SUMMARY: Bombardier 1st Half results are out, and it is not good for Aerospace. With only 318 firm CSeries orders today and up to 95 “questionable”, the program suffers from poor sales but even worst, negative margins due to deals below cost, this cannot continue for very long. Yes, 2016 is a tough year for aircraft orders at Airbus and Boeing, and a “price war” is on ! and any big deal will require +65% off list price, which means every new order brings more loses for Bombardier. Meanwhile, CRJ line has only 66 orders in backlog (9 x CRJ-700, 36 x CRJ-900 and 21 x CRJ-1000) good for 25 months of production at the current 2.7 aircraft per month rate, while the Q400 is down to 48 in backlog (40 + 8 recent orders), good to May, 2018 at the current 2.3 aircraft per month. Big discounting under way on the Q400 and CRJ is evident in financials to boost sales, while Business Aircraft orders are slowing down, and production already 20% below last year will be reduced again soon to balance supply and demand. Nothing very promising at Bombardier Aerospace, the company struggles and the 5 year Transformation to 2020 does not look promising at all, market dynamics are creating havoc for Bombardier, but all of that had to have been anticipated when they decided to enter the BIG league and take on Airbus and Boeing, maybe not such a great idea after all ?

LOTS OF ARTICLES IN AVIATION DOCTOR ON BOMBARDIER, TAKE A LOOK.

Bombardier (TSX:BBD.B) has released its 1^st Half 2016 financials and its time to analyze what is going on at Bombardier so far this year in regard to its struggling Commercial and Business aircraft business.

The first 6 months of this year, has seen Bombardier’s revenue fall from $9.017 in 2015 billion to $ $8.823 billion, a drop of 8.8%. This drop in revenue was lead by the Business Aircraft segment which has a revenue of $2.776 billion in the first 6 months of this year, off by 17% from 2015 revenue of $3.352 billion, clearly major issues going on in the business jet market today for all manufacturers.

The Bombardier Commercial Aircraft segment has posted revenues of $1.380 billion so far this year, 8.5% higher than in 2015. The CSeries is by no stretch of the imagination out of the woods, 2 big orders in the 1st Half, 75 x CS100’s to Delta Airlines and 45 x CS300’s to Air Canada, both orders secured with big discounts (+/-69% off list price) and loss of around $7 million per aircraft ($840 million), which Bombardier cannot afford, and something it will have to keep doing to WIN orders, but all wins will be at a financial LOSS.

Airbus and Boeing are fighting it out this year in a big “price war” for very few orders with single aisle aircraft discounts of +65% off list price. Bombardier is out of its league competing with Airbus and Boeing, in a market segment (100-150 seats that is low in demand and low/negative margins, a perfect storm !

The Bombardier financials show a problem in the EBIT (before special items), where the Business Aircraft business had a 6 month EBIT of $185 million (6.6% EBIT margin), comparable to 6.7% same period last year.

Unfortunately, the Commercial Aircraft side has posted a 6 month EBIT loss of $169 million, a whopping -12.2% EBIT margin versus just -1.5% same time last year, this indicates very aggressive pricing versus last year, especially on the CRJ and Q400 brands, which are suffering from low sales versus their competitors at Embraer and ATR.

The 6 month deliveries for 2016 on Bombardier Business Aircraft are down from 92 in 2015 to just 73 this year, a 20% drop for this year so far:

1. Learjet 70/75, down from 14 deliveries in 2015 to just 6 this year (57% drop), this brand is on its last legs, the brand is old and new competing models will bring this brand to a sad ending in the next 2-3 years, as the cancellation of the Learjet 85 has assured the brands short remaining life.
2. Challenger 350, down from 32 deliveries last year to 30 this year (6.2% drop), this brand has life in it, and will be around for 5+ years still.
3. Challenger 605/650, is up from 8 deliveries last year to 9 this year (12.5% up), this descendant of the original Canadair CL-600, has seen better days, with only 25 delivered in all of 2015, the lowest since 2003 (25 units). The CL-600 is the aircraft on which over 1,902 (as of June 30/2016) CRJ’s (CRJ-100/200/440/700/705/900/1000) were certified on. The Challenger 650 will struggle from here on and after 36+ years it is coming to an end in the next 2-3 years, as new competition from Dassault and Textron begins to bite.
4. Global 5000/6000 the once “cash cow” for Bombardier (42% of Aerospace sales in 2014) when 80 Globals were delivered, has also see better days. For the first 6 months of this year, only 28 Globals were delivered versus 37 same time last year (down 24%), and this is there best margin brand. The high end business jet market is hurting in sales and margins today at all manufacturers, Bombardier is “hoping” for better times with its new $75 million G7000, but times are changing and I am not a big fan of hat market, especially with competition from Airbus (ACJ’s) and Boeing (BBJ’s).

Orders for Bombardier Business Jets so far are 70 (inc. 22 cancellations), which gives a book to bill ratio of 0.97 better than last year’s 0.3, though some orders need to be taken with “caution”. The business jet market is in challenging times and look for Bombardier to cut production further this year, as other OEM’s do the same, trying to keep a balance between supply and demand.

So far this year, Bombardier has delivered 47 commercial aircraft (1 x CRJ-700, 27 x CRJ-900, 4 x CRJ-1000, 14 x Q400’s and 1 x CS100), which is 5 more than last year (+12%).

Orders this year for the first 6 months are 19 x CRJ-900 (10 x “undisclosed” customer), 15 x Q400’s or 34 aircraft versus 28 last year at the same time.

