Fasten your seatbelts

Pierre Beaudoin’s brainchild, the Bombardier CSeries jet, is a game changer and has shaken up the industry. Takeoff was a great success. But the question is, will it deliver?

It was with more of a whisper than a bang that Bombardier’s CSeries took off on its maiden flight at 9:54 a.m. on September 16, 2013.

One of its key selling points is the reduced noise at takeoff, advertised as four times lower than any other craft its size. And it is quiet, so quiet that many of the 300 guests and thousands of employees assembled in Mirabel, Que., for the momentous occasion almost missed its takeoff.

“It’s unbelievably quiet, the same sound footprint as a turboprop,” says Addison Schonland, president of aviation consultants Innovation Analysis Group, based in San Diego. “That will be very good for some airlines, Porter for example, whose planes land very near downtown Toronto.”

Another selling point of the CSeries is its projected 20% fuel economy compared with other planes in the same category. While the 150-minute maiden flight was not long enough to firmly establish that, it does point to a confirmation.

The successful flight was a crowning moment in the career of Pierre Beaudoin, president and CEO of Bombardier Inc. One could say that the CSeries is the towering presence Beaudoin casts at Bombardier. Shortly after becoming president and COO of Bombardier’s aerospace division in 2001, he launched the first CSeries program. Then came the 9/11 terrorist attacks, which quickly pushed it onto a back burner as the whole airline industry suffered from deadly turbulence.

Then, in 2008, after taking over the helm at Bombardier, Beaudoin revived the program.

It was a huge gamble at a difficult time. The entire 2000 decade was a rough ride for Bombardier, just as it was for the whole aeronautics industry. Of course, revenue and profit were hit by the downturn, but by 2012 the company landed on higher ground. Through that period, Bombardier’s aerospace division accounted for approximately half the company’s revenue, the other half coming from its rail transportation division.

Plane delivery numbers fluctuated. The business jet category, which Bombardier comfortably dominates, did quite well. For example, 86 Challengers were delivered in 2012 compared with 39 in 2000, after a peak of 121 in 2008, dropping to 73 in 2010 in the wake of the financial crisis.

Nowhere did Bombardier suffer more than in the regional jet category, which it practically invented back in 1989 by introducing the CRJ. After reaching an all-time high of 214 crafts in 2003, it fell into a tailspin, dropping to 14 deliveries in 2012.

When Beaudoin took over as CEO, the writing was on the wall: CRJ production had sunk to 56 crafts. The category was dominated by Embraer, the Brazilian manufacturer that had started to deliver its regional models E-190 and E-195 in 2005. Bombardier’s deliveries declined almost in exact inverse proportion to Embraer’s: the 12 E-190 deliveries ramped up to 78 in 2008, before sliding to 68 in 2011, according to AirInsight’s Market Analysis of the 100-149 Seat Segment, August 2012.

But the most significant thrust in Bombardier’s fall, also affecting Embraer, has been the demise of the regional jet market. “Demand for 50-seat planes has practically evaporated,” says Cameron Doerksen, industrials and transportation analyst with National Bank Financial in Montreal. “US airlines, the main buyers, are not doing so well and not building up their regional fleets anymore.”

The numbers tell the story: before Beaudoin became president, regional jets were the dominant category in the company’s aerospace division, says Doerksen. By 2012, business jets dominated, with sales of US$4.6 billion on total division sales of US$8.6 billion; by then, regional jet sales had withered to US$1.1 billion. (The company’s services and manufacturing activities account for US$2.9 billion.)

The other side of the coin

But opportunity is the flip side of a crisis, and Bombardier saw an opportunity at the entry level of commercial airliners: planes that fly with 100- to 149-seat capacity and still have only a single aisle. “The duopoly of Airbus and Boeing has neglected this market segment for the last 30 to 40 years,” says Sébastien Mullot, director of Bombardier’s CSeries program. “The Mcdonnell Douglas MD80 was the last completely new plane to be introduced in this segment in the early ’80s.”

Today, not a single plane flying in the market Bombardier covets — the 100 to 149 seat — has been designed specifically for it, with the near exception of the more recent Embraer crafts. The Airbus A318-319 models and the Boeing 737-600 and 700 models are much heavier, overqualified, less economical and larger planes that have been re-engined and retrofitted to quickly fill that market slot. And Embraer’s 2005 models, originally designed for the 80-seat segment, were reworked to fit the bill.

