Bombardier Faces Discount Headache as CSeries Sales Take Off

June 4, 2016, 3:23 PM UTC
The new bombardier aircraft CSseries is shown in Mirabel, Quebec as it is due to take off for the first time on September 16, 2013. Bombardier Inc. carried out final preparations for the maiden flight of its CSeries on September 16, 2013, hoping to translate its ambitions to shatter an Airbus and Boeing duopoly into faster sales of Canada's most ambitious jet. The jet was due to fly from Bombardier's Mirabel factory in Quebec at 9.30 am ET, capping a 5-year $3.4 billion development of the first all-new plane in its class in decades. AFP PHOTO/CLEMENT SABOURIN (Photo credit should read Clement Sabourin/AFP/Getty Images)
Clement Sabourin/AFP—Getty Images

Bombardier is stepping up efforts to woo the airline industry with its more efficient new CSeries jet, hoping to win new orders without falling under the spell of prolonged discounting on price.

The Canadian planemaker flew top executives to a meeting of international airlines in Dublin this week, where it sought to build on a much-needed order from Delta Air Lines [forutne-stock symbol=”DAL”], and on Friday then flew the heads of Star Alliance member airlines from Dublin to Zurich.

“We are in a good place today. We have the contracts ready for you as you exit the plane,” Chief Executive Alain Bellemare joked to the 28 top airline executives on board the 110-seat aircaft.

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While the cash-squeezed project was saved from a near-death experience with Delta’s discounted order, Bombardier’s rivals and others in the industry predict it will remain on the rack a while longer as others demand equal bargains.

“I want the best deal, better than Delta,” said Tewolde Gebremariam, chief executive of Star Alliance member Ethiopian Airlines.

While he probably won’t get that, having expressed an interest in acquiring only 10 to 15 jets rather than the 75 bought by Delta, his remark illustrated Bombardier’s challenge.

“The question is whether or not Bombardier will be successful in raising prices,” said Bertrand Grabowski, a managing director of Germany’s DVB Bank.

“For this to happen, it needs … a steady growth market.”

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Bombardier’s task is not made easier by an outbreak of transparency in the secretive jet market after it was forced by Canadian accounting rules to take a $500 million charge for the Delta deal and two others covering a total of 127 planes.

Rival jetmakers and analysts quickly calculated Delta had paid $22-23 million a plane, a whopping two-thirds discount.

Macquarie analyst Konark Gupta wrote Bombardier could have difficulty getting the CSeries to break even by 2020-21 if it keeps selling at such prices. Others say it has limited choice.

“I think they have got their work cut out trying to convince others to pay maybe $10-15 million more (than Delta) – why would they?” said Airbus executive vice-president Chris Buckley.

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Bombardier additionally faces accusations of price dumping from rival Embraer, which it denies.

“We have to show the market that this price level is unsustainable,” Embraer’s commercial chief Paulo Cesar Silva said.

Industry sources say Airbus leased jets as try-outs for as little as $1 a month to enter the U.S. market in the 1980s, but found itself trapped at low prices for years after that.

But deals are usually kept secret and Bombardier’s provision shed unusual light on what it can take to kick-start sales for new aircraft.

“The next big guy Bombardier talks to is going to say ‘will you be taking a $500 million loss for me’?” an industry source said.

Analysts say previous Bombardier managers sacrificed sales by refusing to bow to cut-throat competition in the jet market. But asked on Saturday if he now wanted to renegotiate on price, the head of Lufthansa, the CSeries jet’s first customer, said no.

“As the launch customer you get a very interesting price. That applied to Lufthansa and I’m sure it applied to Delta too,” Chief Executive Carsten Spohr said.

Lufthansa’s subsidiary airline Swiss will be the first to use the new jet.

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Bombardier’s new leaders acknowledge being more aggressive in the market to reboot the troubled CSeries project but dismiss the reported discounts, saying they fail to reflect shifting costs.

While chasing new customers, they must also prevent existing ones delaying delivery or canceling.

Industry sources estimate as many as 100 of the 325 orders are at risk owing to the patchy finances of some early customers.

But the recent order boost does give the company more visibility on production and strengthens the profile of its order book: Two other parameters watched by investors.

“If you question some orders, we would not debate that,” Bellemare said. “We have re-launched the program. A year ago there were a lot of questions about the CSeries’ future: not any more. The aircraft is here to stay.”

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