Can Air Canada Save the CSeries?

On Wednesday, Air Canada announced a Letter of Intent (LOI) with Bombardier for the purchase of 45 CS300 aircraft with options for an additional 30 and the potential to substitute the CS100. It is the first order for the CSeries family in 2016 and the first order or commitment for the CS300 since 2014. It is also the first order from a major international North American airline. With sales stagnant and Bombardier facing a bleak financial situation, will Air Canada’s order provide the spark necessary to launch the CSeries into the mainstream?

While Bombardier’s CRJ series and Q series aircraft families have enjoyed widespread use and relative success, the new CSeries venture has faced significant headwinds almost since its inception in 2004. It was designed to fill a hole in 100- to 150-seat market and replace aircraft like the DC9, MD80, and 737 Classic. Following a lack of interest, however, the company decided to discontinue the project in 2006, choosing instead to focus on their CRJ family. At the time, the company said, “present market conditions do not justify the launch of the CSeries program,” but they retained a small team on the CSeries project.

In 2007, the company announced the CSeries would continue after consulting potential customers, now with an updated service entry date in 2013. Bombardier officially launched the CSeries family at the 2008 Farnborough Air Show with an LOI from Lufthansa for 30 aircraft plus 30 options.

At the time, Bombardier accepted repayable investments from the Canadian, Irish, and British governments to cover approximately 1/3 of research and development of the aircraft. An audit conducted by the Canadian government in 2013 found this initial distribution of funds to be justified “due to the sector’s financial risks and the importance of the economic benefits that the sector offers for Canadians.”

However, issues soon became apparent shortly after the first flight of the CS100 in September 2013. Based on first flight test results, entry-into-service was pushed back to the second half of 2015. Shortly thereafter, the first CS100 experienced an engine malfunction and flight testing was halted for over three months. An initial budget of $3.4 billion USD ballooned to $5.4 billion by the time the CS300 took its maiden flight, and what appeared to be a steady stream of orders began to dry as major carriers opted for Boeing’s 737 MAX, Airbus’ A320neo, or Embraer’s E2 aircraft families. All of these competing programs represented upgrades of aircraft already widely in use.

Bombardier has secured 53 firm orders for the CS100 and an addition 190 for the CS300 for a total of 243, not including options, but this still falls short of the self-stated target of 300. Bombardier suffered a major blow in January, when potential customer United opted for 40 737-700s, a direct competitor to the CSeries, all but eliminating hopes the carrier would choose Bombardier. When asked if United is still considering the CSeries, the airline simply responded with a refusal to discuss future fleet plans.

Delta seemed to express interest when CEO Richard Anderson said in call in January they were taking a “serious look” and the CSeries and that it is “a pretty impressive airplane.” These comments sparked major speculation as to whether the airline would make a bet on the new airplane; however, with Delta’s preference for the affordable rather than the new, it is unlikely any CSeries will join the airline unless serious discounts are applied.

Bombardier faces stiff headwinds in terms of pricing. While the CSeries provides substantial fuel burn benefits over its older competitors like the 737-700, a 737-700 is currently priced around $70 million, while a new CSeries could cost as much as $82 million. As fuel prices remain low, the company must convince airlines that savings in efficiency will make up for the investment needed in a new airplane. It is unclear if Bombardier could financially support the discounts necessary to make the CSeries competitive.

Facing cash flow issues, Bombardier reached out to various Canadian governments again in late 2015 looking for assistance. In October, the government of Quebec provided $1 billion USD in exchange for a 49.5% stake in the CSeries program. Even with the additional support, the program is not expected to break even for another five or six years. Quebec, for their part, will guarantee CSeries production in the province for 20 years.

At the same time, Bombardier has announced a 10% reduction in its workforce, meaning the loss of around 7,000 jobs, none of which will come from its Commercial Aircraft division. Bombardier intends to simultaneously grow the CSeries program, in preparation for increased orders it expects as a result of the Air Canada order.

The Air Canada order, if finalized, represents the largest CSeries order to date. For Air Canada, the first 25 will replace retired E190 aircraft, while additional frames will be used to support growth. As Canada’s largest carrier, the order could hint Air Canada was potentially influenced by domestic politics, as the Quebec government simultaneously discontinued litigation related to Air Canada’s operation of a maintenance and overhaul facility in the region. Air Canada President and CEO Calin Rovinescu noted, “today’s announcement reflects our continued support for Canada’s aerospace industry,” but emphasized, “the CSeries is very well suited for our current and future network strategy.”

Whether this order will provide the maturity and legitimacy necessary for other carriers to take a risk on a new aircraft type remains to be seen. Given Bombardier’s storied program past and current financial situation, it seems unlikely the company could expect additional significant orders from major U.S. carriers. Barring significant fluctuations in fuel prices or industry instability, the future of the CSeries appears, for the moment, bleak.

The first aircraft is expected to enter service with SWISS to replace its Avro RJ100 fleet. As the first few frames enter service and bugs are worked out, other established network carriers may decide to take a shot on the Canadian venture. Until that time, prospects for Canada’s newest commercial jet appear frozen.

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