Business

Bombardier's CSeries dogged by low oil, risk-averse airlines

Aerospace analysts say low fuel prices and risk-averse airlines are putting a damper on Bombardier's efforts to sell its new CSeries jets, and that the Montreal-based manufacturer may need to sell a stake in its railway division in the years ahead.

Fall in fuel prices sees companies sticking with older, less efficient jets, analysts says

Bombardier was unable to win a single order for its new CSeries planes at the Paris airshow in June and, with only 243 firm orders signed for the CS100, is still short of the 300 it sought to have lined up by the time the commercial aircraft are due to enter service next year. (Christinne Muschi/Reuters)

The difference between a "desperate" and "creative" move is, in business, often a matter of opinion and spin. But the aerospace industry cocked a collective eyebrow nonetheless on Tuesday with word that Bombardier had, however briefly, eyed its rival Airbus as a potential partner on its new CSeries jets. 

True, the new family of jets — now more than two years overdue and billions of dollars over budget — has been a millstone around the neck of the Montreal-based company. 

The company was unable to win a single order for the CSeries at the Paris airshow in June and, with only 243 firm orders signed for the CS100, is still short of the 300 it sought to have lined up by the time the commercial aircraft are due to enter service next year. 
  
Even for an industry prone to long delays and cost overruns, the development of the CSeries has been rocky and has battered Bombardier's balance sheet. 

The fuel economy bugaboo is nowhere near as strong as it used to be.— Rick Erickson

Some analysts wondered why Bombardier would even consider selling a majority stake in the $5.4-billion US project when it's seemingly just a few months away from finally paying off. 

The offer was "either not real or very desperate," analyst Richard Aboulafia of the Teal Group said. 

Karl Moore, an aviation expert and associate professor at Montreal's McGill University, agrees CSeries sales have been disappointing. 

"The industry is nervous because [the CSeries] is so late," he says. "They want to see it working and saving on fuel." 

Part of the problem

But fuel efficiency could be part of the problem. Bombardier is building the CSeries with light-but-strong carbon fibres that are expected to cut fuel consumption by 20 per cent. 

That was a big selling point when oil was trading at $100 a barrel. But with fuel prices now back down to earth, some experts say airlines are less inclined to shell out for new, expensive and unfamiliar planes. 

After almost 10 years in development Bombardier's new CSeries 100 made its maiden flight from Mirabel airport north of Montreal on Sept. 16, 2013. (Ryan Remiorz/Canadian Press)
"The fuel economy bugaboo is nowhere near as strong as it used to be," says Calgary-based industry consultant Rick Erickson.

"You've got people going out and paying $280 million for a new [Boeing] 777. But with oil at $40 a barrel you really don't need those fuel economies. Why not fly your $15-million Boeing 767 — an airplane from the '80s and '90s? 

"Even though it's got higher maintenance costs, even though it's got higher fuel burn costs, you can still live within the pricing envelope." 

The drop in oil prices has put a damper on sales across the aerospace sector, he said

"Boeing and Airbus aren't happy about it either." 

David Tyerman, a transport industry analyst with Canaccord Genuity, predicts the CSeries will make it to market next year. But even the expected boost to its bottom line, Bombardier will need to raise between $700 million and $800 million by 2018 — possibly by selling its railway division — if it's to maintain its minimum liquidity. 

"We think that's the only one that's really going to raise a decent amount of money," he said. 

Selling a 25 per cent stake could bring in $1.5 billion, he says. An IPO could come by the fourth quarter of this year. 

Too small? Too big? 

CSeries jets will seat between 100 and 160 people — building on the success of Bombardier's CRJ line of planes and putting the company in competition with the some of the smaller aircraft made by industry giants Boeing and Airbus. 

The CSeries has already drawn praise from some discerning buyers around the globe. Its first confirmed buyer was Swissair, a division of Germany's famously demanding Lufthansa. 

"That's very significant," says Erickson. "If you can convince Lufthansa to buy your airplane — wow, that's an endorsement." 

But they're not right for everyone, including some Canadian carriers. 

WestJet is apparently happy with its Boeing planes and the CSeries is a little small for Air Canada, which tends to use aircraft that seat between 160 and 200 passengers. 

And yet, those same jets are apparently too big for Air Canada's regional partner Jazz, says Erickson, because of clauses in union contracts that prevent Jazz pilots from flying planes with more than 150 seats. 

"Air Canada unions are not happy if Jazz pilots are flying larger planes," he says. 

Bombardier does have a buyer in Porter Airlines, which has long planned to fly the CSeries out of Toronto's Island Airport, pending extension of its runway. 

But some residents have vigorously opposed the expansion over fears the addition of jets to the small airport will bring too much noise to the island's park-like atmosphere. 

Erickson is a fan of the CSeries, calling it a "knock-out-of-the-park winner." But for now, Bombardier faces the challenge of closing deals in a market full of airlines that are taking a wait-and-see approach. 

"Quite a few carriers are sitting on the sidelines waiting to see what [the CSeries] does." 

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