Air Canada is halting a planned purchase of narrow-bodied aircraft, dashing Bombardier Inc.'s hopes of landing Canada's largest carrier as a customer for its new C Series airplane and signalling that its new phase of growth will be prudent.
The airline will hang on to 25 Embraer SA aircraft instead of replacing them with new planes in a contest many analysts believed Bombardier's C Series had a strong chance of winning.
Air Canada will go ahead with an order of narrow-bodied 737s that was made in December, and deliveries of wide-bodied Boeing 787 planes that were ordered nine years ago begin this weekend. But the second phase of the narrow-bodied order has been put on hold. The 737 and 787 orders combined are worth more than $10-billion at list prices.
"We are ready to move from a period of survival and transformation to a period of investment, profitable growth, and opportunity," chief executive officer Calin Rovinescu said Thursday.
But the decision to put off the second phase of the narrow-bodied order shows that Mr. Rovinescu is determined not to let the company's financial turnaround lead to excessive exuberance.
"Given other priorities, we did not want to further increase capital expenditures nor debt levels," Mike Rousseau, Air Canada's chief financial officer told analysts and investors on a conference call Thursday. The Embraer E190 planes are relatively new, productive and well accepted by travellers on existing routes, Mr. Rousseau added.
It's another example of the difficulties Bombardier has had in landing big-name customers for the $3.4-billion C Series program in the face of specific issues at individual airlines and furious competitive responses from Airbus Industrie SA and Boeing Co.
"It is disappointing as it could have been a good order and it would have been from a brand name airline," said analyst David Tyerman, who follows Air Canada and Bombardier for Canaccord Genuity. "Air Canada's decision is not a negative comment about the C Series aircraft, but it is disappointing from the order-book standpoint." Bombardier class B shares dropped 30 cents or 7 per cent to $3.90 Thursday.
Bombardier has insisted that it is on track to have 300 orders by the time the first plane is delivered to customers, an event that is scheduled for the second half of 2015.
Air Canada's decision is not a rejection of the C Series, said Mr. Rovinescu, who called it a "great airplane."
Air Canada measured the "relative advantages of shifting out the equipment to something else relative to keeping it and the capital costs involved with that; our decision was to keep it for the foreseeable future," Mr. Rovinescu told reporters after the airline's annual meeting.
"When those aircraft are near end-of-life we're still going to have those 25 to replace at some stage and we're going to have the entire [Airbus] 319 fleet at Rouge to replace with some narrow-body product, but that's not a tomorrow sort of decision."
Bombardier spokeswoman Marianella Dellabarrera said Bombardier understands Air Canada's decision. "We'll be ready when they are to restart discussions," she said.
On the financial front, Air Canada posted an adjusted net loss of $132-million in the three months ended March 31, compared with $143-million a year earlier.
The carrier recently borrowed $400-million (U.S.), which was $100-million more than it initially proposed to raise, Mr. Rovinescu said in his speech at the meeting.
"With that financing, the capital markets demonstrated confidence by extending us credit on an unsecured basis at a materially lower cost of borrowing than only a short while ago," he said.
The first-quarter results were hit by the drop in the value of the Canadian dollar, which increased operating expenses by $130-million.
Robert Kokonis, who heads consulting firm AirTrav Inc., noted that one positive factor in the results was the increase in revenue per available seat mile, which although just a fraction at 0.1 per cent, was in the right direction, while costs per available seat mile fell 1.5 per cent.