Bombardier jumped in with the CSeries, a new plane optimally designed for the targeted segment “because we think there’s a lot of pent-up demand there,” says Philippe Poutissou, marketing vice-president, Bombardier commercial aircraft.

For Bombardier, this represents a departure from the regional category, with the hub-and-spoke, short-distance and small-capacity hauls, and is the entrance to long-distance flights with larger seat capacity.

Three developments favour this market. First, there is a move toward what the AirInsight study calls rightsizing: following the increase in the price of oil, airline companies want planes that have an optimized cost-capacity mix. This means airlines are replacing the overqualified Airbus and Boeing crafts with planes that cost less to transport an equivalent number of passengers. This is where Embraer’s planes are currently gaining traction — and where Bombardier aims to overtake with its CSeries.

The AirInsight study also shows that average flight distances call for smaller, more efficient crafts. Among US airlines flying the overqualified Airbus A319, for example, the average flight length is 716 nautical miles, and that’s only 22% of that model’s potential range. According to the study, “Airbus and Boeing have grown their A320 and 737 family ranges beyond what is necessary for the majority of flights operated in the US and elsewhere.”

Third, the logic of rightsizing combined with shorter distances will inevitably prevail in tomorrow’s fast-growing emerging economies. “Up to 2022, air traffic in emerging markets is projected to grow 6.6% annually, and only 2.3% in North America,” says David Yang, lead analyst at industry research firm IBI SWorld in New York. And the Chinese market, where Bombardier has a firm footing thanks to a major partnership with Shenyang Aircraft Corp., which manufactures the CSeries fuselage, is a target market for Bombardier. “We know there will be a large need for planes of our type,” Poutissou says.

To the sizable opportunity it saw, Bombardier responded with a $3.2-billion development initiative, as originally planned, but “is trending toward a development cost of $3.9 billion — barring any major program delay,” writes RBC Capital Markets analyst Walter Spracklin. That’s a 22% cost overrun. But there’s no reason to worry, according to Spracklin, who believes “this will not have a material impact on Bombardier’s liquidity position and can be easily funded through the balance sheet.”

Tying it together

For its massive undertaking, Bombardier had to marshal all the resources of its vast global network. Nowhere does that effort show better than in the way design activities ramped up and all supply chain parts were tied together.

An initial design team of 30 engineers determined all the components necessary to come up with a leading edge craft. Once all the pieces fit together — at least in theory — small teams of engineers and designers came from global partners to improve and refine the individual pieces of the puzzle. Weaving all those people into a single mind web “involves an extraordinary logistical effort,” says Fassi Kafyeke, Bombardier’s director of strategic technologies. And by the time of the maiden flight, the number of players devoted to the CSeries had ramped up to 2,000-plus workers.

The key technology at the centre of the design is Pratt & Whitney’s Geared Turbo Fan engine, a remarkable piece of machinery. Above that founding technology, Bombardier added many of its own, for example an extensive use of composite materials reaching up to 43% of total weight and electric brakes that the company “has spent four years developing and fine-tuning,” says Kafyeke.

Welding together a supply chain of a few hundred direct and indirect suppliers from all continents, Canada alone accounting for more than 180 employees, is an art Bombardier has been refining “since we pioneered that approach with the Global Express plane in 1993,” says Claire Auroi, Bombardier’s manager, strategy, aerospace supply chain. “Implementation of a strategy of integration is more recent for players like Boeing and Airbus.”

Before the CSeries, partner suppliers essentially participated in the manufacturing stages. “With the CSeries, we brought them in at the design phase of the plane,” says Auroi. She presents the analogy that previously suppliers acted more as order-takers, with Bombardier supplying them with all the specifications for 10,000 pencils they were to manufacture. Now, for the CSeries, Bombardier challenged those same suppliers to develop for it the best possible writing device that will last 20 years. It was up to them to come up with a pencil, a pen or word-processing software.

Of course, in such a scenario suppliers shoulder a larger share of the financial risk, but also stand to gain a larger share of the profit. And their upstream contribution is beneficial for the plane manufacturer since each is expert in its own domain and has a better understanding of the leading-edge technologies in its field. “It allows us to build a better-performing plane,” Auroi says.

The big “if”

But can Bombardier pull it off? In a sense, developing a leading-edge craft was the easy part. Its biggest challenge is yet to come and that is in the marketplace, where there appears to be strong head winds.

