New Catalysts Could Be Huge for Bombardier Stock
The big topic of conversation about Bombardier, Inc. (TSE:BBD.B) has revolved around the “C Series” airliner for some time. The successes and failures of the C Series program have affected the course of Bombardier stock for the past few years. However, never has the C Series been more crucial to Bombardier’s market valuation than in the past year.
In the last quarter of 2015, rumors about the C Series and its production delays hampered Bombardier stock. Such was the level of pessimism that Bombardier stock’s share price dropped to about a third ($0.77) of what it is now, hovering around the $2.00-per-share mark. Bombardier stock should get a strong boost when it begins delivering the C Series to its launch customer, Swiss Global Air Lines, this month.
However, Bombardier stock has even more potential than that. I call it the stock’s “X-factor.”
There is no question that the C Series, Bombardier’s most ambitious project ever, will continue to drive Bombardier stock’s fortunes for some time. It also tends to cast a shadow over other bullish businesses at Canada’s largest industrial group.
Recently, as it happens, Bombardier said that Calgary-based WestJet has converted its remaining options into firm orders for new “Q400” aircraft. This order is all the more remarkable as it comes from an airline in one of the areas that has been hit the hardest by the depression in oil prices. This suggests that the market for regional airliners has organic strength. Other regional airlines in Canada and the United States are likely to experience demand, translating to more Q400 sales for Bombardier, which is perhaps the world’s top maker of regional airliners.
Bombardier said that it concluded the deal with WestJet for $293 million. The Q400 is the latest in the range of “Q Series” aircraft from Bombardier. It is available in several configurations, one with a seating capacity of up to 90. The latter model was introduced to fill regional traffic demand worldwide. (Source: “Bombardier offers 90-seat Q400,” AIN Online, February 17, 2016.)
Unfortunately, the market ignores this long and reliable revenue-generating machine.
Just last February, Bombardier sold two more Q400s to Ethiopian Airlines, by far Africa’s best airline—and actually one of the world’s best airlines. And Ethiopian Airlines, as it happens, is close to being the source of the next major news headline for the C Series program. This means it is going to be one of the factors to watch to predict a major surge in Bombardier stock.
Indeed, one of the reasons why regional airliner sales are so important to an expanding plane maker like Bombardier is the same reason why Mercedes Benz and BMW, for example, offer cars—always at the highest end—in all market segments. A buyer starts out with the introductory model only to upgrade as his or her income increases, eventually reaching the high profit-margin, top-of-the-line model.
In an airline, that kind of progression is even more important. By reducing the number of suppliers, an airline can better manage service levels, maintenance, and training costs. This is such an important factor that it’s at the heart of the success of such single-model airlines as Ryanair (with its Boeing “737”s) or Southwest, for instance. (Source: “Bombardier CSeries, Embraer vie for attention from Ethiopian Airlines,” Montreal Gazette, June 3, 2016.)
At a rumored 30 planes, the potential Ethiopian Airlines order would be in the range of some $3.0 billion. However, perhaps the most important outcome of the deal is that it would establish the C Series in a rapidly growing market. Ethiopian Airlines needs the planes to fill demand in Africa’s growing travel market. The airline will be the pioneer in new markets, but it will also stimulate competition from other carriers needing similar 100–150-seat ultra-efficient jets.
As for Ethiopian Airlines, itself, this carrier is opening a number of direct service routes from Africa to Europe and North America. It is buying more long-haul airliners like the Boeing “787,” which then feed traffic to regional routes in a self-perpetuating growth cycle. As in the deal that Bombardier recently won with Delta Air Lines for 75 C Series aircraft, the Canadian plane maker is competing with Brazil’s Embraer for the Ethiopian Airlines contract. The fact that Bombardier has a solid relationship with Ethiopian Airlines through the Q400 is an important point in its favor.
Finally, what might be the best news for Bombardier stock is that, as the president of Bombardier Commercial Aircraft, Fred Cromer told The Wall Street Journal that the company could start to sell its C Series planes at higher margins. Like all plane makers, Bombardier offered incentives and discounts to secure the initial deals. Having made those deals, the company no longer has to offer those discounts.
The fact that Bombardier can make such a statement is a strong mark of confidence in the company’s future and its stock—whether or not the company gets an investment boost from the Canadian federal government.
The C Series will soon have a chance to prove itself in the commercial environment. The launch customer, Swiss Global Air Lines, will be getting its first C Series models over the next month in order to begin commercial service in July.