By Susan Taylor and Nicole Mordant
TORONTO/VANCOUVER | Sat Nov 10, 2012 10:53am EST
(Reuters)
- Bombardier Inc's decision this week to delay the maiden flight of
its new C-Series jetliner raised questions about the company's ability
to deliver the jet on time - and the amount it may have to discount the
price to boost sales.
Tripped up by supplier delays, Bombardier
pushed back the inaugural flight by six months, a blow that adds to a
host of challenges the world's No. 3 planemaker faces in cracking the
narrow body jetliner market dominated by Boeing Co and Airbus.
The
C-Series promised market-beating performance when it was launched a few
years ago, due to new engine technology and a lighter airframe. But
Boeing and Airbus have since launched similarly advanced planes based on
their best-selling 737 and A320 models, eclipsing much of Bombardier's
advantage.
The Montreal-based plane and train maker had hoped the
C-Series would spark sales growth at its commercial plane unit,
compensating for sputtering demand for its small regional jets and
corporate Learjets.
Bombardier is very confident in its revised timetable, company spokeswoman Marianella de la Barrera said.
But with delay concerns hanging over its biggest jet yet, Bombardier faces an even tougher sales job, analysts say.
To
overcome airlines' reluctance to place firm orders for an unproven
aircraft that could be delivered late, Bombardier will have to offer
bigger discounts, financing, residual value guarantees and walk-away
rights, said aerospace analyst Richard Aboulafia, of Virginia-based Teal
Group.
"The cost of developing a jet is just the start,"
Aboulafia said. "Now that they're in, they need to put an awful lot more
on the table."
Without those incentives, "They brought a creme brulee torch to a flame thrower fight," he said.
WON'T "GIVE AWAY" PLANES
Bombardier's
jet already is significantly less expensive than comparable Boeing and
Airbus planes. At list prices, the 110-seat CS100 costs $62 million. The
130-seat CS300 costs $71 million. In contrast, the Boeing 737 MAX 7
costs $82 million and Airbus's A319 NEO costs $88.8 at list prices.
Bombardier
Chief Executive Pierre Beaudoin has been adamant that he will not "give
away" the plane to ensure a fat order book, and says the company has a
"good level of orders." In addition to the 138 firm orders, Bombardier
also has options or letters of intent for another 214 jets.
By
comparison, Boeing's 737 MAX has 938 firm orders, and Airbus' NEO family
has 1449, though only a small fraction of those orders are for the
smaller models that compete directly with the C-Series.
"What I
said before, and I remain firm, is we don't need to go and give prices
that we will regret when we deliver the airplane," Beaudoin said on a
conference call this week.
"This is a good airplane, with a huge competitive advantage and we can get the value for it, so I remain firm on that."
Still,
the plane's order flow has slowed. In 2009, the jetliner drew 50
orders, followed by 40 in 2010 and 43 in 2011. This year, just five
orders have come in.
The industry has been watching Bombardier
pricing closely since it snatched a provisional order for 20 planes for
AirBaltic in June. That order had been widely seen as all but certain to
go to Airbus. Industry experts say Bombardier has been more aggressive
with pricing since the summer.
Earlier this year, Steven
Udvar-Hazy, CEO of Air Lease Corp (AL.N), said Bombardier needed to make
"some sacrifices short term for the long-term benefit of the program."
"I
think they really need to be aggressive. ... Without that, the program
is not going to get the momentum it needs to be competitive with Boeing
and Airbus."
Some say all the C-Series needs is one order from a big airline, and that it should go for it at any cost.
"I
think they need to identify a blue-chip customer, like a Delta (DAL.N),
and really go ahead and cut an aggressive deal," said Scott Hamilton,
managing director of aviation consulting company Leeham Co.
DELIVERY SCHEDULE IN QUESTION
The
next test for Bombardier's pricing will come between the first flight,
now set for the end of June 2013, and the start of commercial service a
year later, said Robert Kokonis, managing director of Toronto-based
airline consultancy AirTrav Inc.
The company has said it wants to have 300 firm orders when the jet enters service.
"If
not much happens between (first flight) and the first customer
delivery, the sales force would have to get more aggressive," he said.
Some
also question whether Bombardier has the financial strength to offer
the kind of incentives needed to book more sales. And if the first
flight is delayed again, analysts are concerned that Bombardier may lack
the resources to keep shouldering the large, expensive project.
"At
that point in time, I think people will start having major
considerations about cash flow issues. People will look at what's going
to happen to Bombardier. How will they sustain $2 billion of spend year
after year after year?" said Stonecap Securities analyst Scott Rattee.
Blaming
a sluggish economic recovery, Bombardier said this week that cash flow
from its aerospace operations won't be enough to fund its $2 billion
worth spending, and it will dip into company cash resources for $500
million. The company has about $3.5 billion in short-term capital
available.
SURVEY SHOWS BUYERS LIMITED
The C-Series
aims to deliver 20 percent fuel-burn savings and 15 percent lower
operating costs than current jets, savings that airlines appreciate amid
rising fuel costs.
Yet even if the jet performs as promised,
arrives on time and carries a bargain price tag it faces other hurdles
in taking on Boeing and Airbus that are based on well-known planes.
Airlines
are keen to maintain a common fleet to keep a cap on parts and
maintenance costs and have pilots certify for and fly the same type of
aircraft, said Byron Capital analyst Tom Astle.
A survey of 26
airlines last year found that most were keen on the plane's savings, but
just 7 percent said they were likely to place an order in the next five
years, said Walter Spracklin, an analyst at RBC Capital Markets who
conducted the poll.
"The No. 1 factor holding people back was not
price: it was the fleet commonality. There is an expense to an airline
introducing a new aircraft in their fleet," Spracklin said.
With its deadline extended, Bombardier is working seven days a week to get the jet finished.
The
schedule is extremely ambitious, with little room for error. If the
CS100 jet flies in June 2013, as planned, with entry into service by
mid-2014, that will be record time.
"I've never seen another company do it in much less than two years," said Astle.
(Reporting by Susan Taylor and Nicole Mordant; Editing by Alwyn Scott and Richard Chang)
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