Canadian aircraft maker Bombardier (NASDAQOTH:BDRAF) is focusing intently on production of narrow-body medium-range jets. The urge to look beyond the small regional jet market and fight rising jet fuel prices prompted Bombardier to start its built-from-scratch CSeries program a decade back. But technical glitches are delaying the CSeries' entry into service, and Bombardier has lost some important orders. These, along with rising project costs, are giving investors sleepless nights. Let's take a closer look at the issue and find out if there is a silver lining.
Is it jinxed?
The project has hit air pockets from the beginning. Bombardier announced the CSeries line in 2004, but almost retired it in 2006 owing to a lack of prospective customers. German airline Deutsche Lufthansa turned things around two years later with a "letter of intent" to buy 30 CSeries jets and an option to take another 30 units after a formal deal-signing.
However, Embraer (NYSE:ERJ) poses a serious threat to the Canadian aircraft maker, as its E-Jet family, including the reengineered E2 jets that directly compete with the CSeries, is finding many takers.
Republic Airways Holdings had ordered 40 CSeries jets to become the aircraft's No. 1 customer. But at a recent investor meet, Republic CEO Bryan Bedford projected the airline's fleet by the close of 2016 would feature Embraer's E170 and E175 regional jets and Bombardier's Q400 turboprops (small regional jets with seating arrangement for about 70 to 84 passengers), but not the CSeries. That suggests the company might not pursue the CSeries order after all. Air Canada's decision to stick to its Embraer fleet also ends speculation that the airline would place an order with Bombardier in the near future.
Sweden-based airline Braathens Aviation would have been the first to fly the single-aisle CSeries jets, but recently the company stepped back as the launch customer. The decision was clearly based on the jets' delayed delivery schedule and engine issues. The jet's first delivery was scheduled in 2013, but now has been postponed to the second half of 2015.
In May, Bombardier was forced to hold back the jet's debut at the 2014 Farnborough Airshow as one of the aircraft's engines, made by United Technologies' Pratt & Whitney unit, caught fire during a ground test. Since the model's first test flight in September 2013, CSeries jets have covered only 14% of the 2,400 hours of flight tests needed for the program. Bad weather could be a reason for the lesser number of test flights, according to a Canaccord Genuity analyst. But the delays could also be due to "issues with the avionics and fly by-wire systems," according to RBC Dominion analyst Walter Spracklin.
The CSeries has two variants: CS100 and CS300. Bombardier plans to launch the smaller CS100 model in the latter half of 2015, while the bigger variant is expected to follow by the first half of 2016. The launch has been rescheduled four times. Goldman Sachs believes another delay is inevitable, as flights were grounded since June on account of faulty engines.
Besides infuriating customers, the delays are increasing the CSeries' development cost, which is taking a toll on Bombardier's margins. The company mentioned in a statement this month that the cost has already reached roughly $4.4 billion, which is $1 billion more than initially planned.
The game isn't over yet
Hiccups in delivering fresh models are nothing new to the aerospace industry, and stalwarts like Boeing and Airbus have kept customers waiting for their own built-from-scratch new planes. Bombardier is no exception in this regard.
The CSeries could still be a game changer for the company, as the prospects of single-aisle regional jets are increasing. Most demand is originating from emerging-market nations due to improving GDP and progressing middle-class populations. The Farnborough Airshow was a ready indicator of airlines' humongous appetite for narrow-body aircraft. Airbus bagged a staggering 317 orders for the A320neo and A321neo, while Boeing got 50 orders for its 737 Max 8. Embraer won orders valued at $2.4 billion for its reengineered E2 jets.
Despite the CSeries' absence from the prestigious air show, Bombardier received some firm orders and commitments. Most important, blue-chip customer Lufthansa is still sticking to its orders. Bombardier expected to generate a pipeline of 300 orders initially to make the C-Series project viable, and its backlog is close to that mark, with total orders of 298 units through mid-July 2014. Of these, 203 are confirmed orders from 16 customers; the rest are based on conditional commitments from eight customers.
Bombardier has fallen behind schedule with the CSeries, but the jets have resumed test runs after the company fixed engine issues, and the rumor mill is buzzing again with news of potential buyers. Avoiding further delays would be the key for Bombardier to grab its share in the lucrative single-aisle market.
ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool recommends Embraer-Empresa Brasileira. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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