After more than ten years of posting on Bombardier, it's nice see a blog like this which seems to share a lot of my own perspective on various topics, as expressed here in posts over the years. Hey, I almost don't have to post anymore...
I'm sure that would be welcome news to some on this board. But that ain't gonna happen anytime soon. We aren't here to try to be popular. The main reason for posting is to learn something about Bombardier, and we can do that whether anyone approves or not.
That said, it's nice to see the share price moving up against a falling market for a couple of days in a row. That's definitely a sign of strong support at these levels - along with the fact that the share price has been beaten down a bit since the release of the earnings results at the beginning of the month.
In any event it isn't just that these guys get into some interesting aspects for consideration on various issues regarding the aerospace markets, but they're also able to see at least some points for the other side of the coin when presenting their arguments. An ability to describe points for the contrary of the view he, or she is presenting is a good sign a poster is trying, at least, to counter his, or her own biases and gives truth a higher value than anything else.
Now that Airbus’ NEO is official, what next? We now have three players in the 100-149 seat segment. The duopoly is over and the segment is now more complex. Before NEO, Airbus and Boeing vacillated between three options; do nothing, re-engine or do a clean sheet design. But with NEO here the three players
Below we offer a quick summary of key points in the 100-149 seat segment.
Airbus
• Had to refresh the A320 family as it was falling behind
• NEO is a considerable update – the NEO should be more fuel efficient and quieter than the 737NG
• Is threatened by the Bombardier CS more than Boeing – and was forced to respond after losing the Republic order
• May struggle to get customers to pay a premium for NEO
• Does have a very strong customer base to build on
Boeing
• Has held its next 737 decision back as long as it can – but key customers expect a response to NEO
• Is focused on PIP offering 2% better fuel burn – the focus is on incremental improvement and still not keen to re-engine while thinking of an NG+
• Is taking the lowest risk approach to next steps – and could wait another 12 months before a decision
• If the decision is a clean sheet program, Boeing faces high R&D costs with little time for R&D recovery on 787 and 747-8 – potentially some resource constraints
• Should be able to offer best pricing – the established (est. 1967) 737 program allows for significant financial flexibility now
• Does have a very strong customer base to build on
Bombardier
• Has managed to get some sales
• CS promises to offer excellent performance – quieter, better fuel burn and adequate range
• But sales have been slow – partly due to the economy, but also because of delayed Airbus and Boeing decisions impacted the segment
• Could easily see its sales campaign negatively impacted by Airbus and Boeing pricing
• Is stuck in the role of outsider in segment
This segment is now being watched closely because it pits the new player against the well established duopoly. Can Bombardier compete against the two giants? Each sale stands on its own – but momentum is important. Which of the three announces the first sale since NEO was announced will achieve an important PR win.
The large customer bases Airbus and Boeing control throw up hurdles for Bombardier. Fleet switches are complicated and expensive. Then toss in big discounts and you can see what a new player is up against. But this assumes things stay broadly as they are; which is not the safe bet.
Here are some variables to consider:
Oil: If oil prices spike again then Boeing is at a disadvantage. Airbus’ NEO is less at a disadvantage but the earliest these planes achieve EIS is 2016. Airlines will be clamoring for lower fuel burn immediately and Bombardier might be able to exploit this sooner. Even now, with oil prices over $90 airlines are trying to recover the cost through higher fares. But EU taxes are adding to the cost, making the next generation of airplanes something EU airlines are keen to see.
Delays: If the compensation charges for delayed 787s and 747-8s grow, big discounts on 737s are unattractive for Boeing. Airbus has been hit with A380 delay costs as well as negative impacts from the A400M. The company is watching the A350XWB program closely to ensure careful resource use. Anything that causes Airbus and Boeing to see more delay costs works in Bombardier’s favor. Indeed the delays at the big OEMs to date have been very useful to Bombardier.
Orders: As we have seen with the 787 and A350XWB, once a program gathers sales momentum, order slots evaporate fast. If Bombardier manages to attract a few key orders, then more orders could come in simply to ensure a delivery slot. Moreover, if oil prices spike then scarce deliver slots become even more important.
Pricing: Clearly Airbus is unlikely to get the premium it wants for NEO – Boeing will ensure this. Boeing will likely cut prices to offset NEO – just as Airbus cut prices on A340s to fend off 777 competition. Both Airbus and Boeing have to now consider what pricing Bombardier can offer as it starts at a considerably lower price point. Bombardier may have to buy some business to seek sales momentum. Airlines will like lower prices, but will that be enough? The CSeries has very good “green credentials”, which is becoming more important in the EU.
New Competition: Embraer is unlikely to allow Bombardier to enter the segment without also wanting to compete with Airbus and Boeing. It might benefit from coming in a bit later after seeing what the others are doing. Such an entry will further complicate the segment. Then throw in the Chinese and Russians to make things really interesting. The segment starts to fragment quickly with probably too little share for a few players. For some, like China, aerospace is a national priority and therefore economics is secondary.
In conclusion, the post NEO environment is challenging for the OEMs. They depend on basically the same suppliers, so the costs of new programs have a long tail that reaches across the globe. Suppliers have to make the same bet the airlines do. A wrong bet can be fatal. Airbus’ NEO move has truly opened the market in ways that could provide unforeseen outcomes. There is going to be a lot of chatter about which of the three OEMs makes the sale where all three are pitted against each other.