By NICOLAS VAN PRAET
Thursday, November 9, 2017
MONTREAL -- Analysts are beginning to challenge the view that Bombardier Inc.'s deal to hand control of its marquee C Series airliner to Airbus SE will give the airplane a new and long life.
Two reports published this week offer a more contrarian take on the future of an Airbus-controlled C Series than the generally positive narrative accepted by investors, who have pushed up Bombardier shares 29 per cent since the Airbus deal was announced Oct. 16. The latest reports argue that, even if the C Series is revived, it still faces a difficult path to profit.
"The starting point for the C Series is not good," Bernstein Research equity analyst Douglas Harned writes in a Nov. 6 report. "The fact that the Quebec government, after investing $1-billion in the C Series is willing to give Airbus a majority stake for free shows how far from profitability the program is."
The analyst said he spoke recently with airline officials and concluded that the C Series is a hard sell at any price above the low $20-million (U.S.) range. He said he does not think Airbus brings anything to the C Series partnership that would allow the company to boost the price of the aircraft significantly. As a result, that means substantial cost reductions will be necessary to make the C Series work.
History suggests it won't, the analyst says. Operating two final assembly lines as planned - one in Mirabel, Que., and one in Mobile, Ala., to serve the U.S. market - will only add to costs, he said. Bombardier said in a regulatory filing that setting up the Mobile site to build the C Series will cost $300-million and create more than 2,000 permanent jobs in the United States.
The idea that Airbus can use its market power to cut costs in the C Series supply chain sounds exactly like what Boeing Co. tried to do when it bought McDonnell Douglas and attempted to cut costs on the MD-95 plane program, Mr. Harned said. The problem that Boeing faced was that suppliers had no desire to invest to reduce costs in a low-volume aircraft program on which they were not making much profit in the first place, he said. Boeing was never able to sufficiently cut costs or raise the price for the plane, which was rebranded as the Boeing 717, and eventually shut the program down in 2006, roughly nine years after taking over McDonnell Douglas.
"The C Series, which we also see as a good airplane, faces the same challenges," Mr. Harned said, adding the agreement with Bombardier brings little to Airbus except removing Bombardier as a challenger to the Airbus-Boeing duopoly.
"Airbus will bring a stronger sales and support network to the C Series but we do not see that as sufficient to change the economics of this airplane."
A separate Nov. 7 report by analysts with Moody's Investors Service says the main challenge in the Airbus-Bombardier partnership will be questionable demand for the C Series in the years to come.
"If demand improves for commercial jets with 100 to 150 seats, bringing Airbus on as majority owner should be helpful to the C Series program as prospective customers may be more comfortable ordering the C Series given Airbus's strengths, including in marketing and support of its aircraft," the Moody's analysts write. "But since its introduction in 2008, the C Series has been unable to attract meaningful interest from more than a small number of airlines and leasing companies."
Bombardier's C Series order book stood at about 340 planes as of Sept. 30, with firm orders from 17 customers. The company believes there is a market for about 6,000 planes seating 100 to 150 seats over the next 20 years and that it can capture at least half of the orders.
That forecast might be ambitious, Moody's says.
"For us to consider the C Series a success, orders will likely need to reach about 1,000 aircraft," Moody's says. "Given the relative youth of the global narrowbody fleet and the airline industry's focus on maintaining an acceptable return on invested capital, we believe the C Series will not reach 1,000 in the next five years. At this level of demand, we would question whether the program would be profitable given its estimated development cost of more than $6-billion to date."
Bombardier is now working to finalize its agreement with Airbus.
"Airbus joining the C Series program is a strong endorsement of the aircraft, the market potential and the opportunity for long-term value creation," Bombardier chief executive Alain Bellemare said on the company's Nov. 2 earnings call.
"The overwhelming customer interest and positive feedback we have received in the past few weeks give us great confidence that we have the right partner and that we are on the right path to unlocking the full potential of the C Series."
Close: $3.04, down 6¢
A C Series aircraft sits on an airport's tarmac during a demo event in New Delhi on Oct. 5. Bombardier's C Series order book stood at about 340 planes as of Sept. 30, with firm orders from 17 customers.