Premium #150 – A sense of quiet confidence at Mirabel

Last week we visited Bombardier's Mirabel facility. In this newsletter, we will share our views on what we observed, and what it means for the CSeries program and Bombardier Commercial Aircraft. The CSeries program has encountered a few delays, as Bombardier has faced the same challenges that Airbus (A380) and Boeing (787) endured as they developed new aircraft unlike any previous models. New-technology aircraft programs are complex, testing people, engineering, and certification processes. But like its competitors, Bombardier appears to now be meeting those challenges and while the airplane will be late, it appears quite attractive. In the remainder of this post we’ll summarize the key points from our visit. Bombardier is an organization with a corporate culture that likes to keep thing close to its vest. However, despite the corporate culture, we ended up having discussions that seemed more open than we had previously experienced. Perhaps this is a reflection of a growing confidence that the CSeries program that has overcome major challenges, and that things now appear to be moving forward toward certification and an on-time EIS in late 2015. With improved sales of the CRJ and Q400, the immediate pressure to increase their backlog has also abated to a slight degree. CSeries The CSeries program remains the key topic for discussion at Bombardier, and rightly so. The sheer scope of the program and the impact on Bombardier financially is immense, overwhelming everything else in commercial aerospace. The predictable big technical items that face any new aircraft program, and that were overhanging the program on our last visit, have now been completed. The pressure on the technical team appears to be winding down, while pressure on the sales team will be ramping up as the aircraft nears EIS. Fortunately, the sales team is closer than ever to being able to demonstrate the promise of the CSeries. In a sense of relief that Airbus and Boeing sales teams will vividly recall, sales campaigns become more focused when there's a real airplane to show and demonstrate. The CSeries is a tantalizing program that has proven disruptive to the industry – engendering three re-engining programs. Airlines and lessors we have spoken with all believe the aircraft will be a technical success. The key question is whether the Bombardier sales team is up to the challenge? To date sales for the aircraft have been slower than desired. A Challenge for Marketing and Sales In the recent reorganization, there have been some major personnel changes in the sales and marketing functions at Bombardier. As a result, the frequency and intensity of communications is just now returning to prior levels, as the new players take over relationships developed by those who have departed. This takes time, and the dust is still settling from the reorganization. One explanation for slow sales is that airlines have recently been burned by placing early orders and deposits for new technology aircraft, in particular the A380 and 787. The logic in the minds of potential customers is that if Airbus and Boeing stumbled with new program development, Bombardier was going to do so as well. And indeed they did, falling about two years behind schedule. Even so, the CSeries has seen more sales in its category than directly competing aircraft from Airbus and Boeing combined. From what we can discern, we believe that there is likely to be a stronger and more positive market reaction to the aircraft after the 1Q15 when aircraft performance data are announced. Technical Progress and Performance Bombardier is expected to announce the performance results, including fuel burn, climb, take-off and landing performance, and range from data gathered from FTV4, which is being used to prove performance and economics. Program VP Rob Dewar was uncharacteristically effusive and confident when we asked about this. His confidence is supported by feedback we have from Pratt & Whitney. We would not be surprised if when performance data is released, the fuel burn numbers are 1-2% better than promised. We asked why Airbus has an “advanced” version of the GTF for the A320neo from 2019 that offers an additional 2% improvement. Rob Dewar indicated that we should not believe that the CSeries GTF is lacking in any way. While he would not share any numbers, when pressed he indicated that when he shares the data with customers early next year that he would be doing so "with a big smile". He reminded us that the CSeries and GTF combination was optimized from the start. The growth potential of the CSeries, including introducing a higher gear ratio, provides a lot of room for future engine improvements. Overall, there appears to be more confidence in the program than we have seen before. For example, the decision to push CS300 first flight to January will not delay the program. The initial plan was to have an inaugural flight with the existing software, but then return to the hangar for a software upgrade and not fly for a week, similar to what happened with the initial CS100 that caused concern among some industry observers. Instead, the team has decided to upgrade its software to the latest version now and then do the first flight when the full team is working after the holiday. Rob Dewar pointed out that many on the team, including him, have not really had a Christmas holiday in recent years. We know that nobody takes any vacation when there are substantial problems. However, since the team will take some time off, the implication is that there is confidence that the program is progressing well to the latest schedule. The certification process continues at Bombardier. The picture below is of the CS100 aircraft preparing to be used for evacuation tests. You might notice that all of the windows are covered in the photo. Typically for evacuation testing, an aircraft is packed to the maximum number of seats possible, which is what the test will determine – how quickly can everyone on board leave an aircraft, and what the maximum capacity is. As with most evacuation test