There hasn’t been much good news for Bombardier, Inc. (TSX:BBD.B) shareholders over the past few weeks.
The company was dealt a blow when Iran decided to go with Airbus in a US$25 billion deal to buy 118 planes. Included in that order were 45 of Airbus’s A320 model, a direct competitor to Bombardier’s CSeries.
There were a couple of reasons why Bombardier missed the order. Firstly, it was limited in its negotiations because Canada still has economic sanctions against Iran. And secondly, it seems obvious that Iran was attracted to Airbus because of the ability to order many different sizes of planes from one manufacturer.
Although it was a big blow, perhaps not all is lost. According to an aviation-focused research firm, Iran will need some 400 new planes in the next decade to replace its fleet, which is among the oldest in the world. Many of these planes will be regional single-aisle jets, so there will still be an opportunity for Bombardier to win a big order from the Middle Eastern country.
While the news of the missed order was bad, I believe a less-publicized piece of information might end up being even worse. In fact, it might just spell the beginning of the end for Bombardier.
Enter Boeing
For the last few years Boeing Co (NYSE:BA) has been working on a new version of its highly popular 737 line of jets. The newest version is called the 737 MAX. On Friday the newest Boeing plane took its first test flight.
The 737 MAX has a number of improvements over previous generations. A combination of new engines, new winglets, and a lighter frame makes the plane approximately 20% more fuel efficient on a per-seat basis than previous models. With a newly designed cabin, capacity of the latest version of the 737 will be higher than before. And finally, the new engines are much quieter than previous models.
This new plane has many of the perks Bombardier’s CSeries has. The big appeal of the CSeries was the quieter engines, the greater fuel efficiency, and the lighter frame–all things Boeing has improved compared to previous models. With the newest generation of Boeing planes scheduled to be delivered to customers in 2017, suddenly there isn’t much incentive for customers to switch over from Boeing’s planes.
The big appeal for Bombardier’s customers was the increased fuel efficiency of the CSeries. But with Bombardier’s production issues, the introduction of new, more fuel efficient planes from Airbus and Boeing, and low oil prices that look here to stay, why exactly would an airline go with Bombardier going forward rather than one of the larger competitors?
Boeing already has a huge advantage, at least with North American airlines. Most of their collective fleets are made up of Boeing planes already. Without a compelling reason to switch, airlines will keep going back to the Boeing models–like the 737–which have worked so well in the past.
It won’t be Boeing that will cause Bombardier to fail. Bombardier’s bloated balance sheet, its inability to control costs, and the myriad of delays surrounding the CSeries are much bigger problems than a competing plane. But at the same time, this successful test flight might be enough to ensure that CSeries orders stay sluggish, which could be enough to ultimately doom the company.
