Boeing and Airbus are both increasing production rates to higher levels that may be unsustainable through the next industry downturn, expected to hit about the end of the decade, perhaps sooner. One of the reasons, hidden behind optimistic forecasts, is to have the ability to thwart inroads from a new competitor by having aircraft to deliver at low prices. Will the All-In Strategy Succeed? Can Bombardier now gain a firm enough foothold to bring the CSeries to profitability? We believe the answer is yes. The CSeries is a strong performing aircraft, with significant economic benefits over even the re-engined models from Airbus and Boeing. It offers flexibility for airlines to right-size capacity to routes, and to profitably serve cities that could not be profitably served with A319 and 737-700 models from Airbus and Boeing. It is always difficult selling against the incumbent, and fleet commonality is an argument that Airbus has been making for years. But when analyzed, the benefits of commonality amount to about 1% of operating costs for an airline. So when an airplane comes along that is 8-10% better, that 1% really doesn’t sway the equation. Service and support are always an issue for airlines. But Bombardier has supported a large fleet of CRJs and Dash-8s, and have global facilities and reach. If they didn’t, their customers wouldn’t still be customers. Bombardier does have the capability to compete. The Potential Market Our market forecast, somewhat lower than Bombardier’s, still provides a strong level of sales for CSeries and enough to make it profitable. The following charts shows our projections for the CS100 and CS300 in green, and the additional sales that could be added by the CS500 and possibly CS700 stretch models.

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