When Bombardier Inc. (TSX: BBD.B) launched its CSeries program, it sent a very powerful message to industry leaders Boeing Co and Airbus: there’s a new kid on the block.
To be more specific, Bombardier planned to build a plane that would compete with Boeing’s 737 and Airbus’s A320. So, how have the two major aircraft manufacturers responded? More importantly, what does this mean for the future of the CSeries? And finally, is now the time to buy Bombardier shares?
Some context
When an industry is dominated by just two major players, you normally don’t see cutthroat pricing tactics. The rivalry between Boeing and Airbus is a little different. The two companies are very aggressive, always offering deep discounts to customers in a constant attempt to steal business from each other.
No room for number three
So, you could imagine how these two giants would react when another competitor emerges.
Airbus has been particularly aggressive. The company re-engined its aircraft, creating the A320neo in 2010. It has offered particularly steep discounts—according to one source, these planes have been sold for as low as US$30-35 million, well below the US$97 million list price. By comparison, the CS100 has a list price of just over US$70 million.
Interestingly, Airbus thinks Boeing made a mistake many years ago by not taking the A320 seriously enough. Airbus doesn’t want to make the same mistake with the CSeries, and is clearly determined to crush it.
Meanwhile, Bombardier is facing a major uphill battle. It is much smaller than Boeing and Airbus, and thus doesn’t have the same scale. Even worse, Bombardier doesn’t make larger planes, meaning it can’t use the CSeries as a loss leader (this is something Airbus has been doing with the A320 planes).
To put it simply, if Bombardier has to compete in an all-out price war, it will lose.
The problems don’t stop there
A couple of other developments have been working against Bombardier. One has been the delays in developing the CSeries, which has given the industry leaders more time to catch up.
The other is the fall in oil prices. Remember, the CSeries is more fuel efficient than rival planes, including the A320neo. So, when fuel costs go down, airline customers may value a big discount from Airbus more than some fuel savings from Bombardier. It’s no wonder the CSeries hasn’t won any firm orders since September.
In my opinion, the investment community hasn’t fully come to terms with these problems. At this point, I would avoid Bombardier until its future is more certain.
