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Aviation History
2004
2004-09 - 2651.PDF
BUSINESS ANALYSIS STRATEGY GRAHAM WARWICK / WASHINGTON DC Paying the price of caution Bombardier may have made a mistake when it cancelled the BRJ-X. Can it reverse its fortunes with the CSeries? Bombardier is now building the business case to launch development of the CSeries 110/135-seat airliner Asked to predict when struggling Bombardier will return to financial strength, chief executive Paul Tellier challenged the questioner: "Tell me how long it is going to take for the airlines to get back on their feet, where the Canadian dol lar will be, where the oil price will be, and I will tell you when." While Bombardier has justifica tion for blaming its difficulties on factors it cannot control, the Canadian company is also paying the price of past decisions. Among those was its 2000 judgement not to develop the 100-seat BRJ-X. Had the programme gone ahead, the large regional jet would have been entering service around now, amid strong signals that the market is moving towards larger aircraft. Instead, Bombardier is now building the business case to launch development of a 110/135- seat airliner, the CSeries, while relying on its existing CRJ family of 50-, 70- and 86-seat regional jets to keep orders coming in for the five years it will take to develop the larger aircraft. But those five years look like being challenging. Higher fuel costs are making it harder for airlines to operate 50- seaters profitably and struggling US airlines are succeeding in per suading their pilots to relax restric tions on operating 70-seaters. Low- cost carriers, led by JetBlue Airways, are adding 100-seaters to their fleets. These trends lead ana lysts to warn that the 50-seat regional jet market is on the verge of a rapid decompression (Flight International, 16-22 November). The speed of the slowdown has forced Bombardier to adjust output of its 50-seat CRJ200 twice in as many months. In early October, the company announced it was cutting production from 98 in its current 2004-5 fiscal year to 68 for 2005-6, resulting in the loss of 2,000 jobs by July next year. Then, earlier this month, Bombardier announced a further reduction in CRJ200 production, to 54 in 2005- 6, while keeping output of the 70/86-seat CRJ700/900 essentially unchanged at 77 aircraft. This time the workforce escaped because of increasing business jet production. While Bombardier has reacted quickly to the downturn in the 50- seat market, analysts believe worse is to come. One reason is the num ber of orders held by the US air lines either operating under or warning of Chapter 11 bankruptcy protection - a concern the manu facturer acknowledges, but plays down. While Delta Air Lines, Independence Air and US Airways account for around 40% of CRJ orders, "the backlog is not in jeop ardy", says Bombardier Aerospace president Pierre Beaudoin. Credit concerns Concerns over Bombardier's declining regional jet order backlog were among the reasons for a rash of downgrades by credit rating agencies over the past month. While Tellier has brushed off the downgrades, citing the company's strong liquidity, junk status will make borrowing more expensive for the company as it tries to get the C$2 billion (SI.63 billion) CSeries programme off the ground. The predicament is clear from an analysis of the orderbooks of both manufacturers. Based on company figures and factoring in orders and cancellations announced since the end of their respective third quar ters, Bombardier and Embraer have identical 130-aircraft firm order backlogs for their 50-seat regional jet families - about two years' pro duction at current rates. These orders already in hand represent more than a third of the 650 30- to 60-seat aircraft Embraer now expects to be delivered over the next 10 years - a 500-unit reduction from its forecast of just a year earlier that is a stark reflection of the accelerating market shift towards larger regional jets. Over 20 years, the Brazilian company is projecting deliveries of 1,950 30- to 60-seat aircraft, down 650 units from a year earlier, but options and conditional orders already held by the manufacturers - 656 by Bombardier and 431 by Embraer - account for more than half the projected deliveries. This is a sign the small regional jet mar ket has passed its peak. Bombardier has not released its own forecast, but it is in line with Embraer's, says Beaudoin. "Fore cast demand for new 50-passenger regional jets has come down as the growth is behind us. What we see is growth in 70- to 90-passenger jets." But the extent to which the company can capitalise on that growth is open to question. The challenge is clearly reflected in the orderbooks. Including orders announced since the end of their respective third quarters, Bombardier has 92 CRJ 700s and 21 CRJ900s in backlog compared with 134 Embraer 170/175s and 170 Embraer 190/195s. The bulk of Embraer's 170/190 firm orders remain to be delivered - the oppo site is true for Bombardier. These backlogs account for only a fraction of the demand for large regional jets foreseen by Embraer, which forecasts a 10-year market for 1,300 61- to 90-seaters and 1,250 91- to 120-seaters. The long- term forecast shows a continuing shift to larger aircraft, with 20-year delivery totals of 2,850 and 3,000 units, respectively. While a further shift to larger air craft will bolster Bombardier's busi ness case for the 110- to 135-seat CSeries, it presents a serious threat in the near term. With 270 sold, the CRJ700 still holds the majority share of the 70-seat market, but with only 45 sold the 86-seat CRJ900 is clearly lagging behind the Embraer 190/195. Analysts expect the disparity to grow as demand shifts to larger aircraft. Analyst Peter Rozenburg of UBS projects that 30- to 60-seaters will constitute only 27% of regional jet deliveries by 2006, down from 60% this year. While shipments of 28 14-20 DECEMBER 2004 FLIGHT INTERNATIONAL www.fliqhtinternational.com
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