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Bombardier in 2014: looks to be a big year for both CSeries and Q-Series

Bombardier’s 2014 is about two aircraft programmes, one all new and one that is 31-years old this year.

The company’s new CSeries narrowbody, delayed again at the beginning of 2014, will be the main focus of airline, investor and media investor attention.

However, the Q-Series turboprop has the potential to be Bombardier’s most important aircraft programme this year, with a major deal brewing in Russia.

For Bombardier, 2013 was solid rather than spectacular

Bombardier ended 2013 in reasonable shape, but the year was solid rather than spectacular for its commercial aircraft segment, in terms of orders and deliveries. While Airbus, Boeing and Embraer were having record or near-record years for orders and deliveries, Bombardier Aerospace president and chief operating officer Guy Hachey noted 2013 “continued to be a challenging year for aviation.”

Bombardier logged a total of 81 orders for its commercial aircraft programmes in 2013, 34 of which were for the CSeries. This was down notably from the company’s total of 138 orders in 2012. The company delivered 55 commercial aircraft, up 10% from deliveries in 2012 and in line with the company’s guidance at the beginning of the year.

Bombardier orders and deliveries for 2013

Aircraft

Orders

Deliveries

Q-Series

17

29

CRJ Series

30

26

CSeries

34

0

Bombardier booked 30 orders for the CRJ series of regional jet and 17 for the Q400 turboprop in 2013. It delivered 26 CRJs and 29 Q-Series turboprops. While orders outweighed deliveries in 2013 – with Bombardier Commercial Aircraft logging a book-to-bill ratio of 1.5 to 1 – the firm order backlog for the Q400 turboprop remains worryingly slim. Over the last three months of 2013, the Q400 firm order backlog dropped by six, to just 26 aircraft, representing approximately 12 months of production at current rates.

Bombardier firm order backlogs as of 30-Sep-2013

Meanwhile, the backlogs for the company’s CRJ and CSeries programmes have climbed. As of the end of 2013, the CRJ backlog was 111 aircraft –around four years production – while the CSeries had reached 182 orders. A number of fresh CSeries orders over the first two months of 2014 have seen the backlog hit 201, around 100 aircraft short of Bombardier's order target before the aircraft enters service.

2014: To be the year of the Q-Series

The Q400 has been one of the mainstays of the regional turboprop market, but competing ATR products have dominated turboprop sales over the past few years. Since 2008 – the first full year of sales since ATR announced the launch of the ‘-600’ series aircraft – the European manufacturer has outsold Bombardier in the turboprop market by better than 2 to 1, leaving Bombardier with a shrinking turboprop order backlog.

Bombardier Q-Series and ATR firm orders: 2008-2013

However, a major change is in the works. Bombardier is on the verge of a major deal in Russia, that would secure the future of its Q400 series turboprop. At the Aug-2013 MAKS Airshow, the company made a number of tentative agreements with the Russian state technology corporation Rostekhnologii (Russian Technologies) and leasing companies to develop a Q400 assembly line in Russia. The company also initialled a series of preliminary agreements for up to 100 Q400s which would sweeten the deal.

These order agreements include the sale of 50 Q400s to Ilyushin Finance Co, as well as a market development agreement with Avia Capital Services – Russian Technologies’ leasing subsidiary – to place at least 50 additional Q400s in the Russia/CIS region. A firm order contract for 100 Q400s would be valued at approximately USD3.39 billion, at list price, although large orders are typically accompanied by substantial discounts.

Securing local production in Russia would be a “landmark opportunity for the Q400 NextGen aircraft program” according to Bombardier. A local production facility in Russia, along with the boost to orders, would set-up Bombardier in the region for at least a five year period, and probably substantially longer. Russian Technologies forecasts around 250-270 Q400s will be operating in Russia by 2030, indicating a strong market in Russia and the CIS for the Q400. For its part, Bombardier is forecasting 144% growth in demand for 60 to 99 seat turboprops in the Russia/CIS region over the next five years.

A move to localise Q400 production could potentially lock-out ATR as a rival in the Russian/CIS market, unless it pursued a similar strategy. At the end of 2013, the Russian Ministry of Industry withdrew proposals to abolish Russian customs duty on imports of aircraft with up to 72 seats. The decision was reversed reportedly at the urging of Russian Technologies, to ensure that the Q400 production agreement goes ahead.

Bombardier and Russian Technologies are now in the validation process for a Q400 final assembly line in Russia, to be managed through a JV arrangement. Approximately USD100 million would be invested in the project, half on infrastructure and the reminder on personnel and training. Capacity for the facility will reportedly be around 24 aircraft per year.

Russia Technologies managing director Alexei Fedorov said in late Jan-2014 that production of the Bombardier Q400 in Russia would commence before the end of 2015, with the assembly line to be built at Ulyanovsk Port Special Economic Zone. According to Mr Fedorov, construction of the new facility is reportedly due to commence in Aug-2014 although Bombardier has only confirmed that discussions with Rostec are “ongoing” and both sides are “working toward the conclusion of a definitive agreement and things are going very well”.

Bombardier maintains that establishing an assembly line in Russia will be “incremental” to Q400 production and will not impact manufacturing in Canada. Toronto-area production would remain “the primary home” for Q400 output, but with a minimal backlog and orders few and far between, the facility is operating well below capacity.

To help demand in the rest of the world, at the start of 2014 Bombardier revealed plans to increase the seating capacity of the Q400 to 86 seats, trading cargo space for up to six extra seats. Nok Air has announced its order for two aircraft, placed at the Dubai Airshow, will be delivered in the new configuration, serving as the launch customer for the new option.

