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Monday, February 6, 2006

Bombardier Puts CSeries On Hold; Spending More On RJs, Business Jets

After two years of research, planning and marketing, Bombardier [BBD] last week decided to put its proposed narrow-body mainliner, the CSeries, on hold.

Instead, the Canadian airframe manufacturer will plow money set aside for the CSeries into improving its current regional jet offerings and its growing fleet of business jets.

In the last year, Bombardier spent about $100 million on the CSeries. It will continue to fund a team of about 50 to refine a business plan for the CSeries with a $20 million budget. Gary Scott, who Bombardier hired on to direct its mainline fleet development, will continue to manage the CSeries, said Pierre Beaudoin, president of Bombardier Aerospace. "We will spend $80 million on the other projects," Beaudoin told analysts in a conference call.

The Future

Since it shut down the production of the 50-seat CRJ 200 series, Bombardier has been marketing its 70-seat CRJ 700 and its 86-seat CRJ 900. The Embraer [EJR] 190 and 195 fill a void between the CRJ 900 and the C110, the CSeries model that would have carried 110 passengers.

As of Dec. 31, 2005, Bombardier reports that it had 20 CRJ 900s and 64 CRJ 700s on back order. "The CRJ 700 and CRJ 900 have been on the market for less than five years," Beaudoin said. "We will see success over the next 10 to 15 years. We feel there is a lot of growth ahead. The scope clauses in the U.S. are just now opening up to larger regional jets. We have the right platform for that."

With new funds plowed into the regional jet unit, Beaudoin did not rule out a new regional jet to serve the 80- to 100-seat market that could be launched before the CSeries. A new regional jet could be a derivative of a current plane, a "clean sheet" design or a downsized version of the CSeries.

Based on customer requests, Beaudoin said his engineers have been exploring a stretch version of the CRJ 900 - dubbed the 900X - that could be in the 90- to 100-seat range. Beaudoin would not discuss specific seat counts. It could be a very economical plane to develop with great operating costs, he said.

No new product announcements are expected immediately. "We will continue to explore regional aircraft needs with our customers over the next few months," Beaudoin said.

Tweaking its current RJ portfolio or designing a new regional aircraft would be a "low-risk decision versus the high-risk decision to launch a narrow-body," said Doug Abbey, managing partner of The Velocity Group, an aviation consulting firm.

"I don't know what kind of wing modifications or airframe modifications it would take, but it might be desirable," said Richard Aboulafia, an analyst at Teal Group. "This is a company that has always done the inexpensive derivative rather than all new - both for its benefit and the customer's benefit. There is something to be said for a low operating cost/low acquisition cost strategy. The Embraer product is more comfortable and to an airline that is right up there with making sure the coffee machine is refilled." But bottom line, passenger comfort "just doesn't matter."

"Embraer has a fundamentally higher cost identity both because of the larger fuselage and its size costs more to fly."

Beaudoin also raised the possibility that a larger turboprop may be developed with a seating capacity in the 80 to 100 range. The company's top turboprop, the Q400, seats 74 passengers. The company has 57 of these on back order.

There are niche markets around the world - particularly in Europe and Asia - that could support a larger turboprop, Abbey said. "Turboprop economics are very compelling on short-haul routes," he noted, especially in high-density areas.

Some of the development dollars and CSeries personnel will be assigned to the business jet unit, Beaudoin said. Bombardier currently has 12 different business jets in three different families or classes. Additional platforms in this unit may also be developed. Bombardier has just begun to test the Challenger 605, which can seat up to 12.

"Putting resources into the corporate jets, where the real profits are, would be a great idea," Aboulafia noted.

Bombardier and Embraer have been using different investment strategies, Aboulafia added. Embraer is just now launching a family of business jets. It is taking money from the low-margin people-movers to develop the high-margin business jets, he said. On the other hand, Bombardier had been diverting money from its profitable line of business jets to start the CSeries, a low-margin people-mover.

Bombardier's long-term profits will be from the business jets, he added.

"Tweaking the regional jets and the business jets is OK for the short term," Abbey said. "For the long-term, there have to be new products in the pipeline if they want to continue to be the No. 3 aircraft manufacturer in the world."

