Bombardier's deal to grant Airbus majority ownership of CSeries throws a needed lifeline to a flagship aircraft that observers widely compliment for efficiency, technological advances and relatively smooth entry-into-service.
But the deal's fine print highlights Bombardier's challenges, and raises the possibility Bombardier might eventually sell all of CSeries to Airbus.
Meanwhile, a Boeing-led trade dispute simmers.
It all makes for a dramatic entanglement of three of the world's leading aircraft manufacturers – a tussle over an advanced aircraft with uncertain commercial success.
"Having Airbus now take over the assembly and the sales of [CSeries] – all of a sudden this is real drama," says Darryl Jenkins, executive director of think tank American Aviation Institute. "What is Airbus going to do with this advanced technology? That to me is the interesting thing."
"The transaction illustrates Bombardier’s… difficulties in winning CSeries orders, pressures on cash flows and trade pressures," says Fitch Ratings in a 17 October research note. "At the same time, Airbus’ agreement also highlights that the CSeries is high-quality aircraft with very positive operational reports from initial customers."
The agreement, announced 16 October, calls for Airbus to acquire 50.01% of the CSeries Aircraft Limited Partnership – the entity that manufactures and sells the aircraft. The companies expect the deal to close in the second half of 2018.
Bombardier would be left with 31% ownership, and government corporation Investissement Quebec would hold 19%, the companies say.
Currently, Bombardier owns 62% of the partnership and Investissement Quebec owns 38%.
Adding another chapter to Canada’s star-crossed aviation history, the deal ends Bombardier’s decade-long, independent pursuit of the small narrowbody segment. When the programme was launched in 2008, the CSeries represented arguably the Canadian industry’s most ambitious project since the Avro Canada CF-105 Arrow, an elite fighter design cancelled in the late-1950s over budgetary pressures in Ottawa.
But glitches with the CSeries’ advanced fly-by-wire controls during flight testing set back entry into service by 2.5 years. The CS100 and CS300 have operated smoothly for the two launch operators, but production bottlenecks have prevented Bombardier from ramping up deliveries to raise cash.
In the end, Bombardier was forced to “sell” a majority share of the programme to Airbus for no cash in return, handing the CSeries off to a company that had often belittled the CSeries in public and undermined it at the negotiating table with interested airlines.
In addition, Airbus and Bombardier say they intend to open a CSeries final assembly line in Mobile, Alabama. The companies would produce aircraft for US customers at that site, avoiding a potential 300% tariff on CSeries imported into the USA.
"This is game changing for Bombardier," Bombardier chief executive Alain Bellemare said during a conference call. "By combining Airbus's global reach and scale with Bombardier's state-of-the-art aircraft, we will create tremendous value."
"We will also secure jobs," he said, predicting the deal will lead to more sales and more employment.
Bombardier chief financial officer John Di Bert estimates Airbus's involvement doubles the value of CSeries to "something that is north of" $4 billion.
THE DETAILS
Analysts quickly noted that the agreement requires Airbus to pay nothing at closing for an entity valued at $4 billion.
Airbus will, however, supply CSeries with sales, marketing, procurement and customer support – the commercial heft the companies say will help make CSeries a success.
The deal also gives Airbus a call option to purchase all Bombardier's CSeries interest after seven-and-a-half years. Bombardier likewise gains a put option — allowing it to require Airbus purchase the shares, the companies say.
Bellemare calls those options a "safeguard" in the event the CSeries programme flounders. But, he adds: "We are not doing that with the objective of not making it work".
"The intention is to make this a huge commercial success," he says. "We have no intention to exit that segment of the market."
Rob Morris, head of FlightGlobal's Flight Ascend Consultancy, sees a sale as likely.
His guess? "If it goes well, Airbus will call. And if it goes badly, Bombardier will put," Morris says. "It does seem to me that in seven years time Bombardier will be completely out of CSeries."
If that happens, Bombardier's commercial division would have CRJs and Q400s – both of which face extreme competitive pressure, Morris notes.
The CRJ, though still competitive in the USA thanks to provision in pilot contracts, has older technology than in-development models like Embraer's E-Jets E2 and Mitsubishi Aircraft MRJs.
Meanwhile, Bombardier has 49 outstanding Q400 orders. By comparison, ATR has 222 outstanding turboprop orders, according to Flight Fleets Analyzer. Adding more pressure, Embraer has recently discussed launching a new turboprop.
"Perhaps in a few years Bombardier will be completely out of commercial aerospace, with only their business jet business left," Morris says.
The Airbus deal would also leave Bombardier with just two of seven seats on the CSeries' board. Investissement Quebec would have one, and Airbus would gain four seats, including power to name the board chair, according to the companies.
Airbus and Bombardier officials also think they will avoid a potential 300% import tariff by opening a US assembly site.
"When you produce an aircraft in the US, it is not subject to an import duty under US rules," says Bellemare on 16 October.
The US Commerce Department in recent weeks ruled preliminarily to issue a 300% import tariff following an investigation stemming from an April petition filed by Boeing.
Boeing accused Bombardier of receiving heavy subsidies and then violating trade laws by selling CS100s to Delta Air Lines for a significant loss.
Bombardier and Delta have denied the claims, and the Commerce Department's ruling remains subject to a final ruling and a separate investigation by the US International Trade Commission.
Regardless, Boeing says Airbus' plan to open a US assembly site will not enable the companies to skirt the tax.
"Any duties finally levied against the CSeries… will have to be paid on any imported CSeries airplane or part," said a Boeing tweet attributed to general counsel Michael Luttig.
THE RIGHT MOVE?
Financial analysts and observers believe Bombardier made the right move, and they see a bright future for CSeries.
"We believe the support of Airbus could be the catalyst that turns airline interest into firm orders," says a report from the National Bank of Canada. "The deal effectively turns the CSeries into an Airbus program, which means it will have the full sales support of Airbus behind it."
Moody's Investor Services says CSeries is now "in prime position to capture the majority" of expected demand for 6,000 aircraft in the 100- to 150-seat category in the next 20 years.
Jenkins at the American Aviation Institute thinks CSeries will mature under Airbus into the aircraft Bombardier has long envisioned.
CSeries is unique, he says, providing a more comfortable ride for passengers and technological improvements that translate into significant fuel savings.
"It changes route economics", making unprofitable routes profitable and turning marginal routes into real moneymakers, he says.
Airbus might possibly fold some CSeries technology into A320s. Or, it could develop the larger version dubbed the "CS500", which Bombardier has long contemplated, Jenkins says.
Yes, a CS500 would compete with A320s, but demand for such an aircraft might exist, Jenkins says. He notes that JetBlue Airways and Spirit Airlines – both large Airbus customers – backed Bombardier against Boeing's trade petition.
"I have this hunch JetBlue or Spirit might be looking at a different aircraft in the future," he says.
Source: Cirium Dashboard