Bombardier's CSeries reaches 200 orders, testing extended to ensure flawless entry into service

Bombardier celebrated passing 200 firm orders for the CSeries at the Singapore Airshow in Feb-2014, with orders for three additional aircraft from an unidentified existing customer. Reaching the 200 order milestone adds to the credibility of both Bombardier and the CSeries, but there is still plenty of work for the company if it is to meet its goal of achieving 300 firm orders from 20 to 30 customers by the time the aircraft enters service.

Bombardier still has another 20 purchase rights that have yet to be exercised and is in the midst of a number of sales campaigns. Air Arabia and Lion Air have both expressed interest in the aircraft, and Bombardier is confident of sales success in China and sees opportunities in India.

In Dec-2013, Bombardier named Raymond Jones as the head of sales for Bombardier Commercial Aircraft, replacing Chet Fuller, who departed the company at the end of the year to “pursue other career opportunities” after three years in the position. Mr Jones was previously a senior sales executive at Bombardier Business Aircraft, having considerable success selling Bombardier’s business and executive aircraft. A new approach and new leadership may be just the impetus that the CSeries needs.

Bombardier announced in mid-Jan-2014 that it was delaying the entry into service for the initial CS100 by six to nine months, from late 2014 to 2H2015. This is to be followed by the CS300 aircraft’s entry-into-service, approximately six months afterwards.

The test flight programme extension decision was taken fully five months into the programme. Bombardier had not been making rapid progress with the programme, due to a combination of issues and exceptionally poor North American winter weather. When the delay announcement was made, no more than 250 hours of the planned 2,400 test flight hours had been completed. The second CSeries test aircraft only joined the programme in early Jan-2014 and the third test aircraft has not yet taken flight as of mid-Feb-2014.

While no specific problems have been reported, Bombardier attributed the delay to a lack of “overall software and system maturity” according to Bombardier spokesman, Mark Duchesne. According to Bombardier Commercial Aircraft president Mike Arcamone, the test flight programme has revealed no need for any major design changes and this gives the company “confidence that we will meet our performance targets.”

Software problems have been something of a recurring problem for Bombardier. In 2009, the company’s CRJ1000 test flight programme was temporarily suspended and service entry delayed by around nine months due to software problems with the rudder control-by-wire system. Bombardier also delayed the initial flight of the CSeries in 2013 by about four months, citing software maturity issues.

Bombardier is concentrating on “taking the required time to ensure a flawless entry-into-service”, obviously mindful of the troubled entry into service that Boeing has suffered through with the 787. Mr Duchesne said that Bombardier needs “every piece of equipment, every [bit of] software to be aligned with each other so that the aircraft, when it enters service, is flawless”.

The issues with lengthening the test programme and deferring deliveries are increased costs and deferred revenues. Bombardier announced earlier in Feb-2014 that it has revised the expenditure estimate for the CSeries programme from USD3.4 billion to USD4.35 billion, due to an extra USD750 million in tooling costs and development expenses and another USD300 million in interest and borrowing. Bombardier president and CEO Pierre Beaudoin said his outlook for the CSeries programme is still optimistic, and the company “feel[s] very good” about the business case for the aircraft. Forecast revenues for the CSeries aircraft programme are USD5 billion to USD8 billion p/a, once the programme reaches maturity. Mr Beaudoin has dismissed any suggestion that Bombardier would need to issue debt or equity to complete to programme, however its aerospace business is already looking for ways to cut spending.

In Jan-2014, the company cut 1,700 jobs at Bombardier Aerospace – about 4% of the unit’s workforce – related to cost containment efforts. In a memo to staff, Bombardier warned that it requires tighter spending controls to ensure that it can "consistently meet our budget throughout 2014". These cuts had been planned since 2012, but the timing, on the heels of CSeries programme delays, was unfortunate.

2014: Time for Bombardier to deliver

Bombardier entered this year with announcements about programme delays and job cuts. Like the other aerospace manufacturers, Bombardier is doing its best to minimise costs and ensure lean production.

However, the signs are that 2014 could end up being a very strong year for the Canadian manufacturer. The company needs the CSeries test programme to run smoothly this year, to show that the aircraft will be ready for customers when it enters service in 2015. Once the aircraft is certified, Bombardier will be ready to deliver the aircraft to customers. It will have to continue to plug away at its sales campaigns to ensure that it can meet its 300 aircraft order target.

There are now more than 10 CSeries aircraft in various stages of testing and production and Bombardier has sold out CSeries delivery slots for 2015 and 2016 and most of 2017. Initial production at the company’s Mirabel site is expected to be 40 in the first year, 80 in the second and to reach the full rate of 120 aircraft p/a three years after entry into service. Bombardier has space to increase this further, should the market warrant it.

If the Russian Q400 deal goes ahead, there are potentially hundreds more orders for the Q400 to be had. Establishing the Russian assembly line is the key commercial requirement, and Bombardier, Russian Technologies and related parties are aiming to reach definitive agreements later this year. The manufacturer is pushing other options like the high-density version, but the Q400 continues to be outsold by ATR products, a challenge to work on.

Bombardier is not shrinking away from its challenges and 2014 will be a year of expanding production and increasing revenue. The company has confidence that the CSeries will be a winner and is proceeding accordingly. It plans to deliver 80 commercial aircraft in 2014 (an increase of 25 over 2013), and is looking at an aerospace operating margin of 5%, slightly better than its 2013 performance.

Even without the absence of the first CSeries delivery this year, Bombardier is counting on a strong 2014. If things go as planned - and they have not always - this year could provide a very strong platform for 2015.

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