Premium #214 – What might a CSeries order from Delta mean for the industry?

The rumor mill is alive with reports that Bombardier is close to obtaining an order from Delta Air Lines for 75 firm plus 50 options for the CSeries. This would be a game changer for the CSeries program, which has struggled, and would provide the largest order for the new management team and their recovery strategy, which includes securing major orders from bellwether carriers in North America, Europe, and Asia to join Air Canada, Swiss and Korean, their current “name brand” customers. Of course, we’ve seen previously that once an order appears close, that’s a signal for “best and final” pricing from Airbus and Boeing, neither of whom want Bombardier to gain a market foothold, especially with a key customer of both OEMs. The pencils are, no doubt, being sharpened for an 11th hour offer, and Bombardier will need to ensure that it continues to lead in both the technical and economic evaluations. How low will Airbus and Boeing make Bombardier go to secure this order? The Impact on Bombardier If Delta indeed selects the CSeries, the program will instantly gain renewed credibility in the marketplace. A Delta order would confirm that the aircraft has excellent economics, and can pass muster with an airline that is notorious for picking up used rather than new aircraft, as it has done with the Boeing 717. To win new orders at Delta, the aircraft must be exceptionally cost-effective. An additional 125 commitments would bring the total to nearly 800 (assuming a Republic cancellation) and likely have a positive impact on both the company’s share price and the likelihood for further investment, perhaps from Ottawa. While far from securing long-term profitability for the program, an order from Delta would certainly change market momentum. This momentum would also solidify the company’s backlog, given that several current orders and commitments look shaky. Such a large order would easily counterbalance the threats of cancellation (which is likely for Republic, which is in bankruptcy) and secure production line slots for another year. While a success would bring a champagne toast in Montreal, pressure on Bombardier would not be removed. The company needs to secure several large orders to continue the momentum for the program. The sales team could take a one day breather, and be off to close the next deal. But a Delta order would indicate that the change in strategy introduced with the new management team is working, and provide momentum going into the Farnborough Air Show. In a year with few major order, this one would be significant. The Impact on Airbus and Boeing Airbus and Boeing have been trying to keep Bombardier from competing in their market (over 125 seats), and they consider the CS300 an intrusion into their market, as it competes with the A319neo and 737 MAX7. We’ve previously cited comments by John Leahy at Airbus and Ray Conner at Boeing where each indicated that they want to keep Bombardier out of the market and retain their traditional customers. A win by Bombardier would be an indication that there is a new player in the market with a seriously competitive product. While in the overall scheme of things, with more than 7,000 orders for re-engined models for the big duopoly, a mere 125 aircraft order shouldn’t mean much. But the CSeries, entering service in 2016, has much more updated technology than the 737, first introduced in 1967, and the A320 first introduced in 1988. Think about your car, and the difference in technology that has occurred over the same period. While Boeing and Airbus have made changes, there are limits compared to what can be done with a clean-sheet airplane. Significant changes mean Airbus and Boeing don't get to stay within the grandfather benefits of the original certification. And a clean-sheet airplane, like the CSeries is an excellent aircraft, which they want to keep out of the market. That’s why Boeing sold United 737-700 aircraft at 75% off lists price - to keep Bombardier out and fill the last few production slots as they transition from the NG to the MAX. The United deal demonstrates in money terms how much Boeing is prepared to pay to keep Bombardier out. There is another aspect to the threat Bombardier represents. That is the threat of growing the family of CSeries aircraft. Airbus and Boeing have observed Bombardier stretch the CRJ200 from 50 seats into a 70 seat CRJ 700, a 90 seat CRJ 900, and even a 100 seat CRJ1000. With the 130 seat CS300 as the base model, a 150 seat CS500, 170 seat CS700, and even 190 seat CS900 are not out of the question. And since Bombardier trademarked all three names, future stretch models would surprise no-one. The Potential CS500 We have confirmed with several individuals that Bombardier’s initial pitch to Delta in 2012 included discussion of a CS500, something Delta wanted but Bombardier felt too early to consider at the time. British Airways was another airline that asked about this. It is appropriate now to reconsider an additional model. The CS500, as we understand it, would be a 150 seat aircraft in 2 class configuration, and could accommodate 175 seats in single class configuration. This would place it squarely in competition with the A320neo and 737 MAX8 among narrow-body aircraft. How good might a CS500 be economically against the offerings from Airbus and Boeing? We believe it would be quite good. Our estimates are based on the impact of a four row stretch of the CS300, that would size up well against the competition from Airbus and Boeing, as shown in the table below: The CS500, a four-row stretch of the CS300, which is the baseline model of the CSeries (the CS100 is a shrink) should be relatively easy to accomplish. The wing is certainly strong enough to support the additional weight, and the development of a third model should require low development costs and minimal testing as a derivative of an existing model. After all Bombardier is only using two CS30s for certification compared to five CS100s. We think this would clearly place the CSeries in a strong competitive position with Airbus and Boeing with a three model aircraft family from 110 to 150 seats. Delta, for example, could retire its 149 seat MD-88s and also retire its old (ex Northwest) A150 seat A320s and replace these with one model. Such an outcome offers significant MRO and pilot benefits. Competitively, the CS500 would have equal seat-mile costs to the larger 737 MAX8, but lower aircraft mile costs. This would allow airlines to minimize risks with the smaller CS500 for many markets in which the 737 MAX8 is perceived as too large. The following chart depicts our projected CS500 economics against competitive aircraft. New technology aircraft are shown in green, re-engined in yellow, and current generation in red. The Bottom Line An order from Delta would put the CSeries on the map, and be a bellwether for other airlines to seriously consider it in future campaigns. This would be a major turn-around point for a program that has been short of good news and restore investor confidence in the company. It would also provide momentum to the new management team and validate their strategy in building the order book with sophisticated customers, with those less sophisticated to follow. This is a game-changer deal for Bombardier, and some nails are being chewed until the deal is finalized, signed and announced. While anything can happen at the 11th hour, things are looking up for Bombardier, with an announcement expected after the Delta board meeting on the 28th of this month.

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