The massive biennial international Paris Air Show is often considered one of the most important sales events for the aerospace industry. And for Bombardier, Inc. (TSX:BBD.B), it remains a big focus for investors trying to determine where the company will go from here.
All in all, the event was relatively neutral for the company, which is actually a positive in the grand scheme of things.
On the positive side, the company did receive plane orders. All told, it made deals to sell over 60 of the Q400 dual-prop aircraft. The biggest deal was with SpiceJet, an Indian budget carrier, which agreed to acquire 50 aircraft for $1.7 billion. The fine print shows that it only sold 25 aircraft and that SpiceJet has the right to purchase an additional 25.
During the airshow, Bombardier generated $2 billion in business.
On the negative side, the company didn’t sell receive a single new order for the CSeries line of jets. Its competitors, The Boeing Company and Airbus, had no problem generating sales. Airbus secured orders for 100 of the A320neo aircraft, which is a larger aircraft than the CSeries, but still a competitor.
My concern here is that although the Airbus320neo family is structured to carry 170 or more passengers versus the 100-150 for the CSeries, airlines are still picking the Airbus product. This leads me to believe that for this particular medium-range aircraft, airlines want to pack more passengers in. This presents a serious risk for the CSeries.
That’s why the news is neutral. Anytime Bombardier is able to bring in new orders for one of its products, it’s a good sign; however, I remain unconvinced that the CSeries is serving a large enough niche to justify its existence. On one hand, it has 360 orders as of this year. On the other, it has barely reached 15 delivered planes, demonstrating production problems. And there is some evidence to suggest that the company is selling the plane for US$19.6 million when the production cost is US$33.2 million. How can it succeed if it loses money on planes?
On the topic of production problems, this is clearly a company-wide endemic.
Its $770 million Metrolinx contract is currently at risk as Metrolinx is trying to cancel. Bombardier signed a deal in 2010 to provide the light-rail vehicles for the Crosstown lines; however, it has been habitually late. Metrolinx has already signed a new contract with French competitor Alstom. To make matters worse, Bombardier is also having problems delivering streetcars to Toronto: 100 were due by March, but it only expects to deliver 70 by the end of 2017.
Ultimately, the problem with Bombardier is that there is no real control. With the founding family controlling over 50% of the equity, there is no way to force change, which creates a sense of complacency. And so long as this is the case, I’m an ardent bench warmer just watching the action unfold.
So, while the Paris Air Show was not a flop and, it could be argued, was a decent success, I’m not bullish on the company’s long-term prospects. Perhaps time will tell, but it’s better to invest your money in better companies.
