Bombardier: CSeries Enters Service After Long Gestation

| About: Bombardier Inc.B (BDRBF)
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Summary

CSeries remains an economic leader in its class.

Bombardier has a fight on its hands.

Bombardier's new management is up to the task.

We have just released our third report (2010, 2012, 2016) on the Bombardier (OTCQX:BDRAF) (OTCQX:BDRBF) CSeries. For a long time, the considered view of Bombardier has been that with CSeries, the company bit off more than it could chew. That view was appropriate up to last year.

Bombardier did take a big risk developing the CSeries. It is, by an order of magnitude, vastly more complex than anything the company had attempted previously. Most famous for taking a business jet and then converting that into a regional jet, then stretching that design four times, Bombardier had not developed a clean sheet design for a very long time. The CSeries is not only a clean sheet design, but it also has lots of new technologies.

For example, new engines, new wings, and it makes extensive use of new materials. The supply chain for an aircraft this size meant that Bombardier started to trade with a supply chain used to trading with Airbus (OTCPK:EADSF) (OTCPK:EADSY) and Boeing (NYSE:BA). Unlike Airbus and Boeing, Bombardier could not apply any serious threats to its suppliers the way Airbus and Boeing do.

But, as our report found, the critical obstacle to market success was not the aircraft and the technologies as much as management. Sure, the company was on a very steep learning curve. But the engineers were up to it. The program would likely have run late, but that is the new normal for aerospace.

The most challenging part of the program was trying to sell the aircraft. Airbus (especially) and Boeing were not going to make that easy. These two giants could out-produce Bombardier, which gives them the economies of scale to price at levels Bombardier cannot. They can also offer faster delivery slots. The market environment was such that Bombardier had no margin for error.

But management did err and often. There was confusion in the sales strategy. Bombardier had a strategy that looked fine. Until Boeing announced the MAX, which came a year after the Airbus neo. Once the big competitors focused on re-engined models, the Bombardier strategy had to change.

It did not. Management was viewing the CSeries as a premium product that warranted a higher price because it has so much new technologies and offers such superior performance. What the aircraft offered was accurate. But the market does not pay a premium for this. Moreover, Airbus and Boeing could price and sell aircraft that offer roughly 80% of the CSeries advantages at 25% or more cheaper prices. Whereas Bombardier wanted $36m for its aircraft, Airbus and Boeing would go as low as $25m and offer deliveries faster. In addition, Airbus and Boeing offered no new pilot training requirements. Is it any wonder the CSeries did not sell?

The company had to undertake radical changes, and it did by bringing in new leadership. This leadership came from the aircraft leasing and airline fleet management arena. The former managers had automotive experience. The automobile industry sells and produces in thousands per year, whereas Bombardier is at much less than a hundred produced in a year even if sales are in the hundreds. The difference in philosophy is huge.

The new management understands the market it is selling into. It knows about the pricing issue. It knows that a new aircraft has to "buy its way in". This is a long game with a sales cycle that typically goes for 20 years. Automobiles change every year.

Matching Airbus and Boeing on pricing immediately causes financial pressure Bombardier has not handled before. But it sells aircraft. When an airline buys an aircraft and finds it works well, they will buy more. Buying in may hurt, but it hurts once. As other airlines realize the advantages, they step up too.

For example, once SWISS (owned by Lufthansa (OTCQX:DLAKF), (OTCQX:DLAKY)) demonstrates it can fly its CS100 all over Europe at any hour of the night and not exceed any noise requirements, the competition will immediately be at a disadvantage. As SWISS demonstrates the ability to serve the London city with a better cabin product, competitors have to notice. All the little advantages add up. Having SWISS as a customer puts the CSeries in the hands of an airline that is customer focused and has a premium brand image. The successful deployment of the CSeries is going to make other EU airlines that compete with SWISS have to figure out how to respond. Many may end up buying CSeries too.

The road from launch in 2008 to delivery in 2016 has been long and painful for Bombardier and its stockholders. The company burned through lots of capital and good people. The lifeline from Québec helps lower the program risk considerably. The recent order from Delta (NYSE:DAL), although painful in price terms, is likely to mean more sales over the long term. In the big US market, Delta will use the CSeries to drive traffic by offering a better service. Once again, we see the potential for more CSeries sales as competitors realize they must match product offerings.

Another example is apropos. The CSeries has better cabin experience - wider seats and best-in-class overhead storage. People will select this aircraft once they have flown it when they make their next booking. Airbus has seen this with its A380. Travelers tend to be smart consumers because the sticker price on every purchase is relatively expensive, but also entails significant personal discomfort for extended time periods.

Our report concludes the CSeries remains ahead of its competition. Its new management is up to the task of getting the program back on track and selling into key airlines. Québec's investment provides this management with the capital to do deals that will repay the investment by creating more high-skilled jobs as well as repaying the initial investment.

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