I am writing about Bombardier today, partly because it has been crushed in the market over the past month, and also because on a recent business trip to the U.S. I was surprised at how many people thought it was a French company (it's OK, most Europeans believe it to be American). Part of the reason it doesn't get much coverage in the US is because it trades on the pink sheets under the ridiculous ticker symbol BDRBF.PK. In Toronto it trades under a slightly more visually appealing symbol BBD.B. So, yes, it is actually a Canadian company, started in 1942 by Joseph-Armand Bombardier and headquartered in Montreal.
Bombardier's business is split roughly equally between its rail and aerospace business. It is the world's largest train manufacturer, producing the Acela, pressurized cabins for China's Qinghai-Tibetan line, and numerous subway and streetcar systems. It is also the world's third largest aircraft manufacturer, producing the amphibious water-bomber CL-415, Learjet family, Challenger, Global Express, the venerable Dash-8 (now superseded by the Q400 turboprop), CRJs and soon the C-Series, which threatens to break Boeing's and Airbus's duopoly in the single aisle commercial market (think Boeing's 737 - arguably the most successful aircraft ever and Airbus's A320).
How can Bombardier break into the single aisle airframe market (~100-220 seats) now when it has been a duopoly for the past 23 years (prior to that it was all Boeing's)? The biggest reason is that the next generation of engine is near completion, promising drastic fuel savings. After a few false starts, Bombardier is now well on its way in developing the first new single aisle airframe with next generation Pratt & Whitney geared turbofan (GTF) engines. The company projects 20% lower fuel costs and 15% lower operating costs than today's aircraft. This has forced Airbus and Boeing to respond by slapping next generation engines onto their existing A320 and 737 airframes, Boeing following more reluctantly after seeing the success of the new A320NEO at the 2011 Paris Airshow. These two offerings will provide better fuel savings than the aircraft they replace, but without a new 21st century airframe coupled to 21st century engines the savings will not be as high as for the C-Series. I.e., inserting a 2011 engine into a car designed in the 80s will improve its performance, but you will not end up with an optimal vehicle.
Bombardier's CS100 (seating 100-130) is expected to enter service in 2013 with the larger CS300 (seating 130-149) following in 2014. The A320NEO is scheduled to enter service in 2016 and the A319NEO, the real competition, in 2017. The 737-700Max is scheduled to also enter service in 2017 but it appears as if Boeing is aiming for a larger seating capacity than C-Series and will not re-engine its smaller 737s. Embraer, which is Bombardier's traditional competitor in the smaller regional jet market (less than 100 seats), has yet to decide if it will stretch and re-engine its existing E-Jets or develop a clean-sheet aircraft. To date Bombardier's C-Series has 143 firm orders and 149 options with good geographic representation.
Summary of Narrow-body Aircraft Programs (top right corner is where you want to be)
|20th Century Airframe||21st Century Airframe*|
|21st Century Engines|| || |
|20th Century Engines|| ||NONE|
* Russia's Irkut MS-21-200, the smallest aircraft, seats up to 162 people and is scheduled to enter service in 2016. China's COMAC C919 is also a larger aircraft and is expected to enter service in 2016.
The China Factor
When discussing the future of the aerospace industry, you would be negligent not to discuss China. Boeing estimates that China will require 5,000 new commercial airplanes over the next 20 years, with the majority (3,500), being single-aisle, narrow body aircraft. The main state airplane manufacturer in China is COMAC, which plans to deliver its first large commercial aircraft in 2016 and will undoubtedly be a major player in the domestic market.
Bombardier has recently signed an agreement with COMAC to establish long term strategic cooperation on commercial aircraft. Currently neither manufacturer's products overlap, as COMAC's smallest aircraft is larger than Bombardier's largest. It would seem that China has found its strategic western partner and Bombardier now has a greater access to China's rapidly developing commercial aerospace industry. In short, China will gain expertise and Bombardier will increase its revenue through direct sales in China and customer support and maintenance support to COMAC outside of China. Additionally, approximately 15% of the C-Series is produced in China, mainly by Aviation Industry Corp of China (AVIC). This reduces import tariffs that have plagued bombardier's smaller CRJ aircraft. Expect to see Bombardier C-Series sales announced for China at one of the upcoming air-shows.
I have been following Bombardier's development of the C-Series for the last five years and now that they have secured close to 300 orders including options, the C-Series no longer appears to be just a paper airplane. Additionally the company's total backlog for aircraft and trains increased to $57B at the end of Q2. With the stock price recently falling to $4 from $7 and a trailing PE of 8 it appears that the stock is now reasonably priced with a large potential upside.
Another option than investing in the stock outright is to purchase calls expiring in December. This is to take advantage of any potential sales at the Dubai Airshow, which commences on Nov. 17, 2011. At the Paris Airshow in June this year, expectations were high that Bombardier would announce C-Series sales and the company did not disappoint, however most of the upside had already been realized prior to these announcements and it became a "buy the rumour sell the news" event. Heading into the Dubai Airshow, expectations are low and any new order announcements should provide a lift to the stock.
Investing in a global manufacturer during a weak point in the economic cycle is always risky and you can expect volatility to be high, however, I believe most of the downside is priced in at this point. In bullet form, here is a list of what I perceive to be the main risks:
- Severe economic downturn drives oil prices lower and greatly reduces airliners and business's capital expenditure budgets. This would delay new aircraft orders even though this next generation aircraft will greatly reduce operating costs in the longer term
- Although the C-Series is a technically superior aircraft until sometime in the 2020s, Boeing and Airbus have immense pricing power and fleet commonality with their existing aircraft that are already in service
- Delays to the C-Series. Airlines watched Boeing and Airbus experience major delays introducing their new aircraft and this is now a concern with Bombardier, however, Bombardier's development schedule is more conservative and considerably longer than its competitors'
- On the rail front, the biggest risk is how much China will slow its massive rail expansion
On the balance, and especially at this price, I am bullish on Bombardier. The company has a proven track record of bringing new products to market with global supply chains and is launching the C-Series at a time when the duopoly cannot respond with a brand new aircraft due to their current full project pipelines. With Brent oil hovering around $110/bbl and fuel costs representing 30% of operating costs, a new aircraft with superior fuel savings is very enticing to airline operators especially on competitive routes. Ultimately it comes down to whether you believe a technically superior offering is enough (unlike the Betamax vs. VCR of years ago, this one directly affects a buyers bottom line). I believe it does so I am long Bombardier.
FYI - What is the competition saying? Randy Tinseth Boeing's VP of Marketing, concedes, "Bombardier Inc.'s C-Series future jet is a good aircraft." He continues that he doesn't think there's a market for it. Maybe, maybe not. They said the same thing when Bombardier created the regional jet market with the CRJ in the 90's. This offering proved so successful that Embraer, the Brazilian aircraft manufacturer, was able to enter this market and thrive, helping to nudge Bombardier into the larger aircraft segment.
Disclosure: I am long BDRBF.PK.