The fundamental fact to remember is that Bombardier is moving into a totally different market, one Airbus and Boeing consider their private reserve. If Bombardier was entering those hunting grounds stealthily, silently tiptoeing around the sleeping giants to capture a fair share of game, things would probably be easier.

But that is not the case. “In 2008, the CSeries launch came from left field,” Richard Aboulafia, Teal Group vice-president, analysis, wrote in a June 2013 letter to clients. And it certainly did not go unnoticed. “By co-creating the CSeries, Pratt & Whitney lit the fuse on the single aisle powder keg (i.e. the smaller crafts at the lower end of the mainline market that have only one aisle rather than the double aisles of the massive intercontinental planes). Airbus, threatened by a new single aisle jetliner with new generation engines, fought back like a crazed wolverine.”

That resulted in a flurry of hyperactivity on the part of Airbus, Boeing and Embraer. Each successively entered the game with a new family of crafts, though in all cases they are older, but redesigned and, except for Embraer, overqualified planes.

However, the Airbus and Embraer redesigned models integrate new motors, notably the same Pratt & Whitney engines the CSeries boasts. That is a troubling element, since fuel and noise reduction in the CSeries are essentially the result of the Pratt & Whitney motor. These competing crafts will enter service in 2016 for Airbus, 2017 for Boeing and 2018 for Embraer.

The 2016 Airbus 319neo introduction could lead one to think that Bombardier will have the market to itself for at least two years, but that’s not to be. The competition is on. According to Aboulafia, Airbus and Boeing are currently selling their new crafts and as of June 2013, had 2,500 combined and imminent orders of more than 3,000, compared with Bombardier’s 177.

But these numbers can be misleading. In reality, the 100- to 149-seat segment where the CSeries flies represents only a small fraction of total Airbus and Boeing orders. As of November 2013, according to Scott Hamilton, managing director of aviation consultants Leeham Co., firm orders held by the two in that segment numbered only 100 crafts against Bombardier’s 177 firm orders.

Compared to the competitor’s re-engined models, the AirInsight study still sees key cost advantages for Bombardier’s totally new design. For example, the bigger CS300 will have a fuel cost per 600 nautical mile mission of US$3,039 compared with US$3,331 and US$3,348 for its direct competitors, the Airbus 319neo and Boeing 7MA X. A US$300 difference per flight adds up to millions of dollars of savings over the lifespan of a plane.

But are economic advantages based on technical superiority enough for Bombardier to secure a 50% share of the 6,900 total units it forecasts will be sold in the next 20 years in the market segment it targets? Such an ambition is “optimistic,” Hamilton says, though he believes Bombardier has the potential to become the leader in that segment.

But the competition has other weapons: deep pockets. They can crush prices, and their legacy airframes give clients cost advantages on spare parts and crew and mechanic training that count in the long run.

That means Bombardier will have to be very aggressive on price and marginal advantages, says Aboulafia. The CSeries “is a very good jet,” he says, but wonders if it’s in the hands of the right company. The problem for Bombardier, as Aboulafia sees it, is that it is not competing with the average cost of an Airbus single aisle jet. It is competing with the marginal cost to Airbus of building additional A319neos on top of the hundreds of A320/321neos it will be building annually. Furthermore, he asks, “Do major airlines want to make some space for a new entrant alongside the Airbus, Boeing and Embraer planes they already operate?”

Bombardier will be forced to offer very seriously discounted CSeries prices to match this volume,” Aboulafia says. “Right now, that’s what it should be doing: heavily discounting, offering walk-away rights, residual value guarantees and even [original equipment manufacturer] finance to gouge its way into the market. But the weak order book implies it isn’t doing those things. Does it have the financial power to begin with?”

Good question. “We were in a similar position when we introduced the regional jets, and we succeeded,” Poutissou says. “Today, with a good product, we will offer the choices and the necessary conditions to win accounts.”

Yes, the regional jets were successful, but it’s a market Bombardier lost to Embraer. Bombardier “doesn’t have the government backing the other guys have to survive a serious crisis,” says Aboulafia, who thinks that Embraer, with an E2 jet smaller and lighter than the CSeries “beats Bombardier with Bombardier’s own argument. If the folks behind the CSeries don’t get serious about selling it, and it slowly dies, it will have done a lot of good. The world will be able to thank Canadian taxpayers for their noble sacrifice.”