Bombardier Suffers a Delay, But It’s More Manageable This Time
Bombardier, Inc. (TSX:BBD.B) said it would deliver half of the “CSeries” aircraft that it expected to deliver over the last months of this year. Bombardier stock predictably suffered, closing at CA$2.03 per share. But the loss was minimal for two basic reasons. The first is that the delays this time have nothing to do with Bombardier itself; it has to do with Pratt & Whitney Canada, which makes the geared turbofan engines for the CSeries.
Indeed, while down 4.25% for the day, Bombardier stock was still trading some seven percent higher than a month ago. When you consider Bombardier’s 58% year-to-date gain, BBD.B stock has not lost any of its appeal. As for Pratt & Whitney, the engine delays are due to problems in keeping up the production rate. Where Bombardier stock is concerned, this is much better news than if the engine manufacturer had blamed the slowdown on a design or performance flaw.
Bombardier, based in Montreal, now expects to deliver seven—instead of 15—aircraft to Swiss International Air Lines and Air Baltic Corporation this year. Such a setback, had the company itself been responsible, would have caused a much bigger loss. But given that the cause of the delay is not technical, the damage to BBD.B stock was relatively minimal. The new delivery forecast means that the plane manufacturer will report 2016 revenues closer to the lower end of its guidance of US$16.5 billion to $17.5 billion.
This Time It’s Not Bombardier’s Fault
A technical problem, rather than simply a production slowdown (Pratt & Whitney makes the same type of engines for other plane manufacturers) would have hurt BBD.B stock considerably. For example, in 2014, during the testing phase, an engine fire on the ground caused Bombardier to delay CSeries testing for four months. Pratt & Whitney simply explained its delay, noting that there is pressure on deliveries. Now, in order to have a delay in deliveries, you need to have the sales in the first place.
The CSeries program has been delayed by two-and-a-half years from its initial schedule. This has predictably forced cost excesses. But no commercial airplane company, given the complicated design and safety concerns for each single component, has delivered any new airliner on time and on budget. All aircraft companies, from Boeing Co. (NYSE:BA) to Airbus, have suffered delays—often longer and more expensive than anything Bombardier has experienced.
Meanwhile, on happier news, Bombardier confirmed having received the second tranche of a $500.0-million investment from the government of Quebec, which is the Canadian province where Bombardier has its main operations. Moreover, Bombardier has every reason to remain confident that it will produce between 90 and 120 CSeries per year by 2020. Moreover, while it will have to offer some cost reductions as penalty for the delays to Swiss International Air Lines and Air Baltic (its launch customers for the “CS100” and “CS300” aircraft), Pratt & Whitney will compensate Bombardier for the delay.
First CSeries Planes Are Flying and Customer Is Satisfied
Meanwhile, even as the first CSeries plane is already providing regular route service with Swiss International Air Lines, Bombardier will still deliver the first CSeries 300—a larger version—to Latvian carrier Air Baltic in the fall. At this point, what’s important is how well the planes that are already in service perform. Good performance will sell more planes. Delays with suppliers and related glitches have plagued Boeing and Airbus for years. Eventually, as production settles into a routine, Bombardier will be better able to address deadlines and targets.
Bombardier, which can eventually expect to get an investment from the Canadian federal government to help with production, has so far banked 370 firm orders for the CSeries and 380 options and commitments. Moreover, despite the delays and related lower-revenue guidance, Bombardier could still deliver the same earnings. This is because the company has experienced solid demand for its higher-margin business jets, which will compensate for any missed CSeries deliveries.
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