The CSeries now has 161 orders this year from 0/zero in 2015, which brought the “firm” order book to 370 earlier this year, but since 40 CS300’s for Republic Airways were taken off the books and 12 as well from Ilyushin Finance (Russia), which most likely is NOT ever going to happen, so 318 orders on the book today are “firm”.

Yet, up to 95 orders are “questionable” some going back to 2010 like:

Gulf Air (10), Ilyushin Finance (20), Iraqi Airways (5), Korean Air (10), Lease Corp (20), Macquarie AirFinance (40), Odyssey (10)

So the “real” order” book could be somewhere between a low of 223 and the current 318, but surely there are “iffy” orders as Bombardier itself claimed a maximum CSeries production of 315 units by the end of 2020 is possible, which would and should take care of all the existing 318 “firm” orders which are ALL at a LOSS for the company, due to low pricing.

Yet Bombardier is offering 2018-2020 deliveries to “new” airlines ? can realistically any airline wait until 2021 (5 years for a delivery of a new aircraft) ? most likely not.

Not only is the CSeries struggling with orders, but even more worrying is that they cannot seem to get a price above cost, and that cannot go on for too much longer. Yet the competition between Airbus and Boeing is very well known and +60% off on List Price is the norm today, and while the duopoly can afford it, Bombardier cannot, and here lies the programs death bed, pricing above cost will be a major challenge.

Everyone knows they took a “bath” on the 75 aircraft Delta Air Lines deal of around $525 million or $7 million loss per aircraft (price $22 million, cost $29 million), and surely Air Canada got plus/minus the same deal, as did Lufthansa years ago.

Bombardier did take a onerous contract provision on the CSeries of $492 million, which covers the unavoidable costs of meeting contract obligations exceed benefits, and a loss will result from the contract. The unavoidable costs under the contract (Delta Air Lines and Air Canada) reflect the LEAST net cost of exiting from the contract or fulfilling the contract, with compensation or penalties lower than fulfilling the contract. In other words, Bombardier lowest cost is $492 million by not delivering on the contract versus a possible $840 million dleivering the 120 aircraft to Air Canada and Delta Air Lines.

The other problem is the small market in the 100-150 seats, where Airbus and Boeing have only 118 orders for their A319neo and B737Max7 single aisle aircraft, or only 1.5% of their total single aisle orders (+7,850 orders for A320/321neo and B737Max8/9). Look at the graph below, of the 100-150 seat segment deliveries, the trend to larger aircraft outside this segmen are evident, as is the trend downwards, it is this market segment that will ultimately be the CAUSE of the CSeries demise. It destroyed the A318 (81 deliveries) and B737-600 (69) deliveries, soon the CRJ-1000 (47 deliveries) and eventually CS-100 and CS300 ?

The segment had only 54 deliveries in 2015, and 4 manufacturers compete on very low or negative margins. Bombardier is “stuck” in this segment with its CS100/CS300 while Airbus and Boeing have lots of business higher up, where 98.5% of single aisle aircraft orders come from (150-240 seat segment).

The program is sadly doomed to fail, and Canadians are now going to be 2/3 owners of an aircraft program that no OEM wanted last fall when it was for sale, for a good reason. Mr. Leahy, CCO of Airbus said it best “they (Bombardier) have no business case for the aircraft”, no way of it making money !

There is no demand for 7,000 over the next 20 years in this segment ! as Bombardier likes to flaunt, the best year was 1991 with 330 deliveries and it has been down hill for the past 9 years (54 last year), as airlines buy bigger aircraft with better seat costs today, the order books do not lie, just look at 7,850+ single aisle Airbus neo and Boeing Max orders versus what 318 orders at best at Bombardier for the CSeries ? pure fantasy !

The problem at Bombardier Commercial is the poor sales of its Q400 and CRJ brands. As of June 30, 2016 there were only 40 x Q400’s in backlog and with production this year running at only 2.3 aircraft per month, that is 18 months of production with no new orders or changes to production

This month there were 2 orders for 8 aircraft (ANA x 3, Porter x 3 and Air Tanzania x 2), so as of today, the Q400 production is good to May, 2018 (based on 48 in backlog). The Q400 just finds it hard to compete with the ATR-72-600 on economics, even with huge price discounting by Bombardier.

The CRJ line is also in trouble, as it struggles to compete with Embraer’s E175-E1’s and will be blown out of the water when the new E2’s come on line in the next 2-4 years.

Presently, the CRJ order backlog stands at 66 aircraft (9 x CRJ-700, 36 x CRJ-900 and 21 x CRJ1000’s), with some CRJ-1000 orders very questionable, but even with a current production rate of 2.7 aircraft per month, production is good for 25 months with no new orders or changes to production, so September 2018.

With sales and pricing problems with the CSeries, Q400 and CRJ, the Commercial Aircraft segment at Bombardier faces a very dark future, and by 2020 this business could be finished, and either bought by Comac (China) or just folded.

Bombardier was too arrogant and naïve to think it could compete with Airbus and Boeing and is now finding out what real competition is like in the BIG league, where sales in 2016 are tough and Airbus and Boeing are driving prices to new lows.

For Bombardier to win orders it has to lose money ! no future here, they should have stayed in the MINORS and competed with Embraer, Mitsubishi and Sukhoi, but marketing “myopia” blinded the executive branch and here they are in big trouble.

Till next time, thank you for reading my blog, hope you learned something, keep those good comments coming ! and I guess you can even send the bad ones too ! LOL