The CSeries

The CSeries is on hold, but not dead, Beaudoin said. "We are not canceling the program. We will continue to invest. Current market conditions don't allow us to move ahead."

With the company plowing another $20 million into the program, Bombardier will be talking to international partners to refine the business plan. Bombardier has had and will continue to have discussions with Russian, Chinese and Indian aerospace companies looking to form a joint venture to produce and the sell the plane, Beaudoin noted.

"We are keeping the CSeries team operational based on the conviction that the market for the 90- to 149-seat plane offers significant potential. The CSeries aircraft is the optimum solution for the lower end of that market."

Most analysts had expected Northwest Airlines [NWACQ] to be the launch customer for the CSeries as a replacement vehicle for its aging fleet of DC-9s. While not acknowledging this speculation, Beaudoin specifically noted that Northwest has filed for bankruptcy.

With at least four U.S. airlines operating in bankruptcy, Beaudoin said the airline industry was not interested in new aircraft. Furthermore, he said, the planned 2010 proposed delivery date "was too far out into the future for some customers."

A year ago, when the CSeries' development was pegged at $2.1 billion, Bombardier indicated it was willing to invest one-third of the project tab but that it wanted government support for one-third and suppliers to chip in the final third. Bombardier secured funding from the Canadian federal government as well as the Quebec provincial government to secure the final assembly plant outside of Montreal.

The British government agreed to contribute funding so that major elements of the plane, such as the wings, could be built in an existing Bombardier plant in Belfast, Northern Ireland.

However, no supplier stepped forward to invest funds in the project. Pratt & Whitney agreed to build an engine for the CSeries after several other engine makers turned Bombardier down.

"The decision was an easy call," said Aboulafia. "There was bad news on both the supply side and the demand side. The governments came through with enough matching cash that it was almost impossible not to go. If you can't make it work with those kinds of matching funds, there is something wrong."

There also was some question as to how deep the demand would be in the niche the CSeries would seek to fill.

Since 2001, the number of aircraft flying in the 80- to 100-seat range has been cut in half to about 400 planes, said Tulinda Larsen, an analyst with BACK Aviation Solutions. Furthermore, most of the planes in the 100-seat to 140-seat class of narrow-body aircraft are not that old. If the new aircraft would produce a major cost savings, Larsen said, then the operating economics would drive the equation - the airlines would replace their obsolete fleets at an earlier time. If there is no cost savings, then the new planes would remain unsold.

Larsen questions if the CSeries could obtain the necessary benchmark of a 15 percent cost savings over any other aircraft, as Bombardier had been promising.

The proposed C110 variant could have a market niche to itself. However, the larger capacity C130 would compete against the Boeing [BA] 717 and the Airbus 319. Boeing has decided to cancel production of the B717. Aboulafia said that both Boeing and Airbus would face substantially smaller investments to transfer new technology to replace older offerings in order to compete with Bombardier.

"There is no paradigm-shifting with the CSeries design. They would be fighting well-established competitors," Aboulafia said.

>>Contacts: Bombardier, (514) 861-9481; Doug Abbey, Velocity Group, (202) 338-1727; Richard Aboulafia, Teal Group, (703) 385-1992, Tulinda Larsen, BACK, (202) 783- 5052.<<

Bombardier's CSeries - On Hold
C110 110 passengers; 1,800 nautical miles
C110 ER 110 passengers; 3,000 nautical miles
C130 130 passengers; 1,800 nautical miles
C130 ER 130 passengers; 3,000 nautical miles
2005 Launch - No Sales
2008 First flight
2010 Enters service
Cseries Competition
Embraer 195 108-118 passengers; 1,800 nautical miles
Boeing 717 106 passengers; 1,430 nautical miles
Boeing 737-600 110-132 passengers; 3,510 statute miles
Boeing 737-700 126-149 passengers; 3,752 statute miles
Airbus 318 110-129 passengers; 2,850 nautical miles
Airbus 319 110-145 passengers; 3,000 nautical miles
Replacement Targets
DC-9/ DC-10 1965- 1981
BAe 146/ Avro RJ 1982- 2002
MD-80 1979- 1997
Boeing 737-200 1967- 1985
Boeing 737-300 1984- 1999
Fokker 70/100 1986- 1997
Sources: Bombardier, Airbus, Boeing, Embraer
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