Now that Boeing has elected to follow Airbus and proceed with the re-engining route for its single aisle jet, the 737, Bombardier and Embraer have clarity from which to make decisions.

For Embraer, which has been waiting for Boeing to move, its decision revolves around whether to enhance the current E-Jet line or proceed with an entirely new airplane. For Bombardier, it – and the market – finally know what they are competing against. While analyst response has been split whether this is a good or bad thing for Bombardier, we see this as a net positive.

Embraer
Embraer made it clear they were waiting for Boeing to make its decision to re-engine or do an NSA. Boeing’s decision has been made. Now Embraer has the clarity it needs to decide whether to enhance the E-190/195, stretch it, re-engine it or proceed with a clean-sheet aircraft.

In a research note issued July 25, Goldman Sachs analysts believe that the company now may have a better case for stretching the E-195 and doing a re-engine as well.  The E-Jets sell well and the most recent important win at Alitalia, with stiff competition from a newer generation offering from SuperJet (partially Italian) demonstrates E-Jet economics remain compelling and competitive.  Embraer may not feel compelled to rush into anything and conserve its R&D.  Once it is clear that an updated GE engine or an appropriate sized P&W GTF is ready, they could move forward.  We understand that Embraer has been speaking with both P&W and GE (the E-Jet currently uses the GE CF34) GE is researching the next generation CF34.  Since Embraer has made no public statements other than it is waiting to consider its options, it is under no real pressure to do anything now.

Bombardier
Bombardier is the market-maker in the new narrow bodies; and the reason we have the RE and neo now is because Bombardier started the process when it launched its CSeries.  The bigger OEMs either spoke poorly of it (Airbus) or politely ignored it (Boeing), and the Lufthansa and LCI orders didn’t move the needle, but when Republic Holdings placed its CSeries order on behalf of Airbus operator Frontier Airlines, this shocked Airbus.  Suddenly the need for Airbus to react was clear – it was likely to be the bigger loser to the CSeries.  This led to the introduction of A320neo, the success of which has led to the 737RE.

Bombardier is under a bright spotlight. Some analysts think Boeing’s move is a positive for Bombardier, providing clarity and a clear path for orders. This group argues the CS300 will be more fuel efficient than the 737-700RE and, with 21st century technology, justifies ordering this model over the 737. Others think the 737-700RE will sufficiently close the fuel savings gap as to making a switch to the CS300 not worth the cost of a new fleet type.

In our view, either argument ignores one key element that actually aligns with the Airbus and Boeing theories of up-sizing fleets: regional jets are being retired in favor of larger planes. The day of the 50-70 jet is gone and we think even the days of the 70-90 seat jet are numbered.

This makes the 100-130 seat CS100 an attractive proposition. Sales of the CSeries are slightly weighted to the 130-149 seat CS300, but the CS100 has proved a respectable seller. As airlines move up from the traditional RJ market, the CS100 should prove popular.

The CS300 will be more efficient than the A319neo and the 737-700RE and the CSeries is more passenger-friendly than the E-Jets (larger overhead bins, bigger windows), putting pressure on Embraer.

The other advantage is that Bombardier can deliver aircraft in 2014, two to three years before availability of competing Boeing and Airbus aircraft.  With a 15% reduction in total operating costs over today’s aircraft, that represents substantial cash flow. Airbus and Boeing have full production lines with significant backlogs. While both are considering increasing production rates even higher than the 40-42 announced, and while both over-book their sales, there may also be sales driven to another producer simply because Airbus and Boeing can’t offer timely delivery positions.

There are some big opportunities beckoning for Bombardier.  First would be Delta, which has an RFP out and is currently evaluating responses, likely to be closely followed by RFPs at United and Southwest.   The two former airlines are, we understand, are favorably disposed to CSeries.  Southwest is a dark horse right now, but neither Airbus nor Boeing play effectively in the Boeing 717 space, giving Bombardier a potential opportunity should Southwest wish to replace the 717s it is acquiring with AirTran for something more efficient.

Bombardier has an interesting window of opportunity in which it can capitalize on its advantages. Airbus and Boeing are busy with their orders and developing their re-engine programs.  There is no Brazil offering yet.  China has nothing right now in this space and the Russo/Italian SuperJet has less momentum than CSeries.  Experience with new program delays at Airbus and Boeing have made airlines wary – the thinking is if these two messed up schedules, surely Bombardier will do the same.  But Bombardier seems to have learned from its competitors, it is currently on schedule, and its CSeries will be flying before anyone else’s planes, and it has production capacity to offer earlier deliveries.

There are several reasons the CSeries hasn’t been selling well to date:

  1. Market uncertainty – now clarified
  2. Customer skepticism – still not solved
  3. Highly competitive prices from Airbus and Boeing – not solved but solvable
  4. Show me the numbers – P&W recently become credible with its GTF, and Bombardier is just getting there with CS.  First flights and performance verification will go a long way in eliminating #2.

Airbus neo has built a market bubble, which Boeing will now try to match.  But bubbles burst, which the big guys can handle, but little guys can’t.  Bombardier doesn’t need 1,000 orders, just a couple hundred to be where it wants to be, and is likely to get them before the end of this year.

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