Bombardier may have made a mistake when it cancelled the BRJ-X. Can it reverse its fortunes with the CSeries?
Asked to predict when struggling Bombardier will return to financial strength, chief executive Paul Tellier challenged the questioner: "Tell me how long it is going to take for the airlines to get back on their feet, where the Canadian dollar will be, where the oil price will be, and I will tell you when."
While Bombardier has justification for blaming its difficulties on factors it cannot control, the Canadian company is also paying the price of past decisions. Among those was its 2000 judgement not to develop the 100-seat BRJ-X. Had the programme gone ahead, the large regional jet would have been entering service around now, amid strong signals that the market is moving towards larger aircraft.
Instead, Bombardier is now building the business case to launch development of a 110/135-seat airliner, the CSeries, while relying on its existing CRJ family of 50-, 70- and 86-seat regional jets to keep orders coming in for the five years it will take to develop the larger aircraft. But those five years look like being challenging.
Higher fuel costs are making it harder for airlines to operate 50-seaters profitably and struggling US airlines are succeeding in persuading their pilots to relax restrictions on operating 70-seaters. Low-cost carriers, led by JetBlue Airways, are adding 100-seaters to their fleets. These trends lead analysts to warn that the 50-seat regional jet market is on the verge of a rapid decompression (Flight International, 16-22 November).
The speed of the slowdown has forced Bombardier to adjust output of its 50-seat CRJ200 twice in as many months. In early October, the company announced it was cutting production from 98 in its current 2004-5 fiscal year to 68 for 2005-6, resulting in the loss of 2,000 jobs by July next year. Then, earlier this month, Bombardier announced a further reduction in CRJ200 production, to 54 in 2005-6, while keeping output of the 70/86-seat CRJ700/900 essentially unchanged at 77 aircraft. This time the workforce escaped because of increasing business jet production.
While Bombardier has reacted quickly to the downturn in the 50-seat market, analysts believe worse is to come. One reason is the number of orders held by the US airlines either operating under or warning of Chapter 11 bankruptcy protection - a concern the manufacturer acknowledges, but plays down. While Delta Air Lines, Independence Air and US Airways account for around 40% of CRJ orders, "the backlog is not in jeopardy", says Bombardier Aerospace president Pierre Beaudoin.
Credit concerns
Concerns over Bombardier's declining regional jet order backlog were among the reasons for a rash of downgrades by credit rating agencies over the past month. While Tellier has brushed off the downgrades, citing the company's strong liquidity, junk status will make borrowing more expensive for the company as it tries to get the C$2 billion (S1.63 billion) CSeries programme off the ground.
The predicament is clear from an analysis of the orderbooks of both manufacturers. Based on company figures and factoring in orders and cancellations announced since the end of their respective third quarters, Bombardier and Embraer have identical 130-aircraft firm order backlogs for their 50-seat regional jet families - about two years' production at current rates.
These orders already in hand represent more than a third of the 650 30- to 60-seat aircraft Embraer now expects to be delivered over the next 10 years - a 500-unit reduction from its forecast of just a year earlier that is a stark reflection of the accelerating market shift towards larger regional jets.
Over 20 years, the Brazilian company is projecting deliveries of 1,950 30- to 60-seat aircraft, down 650 units from a year earlier, but options and conditional orders already held by the manufacturers - 656 by Bombardier and 431 by Embraer - account for more than half the projected deliveries. This is a sign the small regional jet market has passed its peak.
Bombardier has not released its own forecast, but it is in line with Embraer's, says Beaudoin. "Forecast demand for new 50-passenger regional jets has come down as the growth is behind us. What we see is growth in 70- to 90-passenger jets." But the extent to which the company can capitalise on that growth is open to question.
The challenge is clearly reflected in the orderbooks. Including orders announced since the end of their respective third quarters, Bombardier has 92 CRJ700s and 21 CRJ900s in backlog compared with 134 Embraer 170/175s and 170 Embraer 190/195s. The bulk of Embraer's 170/190 firm orders remain to be delivered - the opposite is true for Bombardier.
These backlogs account for only a fraction of the demand for large regional jets foreseen by Embraer, which forecasts a 10-year market for 1,300 61- to 90-seaters and 1,250 91- to 120-seaters. The long-term forecast shows a continuing shift to larger aircraft, with 20-year delivery totals of 2,850 and 3,000 units, respectively.
While a further shift to larger aircraft will bolster Bombardier's business case for the 110- to 135-seat CSeries, it presents a serious threat in the near term. With 270 sold, the CRJ700 still holds the majority share of the 70-seat market, but with only 45 sold the 86-seat CRJ900 is clearly lagging behind the Embraer 190/195. Analysts expect the disparity to grow as demand shifts to larger aircraft.
