C Series Could Be Big Catalyst for Bombardier Stock
On June 3, Bombardier, Inc. (TSE:BBD.B) and its commercial aircraft division performed a flawless flight demonstration of its new “C Series” airliner. It was one reason for those who have been sitting on Bombardier stock’s fence to turn bullish.
The flawless flight demonstration was a decisive moment for the airliner and for Bombardier stock itself. Had the flight failed to impress, it could have spelled major delays for the program that would have been too expensive to contemplate. However, instead, the flight impressed and it is the reason that Bombardier investors can now sleep better at night.
A failed flight—which doesn’t mean a crash, but a failure to meet the company’s aggressive performance promises—would have been the signal to unleash a wave of short selling turbulence on Bombardier stock, but short selling Bombardier is the last thing I would consider. Indeed, Bombardier continues to trade at a stable price.
The C Series has defied some analysts’ calls to shut down the program just a year ago. But more than that, investors should consider the C Series as the tool to lift Bombardier stock.
The C Series flight demonstration impressed the kinds of people who make airplane-buying decisions from the 26 airlines that make up the Star Alliance, the largest airline group, including such airlines as Air China, Lufthansa, Singapore Airlines, and United Airlines.
The “CS100” performed better than anyone could have expected on the key indicator of fuel consumption. Apart from labor costs, airlines spend more on fuel than any other aspect of their operations. Cutting fuel burn by even one percent is a welcome achievement. On the flight lasting one hour and 50 minutes from Dublin to Zurich, the C Series burned 20% less fuel than the competing single-aisle aircraft most airlines use on this route now. (Source: “Bombardier C Series Aircraft Reaches for the Stars With Historic First Passenger Flight From Dublin to Zurich,” Marketwired, June 6, 2016.)
It was always going to be all or bust for Bombardier with the C Series. Not by chance, the plane’s performance has served as a gauge on Bombardier stock. But some Bombardier investors and analysts were perhaps too inexperienced in the aerospace industry to grasp that new airliners take many years after their first flight before they can start delivering profits.
By comparison, Boeing Co (NYSE:BA), which burned some $29.0 billion between expected and unexpected costs on the Boeing “787” program, expected to start profiting from the 787 airliner by the end of 2015. Now, some say profitability remains a pipedream. (Source: “Boeing Falls as Analyst Deems 787 Cost Recoup ‘Unachievable’,” Bloomberg, April 20, 2016.)
While ambitious, the Bombardier C Series has actually faced fewer regulatory problems than the Boeing 787, which had to undergo major design overhauls. Given the cost of Bombardier stock, at some $1.99 per share, Bombardier is just risky enough for persevering investors to have a chance at a nice return—some analysts predict a $2.30 share price, which is a 15% return in the shorter term.
Finally, while some enjoy pointing out that Bombardier had to offer major discounts to conclude its recent contract with Delta Air Lines, it should be noted that Boeing and Airbus receive heavy subsidies from their military and government relationships. Making an airliner is a huge undertaking and profits come slowly.
Should detractors point out that Boeing and Airbus launched their C Series rivals after Bombardier (which started in 2008), note that the C Series is an all-new airplane, designed specifically to address its purpose. Airbus and Boeing started from well-known and tested platforms such as the “A-320” and “737” families. In fact, this is one of the reasons the C Series has such a good chance at beating the competition on all major performance indicators.
So, the message for Bombardier investors is to have patience. While the company may remain a risky investment right now, the growing interest in the C Series is both welcomed and encouraging. The C Series will formally enter service in a few weeks and that’s when the market will start to take notice.