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4-Traders Homepage  >  Equities  >  Euronext Paris  >  Airbus SE    AIR   NL0000235190

AIRBUS SE (AIR)
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Delay on Bombardier's new jet heightens price pressure

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11/10/2012 | 04:53pm CET
Scale model of a CS100 Bombardier airplane is displayed in Montreal

TORONTO/VANCOUVER (Reuters) - Bombardier Inc's (>> Bombardier, Inc.) decision this week to delay the maiden flight of its new C-Series jetliner raised questions about the company's ability to deliver the jet on time - and the amount it may have to discount the price to boost sales.

TORONTO/VANCOUVER (Reuters) - Bombardier Inc's (>> Bombardier, Inc.) decision this week to delay the maiden flight of its new C-Series jetliner raised questions about the company's ability to deliver the jet on time - and the amount it may have to discount the price to boost sales.

Tripped up by supplier delays, Bombardier pushed back the inaugural flight by six months, a blow that adds to a host of challenges the world's No. 3 planemaker faces in cracking the narrow body jetliner market dominated by Boeing Co (>> The Boeing Company) and Airbus (>> EADS).

The C-Series promised market-beating performance when it was launched a few years ago, due to new engine technology and a lighter airframe. But Boeing and Airbus have since launched similarly advanced planes based on their best-selling 737 and A320 models, eclipsing much of Bombardier's advantage.

The Montreal-based plane and train maker had hoped the C-Series would spark sales growth at its commercial plane unit, compensating for sputtering demand for its small regional jets and corporate Learjets.

Bombardier is very confident in its revised timetable, company spokeswoman Marianella de la Barrera said.

But with delay concerns hanging over its biggest jet yet, Bombardier faces an even tougher sales job, analysts say.

To overcome airlines' reluctance to place firm orders for an unproven aircraft that could be delivered late, Bombardier will have to offer bigger discounts, financing, residual value guarantees and walk-away rights, said aerospace analyst Richard Aboulafia, of Virginia-based Teal Group.

"The cost of developing a jet is just the start," Aboulafia said. "Now that they're in, they need to put an awful lot more on the table."

Without those incentives, "They brought a creme brulee torch to a flame thrower fight," he said.

WON'T "GIVE AWAY" PLANES

Bombardier's jet already is significantly less expensive than comparable Boeing and Airbus planes. At list prices, the 110-seat CS100 costs $62 million. The 130-seat CS300 costs $71 million. In contrast, the Boeing 737 MAX 7 costs $82 million and Airbus's A319 NEO costs $88.8 at list prices.

Bombardier Chief Executive Pierre Beaudoin has been adamant that he will not "give away" the plane to ensure a fat order book, and says the company has a "good level of orders." In addition to the 138 firm orders, Bombardier also has options or letters of intent for another 214 jets.

By comparison, Boeing's 737 MAX has 938 firm orders, and Airbus' NEO family has 1449, though only a small fraction of those orders are for the smaller models that compete directly with the C-Series.

"What I said before, and I remain firm, is we don't need to go and give prices that we will regret when we deliver the airplane," Beaudoin said on a conference call this week.

"This is a good airplane, with a huge competitive advantage and we can get the value for it, so I remain firm on that."

Still, the plane's order flow has slowed. In 2009, the jetliner drew 50 orders, followed by 40 in 2010 and 43 in 2011. This year, just five orders have come in.

The industry has been watching Bombardier pricing closely since it snatched a provisional order for 20 planes for AirBaltic in June. That order had been widely seen as all but certain to go to Airbus. Industry experts say Bombardier has been more aggressive with pricing since the summer.

Earlier this year, Steven Udvar-Hazy, CEO of Air Lease Corp (>> Air Lease Corp), said Bombardier needed to make "some sacrifices short term for the long-term benefit of the program."

"I think they really need to be aggressive. ... Without that, the program is not going to get the <momentum> it needs to be competitive with Boeing and Airbus."

Some say all the C-Series needs is one order from a big airline, and that it should go for it at any cost.

"I think they need to identify a blue-chip customer, like a Delta (>> Delta Air Lines, Inc.), and really go ahead and cut an aggressive deal," said Scott Hamilton, managing director of aviation consulting company Leeham Co.

DELIVERY SCHEDULE IN QUESTION

The next test for Bombardier's pricing will come between the first flight, now set for the end of June 2013, and the start of commercial service a year later, said Robert Kokonis, managing director of Toronto-based airline consultancy AirTrav Inc.

The company has said it wants to have 300 firm orders when the jet enters service.

"If not much happens between (first flight) and the first customer delivery, the sales force would have to get more aggressive," he said.

Some also question whether Bombardier has the financial strength to offer the kind of incentives needed to book more sales. And if the first flight is delayed again, analysts are concerned that Bombardier may lack the resources to keep shouldering the large, expensive project.

"At that point in time, I think people will start having major considerations about cash flow issues. People will look at what's going to happen to Bombardier. How will they sustain $2 billion of spend year after year after year?" said Stonecap Securities analyst Scott Rattee.

Blaming a sluggish economic recovery, Bombardier said this week that cash flow from its aerospace operations won't be enough to fund its $2 billion worth spending, and it will dip into company cash resources for $500 million. The company has about $3.5 billion in short-term capital available.

SURVEY SHOWS BUYERS LIMITED

The C-Series aims to deliver 20 percent fuel-burn savings and 15 percent lower operating costs than current jets, savings that airlines appreciate amid rising fuel costs.

Yet even if the jet performs as promised, arrives on time and carries a bargain price tag it faces other hurdles in taking on Boeing and Airbus that are based on well-known planes.

Airlines are keen to maintain a common fleet to keep a cap on parts and maintenance costs and have pilots certify for and fly the same type of aircraft, said Byron Capital analyst Tom Astle.

A survey of 26 airlines last year found that most were keen on the plane's savings, but just 7 percent said they were likely to place an order in the next five years, said Walter Spracklin, an analyst at RBC Capital Markets who conducted the poll.

"The No. 1 factor holding people back was not price: it was the fleet commonality. There is an expense to an airline introducing a new aircraft in their fleet," Spracklin said.

With its deadline extended, Bombardier is working seven days a week to get the jet finished.

The schedule is extremely ambitious, with little room for error. If the CS100 jet flies in June 2013, as planned, with entry into service by mid-2014, that will be record time.

"I've never seen another company do it in much less than two years," said Astle.

(Reporting by Susan Taylor and Nicole Mordant; Editing by Alwyn Scott and Richard Chang)

By Susan Taylor and Nicole Mordant

Stocks mentioned in the article
ChangeLast1st jan.
AIR LEASE CORP 1.01% 46.17 Delayed Quote.-4.95%
AIRBUS SE 0.61% 98.12 Real-time Quote.18.22%
BOEING COMPANY (THE) 0.21% 356.66 Delayed Quote.20.69%
BOMBARDIER, INC. 1.53% 3.98 End-of-day quote.31.79%
DELTA AIR LINES 1.73% 53.46 Delayed Quote.-6.16%
EMBRAER 0.00% 22.6 End-of-day quote.11.45%
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Financials (€)
Sales 2018 69 256 M
EBIT 2018 5 115 M
Net income 2018 3 553 M
Finance 2018 10 588 M
Yield 2018 1,82%
P/E ratio 2018 21,71
P/E ratio 2019 17,21
EV / Sales 2018 0,94x
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Denis Ranque Non-Executive Chairman
Fabrice Brégier COO & President-Airbus Commercial Aircraft
Harald Wilhelm Chief Financial Officer
Luc Hennekens Chief Information Officer
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