A key airline customer for the new Bombardier Inc. C Series plane has agreed to become the first buyer of a competing Airbus jet, raising doubts about whether it will follow through on its deal to buy 40 C Series aircraft.
Republic Airways Holdings Inc. signed a letter of intent Wednesday to be the first customer for Airbus’s A319neo (which stands for new engine option), part of a purchase of Airbus planes worth $7-billion (U.S.). That comes on top of a $3.06-billion Bombardier order. (Those are list prices, but discounts run to 30 per cent or higher.) Republic, a holding company that owns Frontier Airlines and other regional U.S. carriers, is important to Bombardier’s hopes of breaking into the market for narrow-bodied passenger jets. Its 40-plane order is the largest single order the Montreal-based transportation giant has and it represents almost one-third of the 123 firm orders for the C Series.
But after the Airbus announcement, analysts raised doubts about whether Republic needs two different airplanes that deliver about 130 passengers – depending on how they are configured – and carry two different engines, which means two sets of spare parts and double the training costs for maintenance technicians.
Republic already has $2.6-billion in debt, lost money in the first quarter, won concessions on wages and vacation from Frontier pilots last week and has a chief executive officer who is taking a pay cut.
That CEO, Bryan Bedford, said yesterday that the deal to take delivery of the larger CS300 version of the Bombardier planes beginning in 2015 still stands, despite the letter of intent Republic signed with Airbus at the Paris Air Show.
“We feel we have a great deal on C Series and valuable early delivery slots,” Mr. Bedford said in response to e-mail questions. “Our restructuring program for Frontier continues to progress. We anticipate hitting our annual $120-million business improvement goal by year end.”
For its new Airbus 319s, Republic chose an engine offered by a consortium of General Electric Co. and Snecma of France instead of a version of the Pratt & Whitney engine Bombardier offers on the C Series.
“If the 319neo order sticks, the CS300 order probably won’t last long,” said Richard Aboulafia, vice-president of analysis for Teal Group, an aerospace consulting firm based in Fairfax, Va. “It’s difficult to imagine them taking both, especially given the airline’s uncertain outlook. This seems to be a serious blow to the C Series.” (Republic would likely have to pay penalties to break the contract.)
Bombardier shares fell initially on the news of Republic’s Airbus order, but later recovered somewhat. They ended the day down nearly 5 per cent to $6.69 (Canadian).
C Series sales went into a lengthy lull after Republic ordered the 40 planes and took options on another 40 in February, 2010. Sales had been picking up with two orders announced in the weeks leading up to Paris and two more deals, one with Korean Air and another with an unnamed carrier, announced at the show.
Cameron Doerksen, who follows Bombardier for National Bank Financial, called Republic’s A319neo order “perplexing.”
“We do not believe that this news necessarily means that the C Series order is at risk (although a cancellation is certainly a possibility), but there is clearly greater uncertainty,” Mr. Doerksen wrote in a note yesterday.
David Tyerman, airline industry analyst at Canaccord Genuity in Toronto, cautioned against placing too much emphasis on one order.
The recent orders and advanced discussions with five or six other customers indicate the C Series is picking up momentum, Mr. Tyerman said in an e-mail from Paris.
Gary Scott, president of Bombardier’s commercial aircraft division, told The Globe and Mail in Paris on Sunday that the Republic order is firm and contractually secure and pointed out that the company had just won concessions from the pilots.
“So they are looking to reduce costs by a significant amount,” Mr. Scott said. “To me that’s all good news.”
With files from Eric Reguly in Paris.
Close: $6.69 (Cdn), down 34¢
Republic Airways (RJET)
Close: $4.46 (U.S.), down 12¢