Bombardier’s big bet

Bombardier Inc. is at a critical juncture in its history. It has made a huge bet on developing a new family of passenger airplanes, the CSeries, but customer interest has so far been tepid. The order this week from Swedish-based Braathens Aviation is encouraging but modest—and the first since February of 2010. Altogether, Bombardier has signed up only four customers since the CSeries was launched three years ago.

The pressure will be on Bombardier to announce some deals at the Paris Air Show, which takes place June 20-26. The show is a big event in the industry, and manufacturers normally use the occasion to announce major orders for their products. It would be a major setback for Bombardier to come away empty-handed.

The CSeries family, consisting of the CS100 and CS300 models, is scheduled to come into service by 2013, and will compete directly with Boeing and Airbus in the 100- to 149-seat segment of the passenger-jet market. The family is a clean-sheet design containing the latest technological advancements, notably Pratt & Whitney’s geared turbofan engines and composites that reduce the weight of fuselages and other parts. Most notably, the improvements promise up to a 15% reduction in operating costs.

In 2004, Gary R. Scott was hired to lead the CSeries development team. Scott had previously been at Boeing Co., where he led the production build-up of Boeing’s 737 NG and 757-300 aircrafts.

A dramatic moment in the CSeries story came on the eve of the Farnborough International Airshow in July of 2008. German airline Lufthansa signed on as the first customer of the CSeries—although only after some last-minute, nerve-wracking negotiations. Says Scott: “There was a plan to announce at Farnborough, but it didn’t really fall into place until we sat down the night before and completed the discussions!”

Two more customers signed up within a year. That gave Bombardier a total of 90 firm orders for CSeries aircraft (Braathens Aviation brought the total to 100). Among existing customers, there are options to purchase another 100 or so CSeries airplanes.

In early 2011, Airbus responded to the Bombardier challenge by announcing a commitment to “re-engine” its low-end airliners for delivery as early as 2016. This project involves replacing the engines with Pratt & Whitney geared turbofans—the same model as Bombardier is using to improve fuel efficiency for the CSeries. Boeing is expected to announce its plans in the near future. 

Airbus’ re-engined aircraft will still be heavier than the comparable CSeries version. Even the smallest Airbus with the new-engine option, the A319, “is 12,000 pounds more than the CSeries,” notes Bombardier CEO Pierre Beaudoin. The AirInsight consultancy estimates that cash operating costs for the CS300 will be 11 percent lower than those for an A319 with the new engine option.

But Airbus and Boeing manufacture airplanes in great volumes, which give them economies of scale, lower unit costs, and an ability to offer sizable price breaks. They can even choose to sell their offerings in the 100- to 149-seat market at a loss, subsidizing shortfalls through other product lines.

In addition, Airbus and Boeing have large customer bases. There is a disincentive for those customers to switch to other manufacturers’ models because they would give up some of the cost savings from having the same set of replacement parts, tools and training procedures. A rival offering would need to have a clear margin of superiority to overcome this hurdle.

Even assuming Bombardier does start filling up its order book, can it deliver product on time, keep customers happy and earn the expected return from the CSeries investment? Boeing’s Dreamliner project is several years behind schedule—will the same fate befall Bombardier?

Designing a new plane from scratch comes with the risk of unexpected delays. Adding to the risk is the use of a global supply chain to build the CSeries. Production of the wings, fuselages and other parts has been outsourced to companies in the U.K., U.S., China and elsewhere. The parts are to be assembled at the Mirabel facilities, north of Montreal.

Nonetheless, Bombardier Aerospace has over 20 years of experience in managing global supply chains, mainly within its business-jet division with the Challenger 300 and Global lines. “There were some problems when we first started in the early 1990s, but we feel now this is something we have mastered,” says Eric Martel, a senior vice president responsible for the CSeries outsourcing program.

Laurent Beaudoin, the architect of Bombardier’s growth over the three decades to the mid-2000s, is no longer involved in day-to-day operations but does retain the chairman position. In late 2009, he was honoured at a conference of the Aerospace Industries Association of Canada, and took that opportunity to respond to several criticisms of the CSeries program.

When asked about government support for the CSeries, he acknowledged that one-third of the estimated $3 billion in development costs would be financed through loans provided by the federal, Quebec and U.K. governments (the other two-thirds of the cost is split between Bombardier and its suppliers). He added that the apportioning of costs in this manner was compliant with World Trade Organization rules—and Bombardier had a track record of paying back government money.

When it was suggested that the CSeries may not be able to withstand competition from Boeing and Airbus, Beaudoin laughed and answered (as reported by Francois Shalom in the Montreal Gazette): “Do you think Honda or Toyota trembled at the thought of competing against GM way back when? Look at them now.”