Premium #178 – Selling the C Series |

A number of questions appeared after the Paris Air Show focused on where Bombardier should see sales for its C Series. The OEM says it is exploring a number of leads. Who are they and where are these opportunities? We don’t have any inside information on this. But looking at what the market, here is our best guess about where the opportunities are and who the targets are. In our analysis we focused on passenger aircraft that are “natural” targets: BAe 146/RJ, Airbus A318 & A319, Fokker 70 & 100, Douglas DC-9 & MD-80 and Boeing 737-500 and -600. Going through global fleet data we come up with the following charts. We excluded the parked aircraft from our market estimate. Together these two seat categories represent 2,466 active aircraft in passenger service. Clearly Bombardier will not win every campaign. Embraer will fight them tooth and nail for every sale. We do not see either Airbus or Boeing seriously competing in this range, with only a handful of orders for A319neo and 737MAX7. There are some industry analysts who doubt that those aircraft will be built, with the OEMs moving existing customers to larger models. Airbus A319neo customers include Avianca-Taca for 19 (out of 133 neos ordered), China Southern for four (out of 50 neos ordered), and Frontier for 18 (out of 80 neos ordered), with eight to an undisclosed customer for a total of 49. Boeing 737MAX7 customers include Southwest for 30 (out of 200 MAX ordered), WestJet for 25 (out of 65 MAX ordered) and Jetlines for five, for a total of 60. In looking at the replacement opportunity, where are these aircraft located? The answer might provide a guide to how the campaigns could play out. To try answer these questions we categorized our data to only look at active aircraft at the end of Q1 2015, and then segmented the fleets into those in the 100-110 seats (CS100) and then 111-150 (CS300) seats categories. Note the airlines listed do not necessarily include the fleets at feeder or allied airlines. Because of the MRO impacts, those fleets might or might not influence decisions at the mainline carrier. 100-120 Seat Category In the following table we list the top operators with at least ten aircraft in this category and they account for 61% of the total category. These operators account for 422 out of 668 aircraft with seats between 100 and 120. Up to arrival of the E-Jet and C Series, the small duopoly offered aircraft below 120 seats. The two columns titled Bombardier and Embraer signify if the operator utilizes either OEM in their current fleet. If an operator is green then it does, and we believe that OEM might have an advantage as the operator refreshes its fleet. Where both columns are red, neither OEM has a presence, and we believe any fleet refresh will be an open competition where neither has an advantage. The current category OEM information indicates which OEM is likely to be replaced. As the table below shows there are many “open” competitions coming. Bombardier appears to have some advantage over Embraer in that it has more presence among the major players in this category. But this is no guarantee of success since aircraft in this category will be different from those below the 100 seat category. 121-150 Seat Category In the bigger segment we also see a lot of red – which means many open competitions. The operators with fleets of more than 10 aircraft account for 72% of the fleet of aircraft in this segment. Airbus accounts for nearly 70% of the fleet. This means the potential switch away from Airbus is going to cause a lot of friction. Airbus has already been quite aggressive and every attempt has been made to stymie C Series sales. Unfortunately for Bombardier, most of those attempts have succeeded. Airbus has kept many customers in the fold by offering pricing Bombardier cannot match and then sweetened the deal by upgauging from A319 to A320. The poster boy for this strategy has been Airbus’ ability to keep EasyJet in the fold – taking 7% of the replacement market out of play. Bombardier is facing this aggressive competition now and Embraer will soon be facing the same aggression. Embraer will have the benefit of seeing what worked for Bombardier and what didn’t. In this case, the first mover may not have an advantage. The opportunities are dwindling though. For example, there are 568 McDonnell Douglas aircraft in this category that are being replaced. Of these 179 are at Delta and 132 are at American (55% of the total). In both cases the airlines are replacing these with Boeing and Airbus aircraft respectively. The moves by Delta and American mean a sizable chunk (16%) of the market may now be off the table. Bear in mind these are two of the most influential airlines Bombardier could want as customers. However both are also large buyers of regional aircraft and Bombardier (and Embraer) has had some success at both. The number of opportunities in this segment also underscore just how disruptive the new generation aircraft are going to be. There have been few MAX7 or A319neo orders. Not because the market doesn’t exist. But because operators are waiting to see what happens and if the new aircraft can actually deliver on promised performance. Airbus and Boeing are ramping up to swamp the market and drive operators to up-size. This strategy has worked well so far. But this has created massive backlogs – and operators that have been waiting to order new aircraft may be driven into the arms of Bombardier and Embraer to get earlier deliveries. Where are the operators? As Bombardier has stated, they are all over the world. Many are large but many more have smaller fleets. This suits Bombardier’s current strategy. But they have lost two years of advantage and this has kept many possible customers to hold back when they might have stepped up with orders. For the CS100 key targets are Avianca, SAS and Air France. These are marquee brands where success will encourage others to follow. But the TACA part of Avianca-TACA is an Airbus stronghold, and their Aeroman maintenance shop in El Salvador is fully certified and handles Airbus maintenance for United Airlines and others on an outsourced basis. It would be a difficult conversion from Airbus, moreover we suspect that a refresh is geographically and culturally Embraer’s to lose. SAS is possible, but likely to be acquired by Lufthansa Group in the future. Which means a refresh decision comes from Frankfurt. AirFrance-KLM is in a politically difficult position with Airbus, and while they need to replace A318s with something more efficient, they are French airplanes and a choice may be slowed. For the CS300 key customers are Delta and American. After this comes the various Lufthansa family carriers. Swiss has already stepped up and barring any fumbles or problems, could put Bombardier into a good position. The big US carriers will be a challenge – especially Delta because it likes cheap aircraft and will likely continue to seek out low capital cost options rather than consider the CS300. American has started to renew its fleet and seems focused on Airbus and Boeing. Delta likes them old and cheap – Bombardier should have won there already but pricing snafus meant losing to the 717s that AirTran was getting rid of when it merged with Southwest. Delta has now taken E-190s (ex Air Canada) so that Embraer has an advantage going forward. What are likely hot buttons for these operators? The first issue will always be cost and price – how low can Bombardier go in capital terms (at ISTAT we heard they should be at $36m compared with a list of $72m) and then what can they offer by way of lower operating costs over current aircraft. The low price of fuel does not help the case for new generation aircraft among US carriers. But in Europe, green issues are important and taxed. There the C Series is compelling. Its quiet operation is also a big plus. In conclusion, we fall back on what Steven Udvar-Hazy said at ISTAT Americas: Bombardier needs to sell to marquee airlines. We know who these are from the tables above. Can the sales team match what the market wants? They really don’t have any option, they must discount aggressively. They must also face the Airbus challenge with better arguments that prove their aircraft is less risky than upgauging. Because, after all, this is a cyclical business. Oil prices will rise again. And as the Bombardier sales team knows only too well, Embraer is working on its E2 diligently for EIS in 2018. The Bottom Line Missed opportunities early in the CSeries program may have limited the potential market penetration for the CSeries in the near term. While the aircraft is technically excellent, and performing better than planned, market opportunities remain a competitive challenge.

US Flight Planner	Airbus vs Boeing
US Airline Schedule Performance	Daily Production & Deliveries

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