Air Canada (TSX: AC)(TSX:AC.B) and Bombardier, Inc. (TSX: BBD.B) recently announced that the two firms have finalized a firm purchase agreement for 45 CS300 planes with an option for 30 more aircraft. At list prices, the firm order is valued at approximately $3.8 billion but would increase to $6.3 billion if the options are fully exercised.
A major milestone
The importance of this deal cannot be overstated.
Since the year began Bombardier has repeatedly proven that its once ill-fated CSeries project—which came in years overdue and billions overbudget—can have success in an incredibly competitive aviation market.
In April Chorus Aviation Inc. announced that it signed a firm purchase agreement to acquire five CRJ900 regional jets from Bombardier with purchase rights for five additional aircraft. Another $184 million deal was made with Trident Jet Ltd. for four CRJ900 aircraft. Delta Air Lines then bought 125 CSeries jets (75 initial orders and an option for 50 more). In June WestJet Airlines Ltd. signed a firm order for nine Bombardier Q400 turboprops.
The latest sales momentum proves that the jet-line project may yet have legs. “There was a lot of pressure from the industry looking at this program, because early in the program there was a milestone of 300 firm orders,” Bombardier executive Fred Cromer said this month. “We have surpassed that number, so from that standpoint the pressure’s off.”
Don’t believe management: the pressure is not off
After receiving certification for its larger-model CSeries passenger jet, Bombardier expects that the first CS300 will be delivered by the end of this year. The smaller CS100 model has already received regulatory clearance. So from a certain perspective, Bombardier should start delivering planes, generating revenues, and hopefully pull its share price out of the doldrums. Right?
While the company has pumped up its latest successes, Bombardier is still stuck between a rock and a hard place.
First off, it has nearly no resources to develop any future projects or revenue streams. The company has roughly $9 billion in debt and only $3.8 billion in cash. Even with optimistic assumptions Bombardier management believes that it requires $2 billion in additional financing over the next five years to complete the CSeries project.
With its current business racking up multi-billion dollar losses, it’s unlikely that Bombardier can finish up the fledgling CSeries jet line on its own.
For fun, let’s say Bombardier actually can fully develop and market its CSeries project. What then?
Unfortunately, long-term profits will still be tough to come by given heavy competition from Airbus Group SE and Boeing Co. Earlier this year, Boeing gave United Continental Holdings Inc. a 75% discount on its 737NG jet, a sign that Bombardier will find stiff resistance in entering the +150-seat market. If Boeing is serious about developing more planes, the market would be flooded with supply, all but ensuring that Bombardier would struggle to turn a profit.
Bombardier would like investors to believe that it’s exiting its multi-year struggle. Given its still crumbling financial situation and ever-rising industry competition, the company still has a long way to go towards an ultimate turnaround.
