Some Buyers Shift To Larger Models

Bombardier [BBD] is reducing the size of its workforce this summer as it scales back the production of its 50-seat regional jet, the CRJ 200.

The Canadian manufacturer announced that it anticipates making 20 fewer CRJ 200s this year than the 120 made last year. It will be laying off 500 workers from its Montreal facility as it reduces the production.

The announcement came late last month as the firm announced it lost $174 million, or 10 cents a share, on first quarter revenues of $3.5 billion. A year ago, the firm earned $54 million, or 3 cents a share, on revenue of $3.3 billion. (Efective Feb. 1, Bombardier is reporting all of its financials in U.S currency instead of Canadian dollars.)

In the first quarter, Bombardier delivered 71 planes - regional jets, business jets and turboprops - an increase of eight over the same period of 2003. The deliveries included 47 regional aircraft, both jets and turboprops, and 24 smaller business jets. Since the beginning of the year, the company has received firm orders for 44 regional aircraft, including 32 converted orders from Atlantic Southeast Airlines for CRJ 200s and four Q400 turboprops for All Nippon Airways [ALNPY].

The backlog as of April 30 stands at $11 billion compared to $10.9 billion a year ago.

Bombardier is beginning to see a shift in the model mix away from the CRJ 200 to the 70-seat CRJ 700 and 86-seat CRJ 900, said Barry MacKinnon, vice president of marketing and airline analysis. The production is being "adjusted to meet anticipated market conditions."

While production for the CRJ 200 is declining, MacKinnon said the 50-seat plane would continue to be the largest segment of the company's deliveries.

Bombardier anticipates making 321 total planes during the current fiscal year, he said. While the total number of planes will be the same as last year, MacKinnon said the mix will be different. Furthermore, he said the company anticipates a similar number of planes will be built next year. Bombardier does not disclose production projections for each model, he said.

Without being specific, MacKinnon said that Bombardier anticipates selling more CRJ 700 and CRJ 900 models this year and even more next year.

The larger planes are gaining in popularity, he said, because more airlines have re-negotiated scope clauses, which permit regional carriers to fly at least the 70-seat plane. In addition, the larger planes provide greater operating efficiencies on a per seat basis.

Steve Laciak, an analyst with National Bank Financial in Toronto, said there are now some estimates that as few as 80 CRJ 200s will be sold in 2005.

"The sweet spot for the 50-seater has passed," he told CRAN. "Obviously the market is moving towards larger aircraft. The United Airlines [UALAQ]-Atlantic Coast [ACAI] unraveling forced other airlines to buy 50-seaters to make up for what Atlantic Coast [took out of the United Express network]. This is what propped up last year's orders, but those planes are already committed so you are back to a lower level of demand."

Most of the orders for the CRJ 200 over the next 10 years will be incremental orders, said Bob Fay, an analyst with Toronto's Canaccord Capital. "Most of the major airlines have placed their initial orders and now we are going to see incremental purchases. The other major issue will be the replacement market, but that is eight to 10 years out into the future," Fay said.

Most of the sales of the 50-seat jet have been driven because airlines could not fly larger planes due to scope clauses. "Up until recently, people only had the choice of buying 50-seaters. They bought [CRJ 200s] because there wasn't a size choice available," Fay said. "I think you will see demand spaced out over several sizes of the jets."

At the same time, Alan Sbarra, an analyst with Unysis R2A Transportation Consultants, noted as the commercial aviation industry shifts from the network carriers to the low-fare carriers there is less of a need for the 50-seat jet. The major carriers purchased the 50-seat jets with the intent for providing service to the business communities in smaller markets. The fare structure was based on the ability of the carrier to charge a business traveler a higher fare. "Business fares have been down and those routes are less viable," Sbarra added.

Last year, US Airways placed an order for 60 CRJ 200s and 25 CRJ 700s, valued at $2.2 billion. It also includes 90 reconfirmable orders. Despite the downgrading of US Airways' credit rating in April, MacKinnon said the airline continues to take delivery of the planes with GE Capital Aviation Services continuing to provide the financing.

However, Pierre Beaudoin, the aerospace division president, said that Bombardier has had to provide $20 million in incentives to undisclosed airlines because increased financing costs have driven up the price of the planes.

While MacKinnon said the sales of the CRJ 700 and 900 models were increasing, the analysts doubt this, in part, because of the announced layoffs.

The backlog for the two larger planes has been declining for "a couple of years. It is not picking up the slack," Laciak noted. "I think a lot of people, myself included, believe that Embraer [ERJ] has the better 70-seater and 90-seater. It is not like Embraer is chock full of orders. It is a pretty choppy market out there.

Bombardier's heyday was the 50-seater. They developed a cheapo 70- and 90-seater, but it looks too stretched, too thin and too small," he added.

"If I was a marketing guy, I would not want to compete with a CRJ 700 against an Embraer 170 head-to-head," Fay said. "I think Airbus and Boeing [BA] will have their hands full with the new Embraer product."

Teal Group analyst Richard Aboulafia wasn't as hard. "There is still an active market for the 70-seater and fortunately for Bombardier a much less active market for the 90-seater. They are pretty much equal to Embraer in the 70-seat market, but as the 90-seaters take off, they are at a serious disadvantage to Embraer."

Bombardier used the occasion of its annual meeting last week to give a peek at the planning for a new jet (CRAN, March 8). In the planning and market assessment for several months, Bombardier said any decision to build a jet larger than the CRJ 900 would be made early next year. At the moment, the company sees three potential modes carrying 100 to 130 passengers. The larger version would definitely be in competition with Airbus and Boeing. The smaller versions would be competing with the Embraer 195.

"I think they've got to go ahead with it," Fay said. "I don't think they will do the 110- to 130-seat version as that is flying a little too close to Boeing and Airbus. I think that would be a tough market if that is where they are aiming. I think they will have to hit the sweet spot that Embraer is hitting in the 80-seat to 110-seat market."

However, if Bombardier goes ahead with the development of a new plane, Fay said the move will dampen demand for the CRJ 700 and 900 models. "The other problems you will have is that people will start to get the idea that those two products will not have a long life to them. You will have a problem with residual values."

Aboulafia is predicting that Bombardier will not go ahead with the production of a new plane. "They can't afford to take on a speculative project. They are really going to annoy investors if they spend on something that speculative."

While it is spending $18 million on early designs and market assessments, the company estimates that it would cost $3.5 billion to develop the new planes. It anticipates only spending about a third of the costs with suppliers and perhaps a friendly government chipping in the rest.

Instead, Aboulafia said Bombardier needs to be ready to move ahead with the plane should the market actually develop. "There is not enough demand there to be more than a speculative venture," he noted. Aboulafia suggests that government funding be lined up to fund the production if a market materializes.

>>Contacts: Barry MacKinnon, Bombardier, (416) 375-3546; Steve Laciak, National Bank Financial, (416) 869-6420; Bob Fay, Canaccord Capital, (416) 869-3028; Alan Sbarra, Unysis, (919) 468-2844; Richard Aboulafia, Teal Group, (703) 385-1992.<<.