aircraft, interiors are jammed with seats in higher densities than airlines would use normally nor its passengers endure – typically worse than a Ryanair configuration. Virtually every commercial airplane has a higher “exit limit,” determined by these tests, than normal seating configuration, which is 125 for the CS100 aircraft in a high-density layout. Rob provided us statistics that make us feel more confident about the program meeting its current schedule: The flight test program has now flown more than 660 hours – they are more than a quarter of the way through the estimated 2,400 hours to obtain certification. Earned credits are higher than actual flight hours because many tests did not require a “second go around.” Test programs build in extra hours in case a test needs to be repeated. It turns out that many of the tests passed the first time through, reducing the overall number of hours required. The flight test program has reached the neck of the hockey stick. Last month the program recorded the most test flight hours to date. The flight test program also achieved a company record with all four FTVs flying, totaling more than 17 hours in one day. The fly-by-wire software is maturing, and is currently at version four of six planned iterations. The test aircraft have experienced no delays or interruptions since all aircraft have been modified to use version four of that software. The team used the engine delay to update the fleet software using the CIASTA ground testing system, and as a result the flight test aircraft were modified from version #2 directly to version #4, without the need for the third revision. Typically it takes about a week of tests to validate the software is working when installed in an aircraft before it can fly again, as this software directly impacts safety of flight. Confidence in the aircraft appears to be growing rapidly. Flight crews are pleased with the aircraft handling and performance, and there are no significant items causing any concerns. Wing tests have performed better than expected, and the wing strength test designed to break the wing has absorbed more than 5,000 pounds additional weight than initially anticipated and not yet broken. While testing continues, the pressure is now off. Economics – no data will be available until 1Q15. But Bombardier seems very confident. FTV4 is economics test vehicle. It is currently reportedly performing better than initially expected. This is backed up by what we have heard at Pratt & Whitney, who make the GTF engine. Although officially Airbus and Pratt & Whitney say the neo is first to get 2% GTF “advanced” fuel burn improvement, Bombardier will obtain some additional benefits with software updates. Because engine and aircraft are optimized for each other as opposed to a re-engine of an aircraft designed with another engine, the CSeries aerodynamic integration is better than its re-engined competitors. We believe CS will still have a better than 5% advantage over A319neo in operating economics. Company tests now appear to be on or ahead of schedule. Cabin evacuation is up next. Critical tests for flutter, wing strength, and software are complete or past the point of any unexpected showstopper. Normal fly-by-wire mode is now the routine for all flights. Though Bombardier won’t name the launch customer, they are confident of 4Q15 delivery and EIS. Even though Bombardier is currently in a financial disagreement with Alenia, parts for the aircraft are coming in on schedule. Quality of the parts being received is not an issue. The production ramp-up starts in January, but no further details were provided during our visit. Aircraft Production and the New Facility We were able to visit the new production facility in Mirabel and see the new production lines for CSeries. The facilities are impressive, and incorporate high technology that should help improve productivity. The production factory floor is highly automated, including robotics. The first fuselage is going to be moved in the area shown below in January for wing join. The empennage is already in the storage area to the back of the scene in this image. There are two production lines on this floor. The devices on the floor descend below the floor when fuselages are moved into place and then rise underneath to hold the airframe and other components for wing join and assembly activities. Here we see fuselage #7 in assembly during shift change. The hull to the left is a CS300 (two over wing exits). On the right is #7 now in fuselage join and called a cigar. Both these fuselages are production models. #7 will be lifted and moved forward next month and robots will place it on frames that rise from below the floor. Lasers will then ensure the fuselage is placed with great accuracy. This ensures minimal use of shims and much tighter fit. Airbus is using similar technologies with lasers on the A350. The Bottom Line It appears that Bombardier has turned the corner with the technical aspects of the CSeries program. Key players who earlier this year looked beleaguered now appear smiling and confident. The question now is whether the market will develop for Bombardier, and if they can withstand the price competition from Airbus and Boeing, who are offering their larger models (which can compete on a seat-mile economics, but not aircraft mile economics) against smaller CSeries models. There have been few sales in the 130 seat class, as A319neo and 7MAX are not selling well at all – to the point that there is some question if either will be built, leaving the 130 seat market to the CS300 and E2-195. Nonetheless, sales in the 100-150 seats segment have not been lighting the world on fire. We believe Bombardier will meet its goal of 300 firm orders by EIS, and could easily do so if existing options and purchase rights, which exceed 500, are executed. The question is whether sales momentum can be built prior to EIS, and whether market confidence in the aircraft can be quickly established to increase the customer base. 2015 is a critical year for the new marketing team at Bombardier.

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