Analyst Peter Rozenburg of UBS projects that 30- to 60-seaters will constitute only 27% of regional jet deliveries by 2006, down from 60% this year. While shipments of 61- to 90-seat aircraft are projected to increase in 2005, they are forecast to decline in 2006 as 91- to 120-seaters grow to 15% of deliveries. This is not good news for Bombardier, UBS concludes.
One reason for the pessimism is a belief that Bombardier's 70/86-seat regional jets will not maintain their competitiveness. Derived from the CRJ200, the CRJ700 and the further stretched CRJ900 were designed to appeal to operators of the Bombardier 50-seater. As more airlines buy 70- to 110-seat jets, Embraer's bigger-cabin 170/190 family is expected to dominate.
Bombardier was first to market in the 70- and 90-seat segments, delivering the first CRJ700 in January 2001 and first CRJ900 two years later, but Embraer is rapidly making up for lost time. Deliveries of the 170 began in March and the 190 is to enter service in August next year. UBS forecasts Embraer will overtake Bombardier in regional jet deliveries next year as 170/190 production ramps up.
Market shift
The rapid market shift to larger aircraft has cast a critical light on Bombardier's reasons for shelving the BRJ-X in 2000. Unveiled in September 1998, the aircraft was originally conceived as an all-new 90- to 110-seater, but was moved upmarket in 1999 when the company begun studying the CRJ900 stretch of the CRJ700. But making the BRJ-X larger moved it out of the regional airline market with which Bombardier was familiar and brought concerns over competing directly with Airbus and Boeing.
Bombardier shelved the BRJ-X in late 2000, saying the then-rapid growth of the 50- to 70-seat regional jet market had undermined the requirement for a larger aircraft. Embraer by then had launched its 170/190 family of 70- to 108-seaters. With four-abreast seating, the 170/190 was smaller than the five-abreast BRJ-X, but similarly all-new, with development costing Embraer and its risk-sharing partners $900 million.
A second opportunity to enter the 90- to 110-seat market emerged in 2002 when Bombardier was offered the chance to acquire the 728/928 programme from bankrupt Fairchild Dornier. After a technical, commercial and financial review, the company declined the offer, saying the programme did not meet its investment standards.
When Tellier took over as chief executive in January 2003, his focus was on strengthening the balance sheet, improving financial transparency and restoring investor confidence. One early action was to restructure the company around its aircraft and rail businesses, and slow the product-development pace that had driven the company's rapid growth. "It is time to take a breather and make money. The major investments are behind us," he said at the time (Flight International, 8-14 April 2003).
A few months later Tellier said the company could revisit its decision to shelve the BRJ-X "in 18-24 months...but at this time we are satisfied with our line of products" (Flight International, 24-30 June). But, within six months, Bombardier had launched a study into the 100-seat market. Perhaps recognising it had missed the boat on the 100-seat market, this evolved into the four-model 110/135-seat family of CSeries airliners unveiled at the 2004 Farnborough air show.
The CSeries is intended as a fully fledged mainline airliner, and is being defined by a New Commercial Aircraft business unit separate from Bombardier's Regional Aircraft division. Concerns about competing head-on with Airbus and Boeing do not seem to be holding the company back - a sign of the critical importance of the programme.
Bombardier is working with a shortlist of potential risk-sharing suppliers to define the CSeries, with the intention of seeking board authority to offer the aircraft in February next year. The company seems convinced there is a 6,000-aircraft market, but the biggest hurdle remains raising the development funding. Bombardier intends to put up only one third of the money, with one third to come from risk-sharing partners and one third from government. To that end, the company is conducting a competition between potential assembly sites in Canada, the UK and the USA.
Repayable loans
While government support would take the form of repayable loans, Bombardier's demands come when the long-running subsidies dispute between Brazil and Canada is only recently settled, and Europe and the USA are at odds over Airbus launch aid. "We are not looking for any subsidy on CSeries," says Beaudoin. "What we are asking for is legal [under World Trade Organisation rules]."
Signs are the Canadian and Quebec governments will provide funding. "We are having a very good dialogue with governments - plural," says Tellier. Arguing that Canada risks losing its aerospace industry, transport minister Jean Lapierre has warned it is "now or never" for government aid, and last week Quebec underlined its backing for Bombardier by providing C$750 million in loan guarantees for CRJ sales. This will help to secure additional CRJ orders, but also underscores the seriousness of concerns for the company's future.
GRAHAM WARWICK / WASHINGTON DC
Source: Flight International
