Bombardier’s C Series order from Delta comes with a cost

Bombardier’s struggling C Series airliner got a big lift Thursday with a firm order from Delta Air Lines for 75 CS100s.

But Delta’s firm order, as well as others, will come at a cost. In announcing the order as part of its first quarter 2016 earnings report – which included news that it delivered only one Wichita-built Learjet in the period – Bombardier said it will take an “onerous” charge related to C Series firm orders in its next financial quarter.

Bombardier said in its earnings release that the company would take a $500 million charge in the second quarter of 2016 on 127 of its more than 300 firm C Series series orders, including the Delta order.

Cowen & Co. analyst Cai von Rumohr estimated the loss at about $4 million per C Series airplane.

The loss is more than likely the result of competing against Airbus and Boeing, which for years have been airlines’ only choice for single-aisle airliners larger than regional jets. Bombardier’s C Series was in the running for a large narrowbody jet order from United Airlines, which was awarded to Boeing in March.

“We assume that pricing to achieve the (Delta) order was especially brutal given Boeing/GE’s very aggressive pricing at UAL to keep C Series out,” von Rumohr wrote in an investor note Thursday.

Still, von Rumohr and other financial analysts said the concessions Bombardier has made to win the coveted Delta order – which includes options for 50 more C Series jets – provides stability and likely longer-term benefits to Bombardier’s first, large jetliner program, as well as the overall company.

“Not only is the order large in terms of size (firm orders to date have averaged only 16), the status of Delta as one of the world’s preeminent airlines will provide a much needed boost to the long-term viability of the CSeries aircraft and will likely help pave the way to follow-on orders from both small and larger airlines alike,” wrote Robert Spracklin, an RBC Dominion Securities analyst, in a note Thursday to investors.

On a conference call Thursday with analysts, Bombardier CEO Alain Bellemare called the Delta order “a game changer.”

“We are entering service with a strong tailwind,” he said.

The order, the value of which is based on list prices, includes an option for 50 additional CS100s. Delta said in its news release that some of those CS100 orders could convert to the CS300, the largest C Series variant.

The CS100 and CS300 have been undergoing flight testing at Bombardier’s Wichita Flight Test Center.

The Delta order is Bombardier’s largest for its struggling C Series program, which has been saddled with significant delays and cost overruns. The firm order is valued at $5.6 billion based on list prices, and deliveries to Delta are expected to begin in spring 2018.

Bellemare said on the call that the Delta order would not end an effort by the company to receive a $1 billion investment from the Quebec government. He said that deal is expected to close by the end of the second quarter.

The Delta announcement came in conjunction with the release of the company’s first quarter 2016 earnings on Thursday.

In the quarter, Bombardier said it posted a $138 million loss on $3.9 billion in revenue. That compares with earnings of $170 million on $4.4 billion in revenue in the same quarter a year ago.

One Learjet delivery

In the quarter, Bombardier’s business aircraft division delivered 31 aircraft compared to 45 in the first quarter of 2015, a 31 percent decline.

Its deliveries included only one Wichita-built Learjet 75 compared with deliveries of nine Learjet 70/75s in the in the first quarter of 2015.

“One aircraft delivery is disappointing for the quarter, but we are focused on revitalizing the brand in 2016,” Bombardier Business Aircraft spokesman Mark Masluch said.

Earlier this month the company announced it was creating a dedicated sales team for Learjet, led by Mike Fahey. The team’s sole focus will be on the marketing and sales of the Learjet 70 and 75.

Masluch said despite the single Learjet delivery in the first quarter, “we’re still optimistic in meeting our (Learjet delivery) targets this year.” He wouldn’t quantify the Learjet delivery number for 2016.

Masluch added that Bombardier Business Aircraft plans to make an announcement around the Learjet product line at the European Business Aviation Convention & Exposition, set for May 24-26 in Geneva, Switzerland.

Bombardier expects to deliver about 150 Learjet, Challenger and Global business jets for all of 2016.

Despite fewer Learjet and other business jet deliveries, Bombardier said it doubled net orders for them in the first quarter – for a total of 40 – compared with 19 in the year-ago first quarter. Its business aircraft backlog stood at $17.3 billion at the end of the first quarter of 2016, a slight increase from 2015.

This story was originally published April 28, 2016 at 7:06 AM with the headline "Bombardier’s C Series order from Delta comes with a cost."