The Republic Airways CSeries Order

| About: Bombardier Inc.B (BDRBF)

Summary

Republic placed its order in 2010.

Republic declared Chapter 11 earlier this year.

Yet all through the years, Republic made it clear the CSeries no longer fit its plans - but never dropped the order.

The original order from Republic Airways (NASDAQ: RJET) in 2010 was heralded as a big win for Bombardier's (OTCQX:BDRBF) then new program. The plan was for the aircraft to be deployed to Frontier, then owned by Republic. It wasn't long before Republic ordered Airbus 320neos and decided to place these with Frontier. Then Republic sold Frontier and the Airbus (EPA: AIR) order went with the deal.

Republic held on to the Bombardier CSeries order. Year after year, Republic's CEO was asked about this decision. It looked completely irrational. Republic made it clear they aircraft no longer fit with its focus. Yet the order remained on the books. Here is a video we made of Mr. Bedford speaking at the 2014 RAA.

But even as the order stayed "on the books", it was increasingly seen as less than credible. By early this year, when the airline went into Chapter 11, the fiction could not be tolerated anymore. Bombardier removed the order from its production schedule.

But the order remains on the order backlog! This is tantalizing. Why would this be? When we asked one of Mr. Bedford's competitors how this made sense, we were told the only way to explain this is that Republic plans to sell its delivery slots. As the CSeries ran into delays, these slots surely became worth less.

Yet there are, waiting for something.

It turns out that post the Air Canada (TSE: BBD.B) order and the Delta Air Lines (NYSE: DAL) order, that order might now start to go up in value again. Bombardier might no longer have to offer the same discounts to the next big customer. Once the orders reach the level of 300, Bombardier's negotiation position might harden. The two deals done earlier this year take the program over 300 firm orders. Whereas Air Canada and Delta could get screaming deals, the next big customer is much less likely to get a deal at the same level of discount.

By a big customer we mean a buyer of 50 or more aircraft. Which brings us back to the long festering Republic order. A further item for consideration is the upcoming Farnborough air show.

Bombardier is sounding much more confident. There are reasons to believe that the company could clean up the Republic order with a real customer for the summer's big show. Such an order could take up the entire 40+40 (order+options) Republic deal and, perhaps, even grow it. This customer is likely to be a leading industry brand because that is the only type worth Bombardier chasing.

Such a deal could come with a steep discount, though probably not at the levels of the two earlier deals this year. But if, and once such a deal is announced, the CSeries will unlikely be trading at anywhere near the same price levels going forward. Bombardier will have moved from a negotiating position of weakness to one of much greater strength. There is nothing nicer than momentum.

It will also be proof that the original strategy of chasing lots of small customers with small discounts was completely incorrect. A few big wins with industry leaders, even at deep discounts, is what it takes to launch a new aircraft program. The new management team at Bombardier know this and it shows.

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