Bombardier’s Big Gamble

Its new CSeries jet could launch it into the big leagues, or flop

Bombardier’s Big GambleUPDATE: Bombardier has reached a deal to sell 40 of its yet-to-be-built CSeries aircraft with Indianapolis-based Republic Airways Holdings, which operates six regional carriers in the United States. The deal, valued at little over US$3 billion, is Bombardier’s first in North America for the fuel efficient 110- to 130-seat family of aircraft. It includes options for Republic to double the size of the order down the road.  Some observers have expressed concern about a lack of orders for the $3.4 billion CSeries project amid tough times for the airline industry. Prior to inking the agreement with Republic, Bombardier had firm orders for just 50 of the planes despite officially launching the program last summer.  The CSeries is larger than Bombardier’s current line of regional jets and will compete head-to-head with smaller aircraft built by industry heavyweights Boeing and Airbus, a first for Bombardier. The first CSeries aircraft are scheduled to roll off the assembly line in Montreal in 2013.

Gary Scott has, fittingly, spent a lot of time among the clouds lately. The head of commercial aviation for Bombardier is just back from Europe to pitch the plane-maker’s new CSeries aircraft, a state-of-the-art jet that, once it rolls off the production line in 2013, would put Bombardier in direct competition with giants Boeing and Airbus for the first time in its history. Next, he is off to visit a potential customer on this side of the Atlantic. Then he wings his way to Singapore, where he was scheduled to meet with dozens of airlines and aircraft leasing companies at a six-day air show.

The globe-trotting is part of the full court press that Bombardier is putting on some 150 potential customers who have expressed interest in its US$3.4-billion CSeries project, a 110- to 130-seat family of aircraft that targets what executives believe is an underserved market. An idea first hatched six years ago, the CSeries will be bigger than Bombardier’s existing regional jets, which top out at around 100 seats, but would be distinguished from the smallest versions of Boeing’s 737 family and Airbus’s A320 family by more fuel-efficient engines, state-of-the-art technology and lightweight composite components.

So far, though, Bombardier has notched just two orders, with firm commitments for a meagre 50 planes (Germany’s Lufthansa has ordered 30, and a leasing company 20). And it backed away from a prediction that it would announce a third order before the end of the company’s fiscal year on Jan. 31. “We are in advanced state of discussions with some customers, but the timing of final contracts and orders is always difficult to predict, particularly in these difficult times,” says Scott. “I do anticipate an order coming from these discussions in the first half of the year.”

Maybe so, but some observers are beginning to wonder if Bombardier overestimated the appetite of the world’s cash-strapped airlines for an all-new aircraft. At the same time, there is growing evidence that Boeing and Airbus don’t intend to simply let Bombardier walk in and steal long-time customers. The stakes are potentially huge. It’s estimated that two-thirds of the 29,000 planes that are expected to be sold over the next two decades will be single-aisle aircraft with less than 180 seats. Of those, roughly 6,300 fall into the category that Bombardier is targeting, representing US$360 billion in sales.

If the gamble pays off, Scott estimates the company could grab about half of those orders, launching Bombardier squarely into the big leagues of aircraft manufacturing, helping to reverse a decade of investor disappointment. Critics, on the other hand, say they are concerned that the CSeries, a project that has already been shelved once because of lack of interest, could end up being little more than a white elephant for Bombardier, albeit one with wings.

The sales pitch for the CSeries is an attractive one—at least on paper. The 110-seat and 130-seat versions will range in price from about US$50 million to US$55 million—in the same range as similar-sized Boeing and Airbus planes—but promise to be 15 per cent cheaper for airlines to operate, using 20 per cent less fuel. It’s a powerful argument in an industry that just two years ago was thrown into a tailspin after oil hit a high of US$147 per barrel, and is still reeling from the impact of the economic downturn.

Part of the savings come from the plane’s engines, built by Pratt & Whitney. They use a gear system to allow the outer rotating fans to turn slower than the turbines inside the engine that produce the actual thrust. That translates into less fuel burn without a corresponding loss in power. At the same time, the CSeries’ wings and tail section are being made of lighter composite materials, which also help to reduce fuel consumption. It all comes wrapped in an eye-catching package that includes a state-of-the-art cockpit with giant LCD displays, big cabin windows, and roomy overhead baggage compartments.

By contrast, the planes Boeing and Airbus are currently selling with a similar number of seats are essentially shrunken versions of larger aircraft. According to Bombardier, scaled-down aircraft tend to be less efficient—not unlike hacking the back third off an SUV and expecting the same ownership costs that come with a small car. Boeing and Airbus could conceivably respond by overhauling their smallest planes to make them more competitive with the CSeries, but the reality is that any “clean sheet” redesign is at least a decade away since both manufacturers are currently focused on much bigger—and more profitable—aircraft, including Boeing’s oft-delayed 787 Dreamliner program.

