Bombardier Inc. (BBD/B)’s bet on winning a plane order from American Airlines, a deal stalled by antitrust opposition to a merger with US Airways Group Inc. (LCC:US), is becoming increasingly crucial for the regional-jet pioneer.
Three other U.S. airlines chose Embraer SA (EMBR3) for regional planes this year, leaving American’s pending purchase as the biggest, and potentially only, sale available for months. Montreal-based Bombardier estimated the order may be for at least 70 aircraft, including options.
“It’s the last big regional-jet order that’s out there for quite some time,” Chris Murray, an AltaCorp Capital analyst, said in a telephone interview from Toronto. “If they win AMR, they’ll be able to sustain production levels for a year or two. If not, they’ll likely have to cut back.”
Since signing Delta Air Lines Inc. (DAL:US) to an estimated $1.85 billion deal in December, Bombardier’s regional-jet order haul this year is just three 100-seat CRJ1000s, part of an aircraft category the company created more than two decades ago. Embraer has amassed more than $9 billion in business in 2013 from United Airlines (UAL:US), SkyWest Inc. and Republic Airways Holdings Inc. (RJET:US)
American’s jet purchase may have a list value of as much as $2 billion, according to Walter Spracklin, an RBC Capital Markets analyst in Toronto. Carriers typically get discounts.
While Bombardier Chief Executive Officer Pierre Beaudoin focuses on the bigger CSeries single-aisle jetliner over the planemaker’s regional-aircraft offerings, Brazil’s Embraer is pushing ahead with upgraded versions of its commuter models.
That competition is eroding manufacturing revenue from Bombardier’s commercial aircraft unit while the company awaits the entry into service of the CSeries -- which can seat as many as 160 people -- in about a year. Last year’s total of $1.1 billion was the lowest in at least a decade, annual reports show. Sales at the unit last year amounted to about one-quarter of the total in Bombardier’s 2004 fiscal year.
Bombardier’s Class B shares fell 4.2 percent in the five years through yesterday, trailing the 74 percent gain for the Standard & Poor’s/Toronto Stock Exchange sub-index of Canadian industrial companies. Shares of Sao Jose dos Campos, Brazil-based Embraer rose 41 percent in the same period.
Aerospace sales, including regional and business jets as well as turboprops, accounted for 51 percent of Bombardier’s $16.8 billion in 2012 revenue. Bombardier also sells locomotives, passenger rail cars and signaling equipment, among other products.
American, which seeks to exit bankruptcy via the US Airways merger, doesn’t control the timing of its order. The airline said in a court filing that the U.S. Justice Department’s Aug. 13 antitrust suit to block the tie-up would delay the regional-jet purchase because financing was at risk.
It’s shopping for new planes after winning revised labor agreements that let pilots for its regional operations fly bigger aircraft. Regional pilots earn less than those on domestic and international routes, giving airlines an incentive to opt for larger planes, such as the 76-seat CRJ900 NextGen models bought by Delta, for their commuter units.
Marc Duchesne, a spokesman for Bombardier, said he couldn’t elaborate on the American sales campaign beyond comments last month by Philippe Poutissou, vice president of marketing at the commercial aircraft unit. Poutissou told an investor conference Sept. 19 that talks were under way and that Bombardier expected a decision “shortly.”
Spokesmen for Embraer and Fort Worth, Texas-based American also declined to comment.
Bombardier’s annual reports show that deliveries of CRJ regional jets dropped to 14 units last year -- the lowest total in at least 16 years -- from a high of 215 in fiscal 2004. The jets retail for $39 million to $48 million, based on 2012 list prices, the latest available.
Able to fly about twice as fast as turboprops, Bombardier’s regional jets helped transform commuter airlines starting in the 1990s. Industrywide demand for the smallest models has waned during the past decade as jet-kerosene prices tripled, boosting operating costs.
“Even with an order from American, things are never going to go back to what they were for the CRJ program,” Andreas Hoppe, vice president of Canadian equities at CIBC Global Asset Management, said in a telephone interview from Montreal. Still, “They want to win that order. If they don’t get it, chances are the production rate doesn’t stay where it is now.”
Bombardier’s backlog through June included 91 firm orders for its CRJ family, according to data compiled by Bloomberg. That was equivalent to about 55 months of production.
At 0.25, Bombardier’s book-to-bill ratio at the end of the second quarter was the worst among the world’s four largest makers of commercial aircraft, data compiled by Bloomberg show. The ratio, which compares orders to deliveries on a unit basis, was 8.1 for Embraer, 3.4 for Boeing Co. (BA:US) and 2.1 for Airbus SAS.
Bombardier is one of Canada’s largest manufacturers. Its aerospace division has about 21,500 employees in Canada and the company was the country’s second-largest research and development spender in 2011, trailing only BlackBerry Ltd., according to Statistics Canada.
With Embraer introducing a revamped version of its regional jet, Bombardier’s best hope of winning the American order may be to compete mostly on price, said RBC Capital’s Spracklin. Embraer’s E2 planes, due to enter service in 2018, feature improved engines and a new wing.
American’s fleet includes 213 Embraer planes and 59 Bombardier aircraft, according to the airline’s website. That “installed base” gives Embraer an advantage in negotiating with the carrier, said Spracklin, who recommends investors buy Bombardier shares.
Investors such as Bob Sharpe, a vice president at Heartland Advisors Inc. in Milwaukee, said they don’t want Bombardier to give away the jets just to keep its factories humming.
“It would be nice to see them win something like the AMR order, but you don’t want to see them sacrifice returns in order to grab something like that,” Sharpe said in a telephone interview. Heartland oversees about $5 billion, including Bombardier shares.
CIBC’s Hoppe said that even as he watches the American campaign, he’s also keeping an eye on Bombardier’s efforts to build and market its largest-ever plane, the 110- to 160-seat CSeries.
Beaudoin, the CEO, has said he expects the CSeries to contribute $5 billion to $8 billion a year in additional revenue for Bombardier later this decade.
“The CSeries is Bombardier’s growth engine,” said Hoppe, whose firm holds Bombardier stock. “The CRJ is not a growth part of the story for Bombardier. It’s a care and maintenance part of the story.”
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