For the past decade, Canadian aerospace firm Bombardier (TSX:BBD.B) has been developing what it views as a game-changing new jet. Whereas Bombardier has previously stuck to building turboprops, regional jets, and private planes, the CSeries represents a bold attempt to compete with global giants Boeing (NYSE:BA) and Airbus in the 100-149 seat jet market.
The CSeries competes head-to-head with the smallest models of Boeing's 737 series and Airbus' A320 series. Taking on these two popular models would have been a tough task under any circumstances, and Bombardier has been plagued by a series of mishaps. As a result, there is a significant risk that the CSeries program will ultimately be a flop.
Delays and weak order activity
One persistent problem for the CSeries jets has been delays in the development and testing process. The first commercial delivery was originally scheduled for late 2013, but it has been postponed multiple times. The first CSeries test flight didn't occur until September 2013, and the test fleet was grounded this past summer after a test aircraft experienced a major engine failure.
As a result, the first delivery is now scheduled for the second half of 2015. However, many aerospace analysts think that another delay is likely, pushing the first delivery into 2016.
The CSeries' weak sales performance represents an even bigger concern than these snags in the timeline. Bombardier currently has 243 firm orders, compared to a goal of having 300 firm orders by the time of the first delivery.
Moreover, some of these orders are suspect. Republic Airways -- one of the first customers to place a big CSeries order -- currently has 40 firm orders and 40 options. However, Republic sold Frontier Airlines (its mainline subsidiary) and no longer plans to operate the CSeries.
In late 2013, Bombardier replaced Chet Fuller, its top sales executive, hoping that a fresh perspective would help revitalize CSeries sales. However, Fuller's replacement resigned last week, leaving a hole at the top of Bombardier's sales organization.
Falling oil prices are a big problem
Bombardier has two key weaknesses vis-a-vis Boeing and Airbus. First, virtually every potential customer for a 100-149 seat jet already operates either 737s or A320s -- or both. Boeing and Airbus are maintaining commonality with these popular models for their new single-aisle jets. This simplifies maintenance and training for airlines compared to Bombardier's all-new design.
Second, airlines increasingly prefer large narrowbodies with close to 200 seats, which tend to have lower per-seat costs than smaller jets. The CSeries has actually outsold the combined total of the 737 MAX 7 and A319neo (its Boeing and Airbus competitors in the 100-149 seat market). However, Boeing and Airbus have each sold thousands of larger narrowbodies.
In contrast to these headwinds, one of the CSeries' biggest selling points is fuel efficiency. Even the reengined 737 MAX 7 and A319neo won't be as fuel-efficient as the comparably sized CS300. Moreover, the CS300 should narrow the cost-per-seat gap between mid-size narrowbodies and larger models like the 737 MAX 9 and A321neo.
Bombardier executives have resisted the urge to offer big discounts to pump up CSeries sales, believing that the jet's fuel-economy leadership would eventually drive solid sales at higher margins. However, the recent fall of oil prices will hurt the business case for the CSeries.
Given the widespread availability of cheap used A319s -- and to a lesser extent, Boeing 737-700s -- it's hard to justify spending tens of millions of dollars more for a CSeries jet with jet fuel prices below $2. Even with 20% lower fuel consumption, it would take an extremely long time to save enough on fuel to justify the CSeries purchase price.
Turning things around
Bombardier faces a long road to try to salvage the CSeries program. The market it has targeted--100-149 seat jets--has completely dried up in the past few years, while airlines have shown a preference for Boeing and Airbus jets in order to maintain commonality with their existing fleets. Meanwhile, the drop in oil prices has dulled the CSeries' biggest competitive advantage.
That said, it's too soon to give up on the CSeries. Oil prices dropped from more than $100 to less than $50 in just 4 months. A rapid decrease in investment in the oil sector or a geopolitical shock (e.g. war in a key oil-producing region) could drive oil prices back up just as quickly.
Alternatively, low oil prices could encourage airlines to increase capacity to the point that they would need to look beyond Airbus and Boeing and the used market to find additional planes. Whereas Boeing and Airbus are nearly sold out through 2020, Bombardier could ramp up production to meet incremental aircraft demand.
For the moment, the best thing Bombardier can do is bring all hands on deck to prevent further delays to the delivery schedule. A year or so of commercial operations could go a long way toward boosting CSeries sales if the jets maintain high reliability and meet their operating cost goals.
Adam Levine-Weinberg owns shares of Republic Airways Holdings, and The Boeing Company and is short May 2015 $15 calls on Republic Airways Holdings,. The Motley Fool has no position in any of the stocks mentioned. 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.