SELLING POINTS include big windows and storage space“There’s a window in the market for Bombardier,” says David Newman, an analyst at National Bank Financial, adding that, with any luck, the CSeries will hit the market in 2013 just in time for an economic turnaround. That, in turn, could prompt several major airlines to pull the trigger on overdue updates of their aging fleets. United Airlines, for example, recently expressed interest in the CSeries as a replacement for some of its 94 Boeing 737s that were recently retired. Meanwhile, Asia’s fast-growing airline market also represents fertile ground, which is among the reasons Bombardier elected to have the CSeries fuselage built by a Chinese aerospace company.

That’s the optimistic view. The other is that Boeing and Airbus move quickly to protect their market share. Both companies are said to be considering putting new engines— possibly similar geared turbofans—on their existing aircraft in order to offer better fuel efficiency. It’s not a perfect solution, since the planes aren’t optimized for the engines, but analysts say it could be enough to dull the appeal of the CSeries for a lot of airlines—particularly those who already fly other Boeing and Airbus models and would be able to save on maintenance and pilot training costs by sticking with a single manufacturer.

For its part, Bombardier is downplaying the competitive threats. Scott, a former Boeing executive, says that putting new engines on existing planes isn’t easy and would only achieve about half of the CSeries’ cost advantages anyway. But others aren’t as confident. “The bulk of this program is about this engine, and if the other guys get this engine, it’s going to make Bombardier’s life difficult,” says Richard Aboulafia, the vice-president of analysis at Teal Group, a U.S. aerospace consulting company. “What I’ve always said about the CSeries business plan is that it depends on the other guys lying quietly asleep.”

Wanted or not, the CSeries is inching its way closer to production. At Montreal’s Mirabel Airport, a testing facility for the plane is being erected and will eventually become part of an 860,000-sq.-foot complex of buildings, about the size of 15 football fields, where the plane’s final assembly will be done. Meanwhile, a Bombardier plant in Ireland is gearing up to begin testing of the CSeries’ carbon fibre wings, and, last summer, Bombardier received a sample fuselage from Chinese partner Shenyang Aircraft.

It may seem risky to forge ahead with so few orders on the books, but it’s not like the entire $3.4-billion investment is riding solely on Bombardier’s shoulders. The company is only putting up about a third of the cash. The rest is coming from suppliers and taxpayers in the form of government loans. That includes a $350-million loan from Ottawa, another $118 million from Quebec and about $220 million from various levels of government in the United Kingdom. Ottawa, like foreign governments, also provides export credit to potential customers by guaranteeing bank loans of foreign airline buyers, although the precise terms of the guarantees are being challenged by Boeing and Airbus.

Such public support has long provided fodder for critics of Bombardier. But McGill University business professor Karl Moore argues that subsidies are par for the course in the aerospace industry. “If you want to play in the game with the big boys, you’re going to need government support,” he says. “Now, the question is to what degree, and should we as taxpayers accept this is a good thing to do? Personally, I think Bombardier is one of our great Canadian companies and creates a lot of jobs for Canada.”

Of course, that doesn’t necessarily mean that the CSeries is a wise way to invest taxpayer money, even if it has already contributed to the creation of some 1,300 jobs (although they have been offset by Bombardier’s layoffs in its regional jet and corporate jet divisions, which have seen sales fall during the downturn). Aboulafia says Bombardier is under pressure from investors after it essentially “won the aerospace lottery” years ago by focusing on regional jets and corporate jets just as the market for both took off. “So what do you do for an encore after you’ve won the lottery? Well, you start going into a much bigger market and a much riskier market, and one that requires a lot more cash and basically enlists government as a partner,” he says. He predicts the plane will ultimately end up being an expensive niche product. “It’s a helluva gamble.”

Scott is the first to admit the CSeries is a “very big step” for Bombardier. But he says it’s also a logical one, given the company’s experience and the opportunity for big rewards down the road. “All of these programs have their challenges and we will have ours, but I think we’ve factored all of that into our risk mitigation plans. The company would never put itself at risk for the sake of one program.” He added that Bombardier has always been driven by innovation—it started out by building snowmobiles, after all—and that it is better positioned than Boeing and Airbus to build smaller planes because aerospace, like many businesses, is easier to scale up than down. But while the CSeries may be a no-brainer for Bombardier, the challenge remains convincing airlines that it makes sense for them, too.

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