Karl Moore is an associate professor at the Desautels Faculty of Management, McGill University, and a long-time observer of the aviation industry and Bombardier.
How important is the Delta deal for Bombardier's C Series? In light of the deal, does Ottawa still need to financially support Bombardier?
Earlier this week, Delta Air Lines announced an order for 75 CS100 planes. This is a landmark deal for the C Series, for two reasons. First, the sheer size of the order – 75 with options for another 50 – is significant by industry standards. Second, Delta has an outsized reputation as one of a handful of very well-run network carrier airlines that does a very thorough analysis before buying new planes.
The fact that it's Delta buying the planes means something in the global aviation industry. Airlines that may have been holding back are now more apt to take a second look at the C Series.
The deal for the order of 75 planes is worth an estimated $5.6-billion (U.S.), based on the list price, although no one in their right mind thinks Delta paid list price. With such a huge order and as the first big U.S. player to buy the C Series, Delta got a big discount, which it fully deserved in the circumstances. A few years ago, Bombardier tried not to discount the C Series. With the high price of fuel at the time, the argument could be made that airlines would buy it at list price based on the economies of the plane and the great customer experience. With the price of oil having dropped dramatically and remaining near historic lows, Bombardier's newish chief executive officer Alain Bellemare and his team came to the conclusion that this pricing approach was no longer sustainable.
The order also may signal the end, or at least the beginning of the end, of the comfortable duopoly Boeing and Airbus have held with this size of plane for a long time. Boeing and Airbus have fought hard against the C Series with product enhancements, very aggressive pricing and a certain amount of FUD – fear, uncertainty and doubt.
FUD is a term I learned at IBM back in the 1980s. Big players use it when they want to convince customers to not consider a new player in their market; they sow FUD about whether the company will be around in the future to support them. Which, in the case of mainframe computers then and of major new aircraft now, is a fair question to raise.
Which brings us to whether Ottawa should support Bombardier and the C Series.
Ed Bastian, Delta president and incoming CEO, told BNN that Delta wanted to be sure Bombardier "had the proper capital in place to be able to support the aircraft." Their big buy absolutely helps. As does the investment from Quebec. Premier Philippe Couillard quite rightly took credit on behalf of his province for the very positive impact that Quebec's C Series investment had on the deal with Delta. The Caisse de dépôt et placement du Québec's investment in Bombardier's rail transportation unit is also very helpful, most fundamentally for the money but also because the Caisse and its CEO Michael Sabia have a global reputation for being great investors.
And yet Bombardier still needs more funding. Doesn't the Delta order solve that? No. The money from this order will not flow into Bombardier's coffers for a few years. Even the first inflow of revenue from Swiss International Air Lines, the launch customer, won't be paid until July. Bombardier is building the planes in Mirabel, just outside Montreal. Each plane they build costs about $30-million in parts and labour, and matching revenue comes some time later. Plus, the earlier planes are more expensive. The cost of production goes down as workers and managers learn how to build them more effectively. The net result is that Bombardier needs cash to fund early production.
But to return to Mr. Bastian's point about the proper amount of capital, if the government of Canada, a Group of Seven country, shows it will stand behind Bombardier, this removes any remaining doubts that airlines might have about whether the company will be around in 20 years. And you buy a plane like the C Series for that length of time and longer – everyone in the industry who has seen the C Series agrees it's a great plane that represents the next generation of airliners. Canada would be merely emulating the European Union and Airbus, Brazil and Embraer, the U.S. government/military and Boeing, and others.
Bombardier is probably Canada's greatest global competitor. Our banks are also big players, but not global – at best, they are international. We have other global players, but none of Bombardier's size. If the federal government stands foursquare behind Bombardier, it would help burnish Canada's reputation as a technological world leader.