Why the Air Canada Delay Is Bad News for Bombardier

On May 15, Air Canada (TSX: AC.B  ) made two major announcements, one reporting first-quarter earnings, and the other updating its fleet-management plan. This article will discuss the changes in the fleet-management plan, and what they mean for Embraer SA (NYSE: ERJ  ) and Bombardier (TSX: BBD.B  ) while in this previous article, I examined the earnings report.

Fleet modernization
I recently discussed Air Canada's approach to modernizing its wide-body fleet in this article, but finding a more cost-effective regional aircraft fleet is also important for the airline. After placing orders to modernize both the wide-body and narrow-body fleets, Air Canada was on the lookout for suitable replacements for its regional jets.

Regional jet rivalry
When it comes to regional jets, there's a heated rivalry between Embraer SA and Bombardier. Both manufacturers make jets for the 50- to 90-seat range, and both companies have major presences in regional carrier fleets.

As Embraer has been updating its models in the smaller-size range, Bombardier looks to be taking a more aggressive pricing strategy to stem the loss of market share. At the same time, Bombardier has poured more than $4 billion into developing its new C Series, designed to both operate for regional carriers and compete for sales with other larger aircraft.

But the development and rollout of the C Series has encountered some turbulence in the form of delays, higher-than-expected costs, and slower-than-expected sales. As costs have continued to rise, the market has not been kind to Bombardier shares. The company could really use some more C Series orders, and Air Canada looked like a good candidate to provide them.

As a Canadian airline, Air Canada would receive some good press from purchasing Bombardier aircraft and promoting Canadian manufacturing. Additionally, Air Canada noted that it was looking for replacements, and most analysts said the C Series was among the candidates.

The bad news
Alongside its first-quarter-earnings announcement, Air Canada announced a change to its fleet-management program. Near the bottom of the press release, the airline had this to say regarding the regional aircraft strategy: "With respect to the remaining 25 Embraer 190 aircraft in the airline's fleet, after careful consideration, Air Canada has decided to continue to operate the aircraft given their young age, productivity and high customer acceptance on existing routes and to avoid additional capital expenditures and debt."

In other words, the order has been delayed indefinitely, meaning that Bombardier is unlikely to get a C Series order from Air Canada anytime soon. With this news, privately held Porter Airlines remains the only Canadian airline to have C Series aircraft on order, and Porter's order is conditional on the airline winning the expansion of the Toronto Island Airport.

Going forward
The news that Air Canada would not be placing an order anytime soon took away a major catalyst for Bombardier at a time where the manufacturer is on the hunt for orders. While not as bad as Air Canada placing the order with a different manufacturer, the news still sent Bombardier shares down around 6% on the day.

At this point, Bombardier is betting a large part of the company's future on the C Series, so investors should remain on the lookout for additional orders and any updates on costs.

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