Even Bombardier Inc.’s competitors stopped what they were doing to watch the CSeries fly.
The long-anticipated, highly troubled Bombardier jetliner was finally making its debut at June’s Paris Air Show. There were line-ups for a look at the aircraft’s interior. CSeries press conferences were overflowing. But the moment of truth was the flight demonstration, where everyone craned their necks to see if the so-called “whisper jet” would live up to its name.
The reviews were enthusiastic. “It really was extremely rewarding after all the hard work,” recalls Rob Dewar, vice-president of the CSeries program.
Bombardier had built a damn good plane. And nobody was buying it
But not rewarding enough. As the show wore on, Bombardier was forced to sit on the sidelines and watch as its competitors racked up hundreds of billions of dollars in new orders for their planes, while all the Montreal-based company had to show for the CSeries was an existing customer, Swiss International Air Lines AG, deciding to upgrade part of an existing CS100 order to the larger CS300.
Canadian PressBombardier's C-Series commercial jet takes off on its first flight on Monday, Sept. 16, 2013 in Montreal.
Bombardier had built a damn good plane. And nobody was buying it.
The CSeries had from the beginning been a gamble. If executed properly, it would pay off in spades. That hasn’t happened and the outcome remains, seven-and-a-half years later, just as uncertain. The CS100 is expected to receive Transport Canada certification within the next few days. In a few months comes its first commercial flight. The CS300 is about six months behind that. But the CSeries has ravaged Bombardier, tearing apart its leadership team, sapping its financial resources and seriously damaging its reputation with investors and customers.
Bombardier shares have lost more than 80 per cent in value since the day the CSeries program was launched in July 2008. The company racked up more than US$9 billion of debt and recently received a total of US$2.5 billion from the Quebec government and the province’s pension fund to stay afloat.
BloombergHere's how Bombardier stock has performed since 2008.
The CSeries comes to market two-and-a-half years behind schedule and more than US$2 billion over budget. There hasn’t been a single new firm order in 15 months. In October, Bombardier took a US$3.2-billion impairment charge on the program. The executives who oversaw the creation of the CSeries are gone as the new CEO, Alain Bellemare, tries to rebuild after so many fiascos.
Bombardier had dreamed big with the CSeries. But, interviews with former and current insiders reveal, it was wholly unprepared for what it was getting itself into — unprepared for the assault that its fiercest competitors would unleash once they sensed the CSeries moving in on their turf; unable to properly manage its supply chain; and worst of all, unable to stay focused on the program, as internal battles broke out between executives over resources.
Bombardier was well aware of the challenges of developing a new aircraft from scratch, says Gary Scott, who led Bombardier’s commercial aircraft division before retiring in 2011. The company took note of Boeing’s well-publicized problems with its 787 Dreamliner — which arrived three years late and billions of dollars over budget — and gave itself what it assumed was a comfortable cushion of time and money.
“Nobody at Bombardier was naïve about the challenge,” Scott says. “They tried to mitigate every risk that they saw, but even with all that, it was still a bigger challenge than they could deal with.”
Postmedia NewsBombardier was well aware of the challenges of developing a new aircraft from scratch, says Gary Scott, who led Bombardier's commercial aircraft division before retiring in 2011.
Moving into the big leagues
Things were simpler before the CSeries was conceived. Bombardier inhabited a comfortable niche in the global aviation industry, making a range of popular business jets and commercial aircraft for short-haul flights. But its core CRJ family of regional jets was starting to age, and Bombardier latched onto the idea of something bigger: a rare opportunity to catapult itself into the big leagues alongside industry giants Airbus Group SE and Boeing Co.
For years, manufacturers had sensed a gap in the market for a 100- to 150-seat transcontinental jet that could be used on secondary routes (think: Portland, Ore., to Charlotte, N.C.). Airlines were stuck relying on old, out-of-production McDonnell Douglas DC-9s and MD-90s, or downsized versions of the too-large Boeing 737 and Airbus A320.
Bombardier saw a huge amount of unfilled demand — its latest forecast still sees a market of 7,000 planes in that segment over the next 20 years. It also saw Boeing and Airbus distracted by new, long-range jet programs like the 787 Dreamliner and the A350. It leaped at its chance.
It started with a brief press release in early 2004 announcing that it had hired Scott, a former Boeing executive, to “evaluate the possibility of proceeding with the creation of a new-generation commercial aircraft.” It would come to be called CSeries — the C stood for “competitive, continental, connector.”
In Scott’s mind, the CSeries was going to be to Bombardier what the 747 was to Boeing in the 1960s: high risk, but, in the end, transformative.
“It damn near took them (Boeing) down; Boeing almost went bankrupt back in the late ’60s because of the 747 program and the fact that the industry took a dive at that time,” Scott says. “But they came through that as the true leader in commercial aircraft.”
By the end of 2005, Scott had taken his project from one employee to 600. The result: plans for “an airplane that was probably 10 per cent better than anything that existed in the market,” he says.
Ten per cent wasn’t good enough. In 2006 Bombardier shelved the project and shrunk Scott’s division to a skeleton staff of 50 while it waited for the right technology to catch up with his vision.
Scott was staying in close touch with Pratt & Whitney, which was developing a new, more fuel-efficient engine technology, known as a high-bypass geared turbofan. It had been in the works for years but was still untested. As the engine came closer to reality, the vision for the CSeries came into focus — an aircraft that would use the new engine technology, along with lightweight composite materials, to significantly reduce fuel and operating costs.
Canadian PressBombardier's first CSeries flight test vehicle (FTV1) being assembled at Bombardier's Mirabel, Quebec facility in 2012.
“We came up with this aircraft concept that was just fundamental. It was providing a 20 per cent improvement in fuel burn,” Graham Webb, vice-president of commercial engine programs at Pratt & Whitney, says. Operating the CSeries, meanwhile, would cost airlines 15 per cent less than the competition.
Webb, who has worked with Bombardier on the CSeries from day one, says the goal was to “set a new bar and a new standard for the rest of the industry.”
“If they were going to be successful in breaking into that market space, they were going to have to have a game-changing aircraft with game-changing technologies,” he says.
Convinced that it did, Bombardier officially launched the reborn CSeries program in July 2008, with first deliveries planned for 2013. A press release included supportive quotes from potential customers such as Deutsche Lufthansa AG and Qatar Airways. The aircraft leasing company, International Lease Finance Corp., said it was “very interested,” but needed “other major airlines” to get on board. Scott remembers interest coming in “from all parts of the world, really from every corner of the market.”
BloombergPassenger seating and windows sit inside the new Bombardier CS100 C Series aircraft show at the International Paris Air Show in June.
But that didn’t turn into orders.
Only one of those original potential customers — Lufthansa — ever followed through, with its subsidiary Swiss International Air Lines becoming both the first CSeries customer and, next year, the first airline to fly the plane.
Over the years, contracts trickled in, but the program is languishing at 243 firm orders, well short of the company’s target of 300 by the time the aircraft enters service next year. The last firm order was in September 2014.
And of those 243 existing orders, 108 face some degree of risk that could result in delays or outright cancellations, according to an analysis done earlier this year by aviation consultancy Leeham Co.
The story of the CSeries is one of bad luck, bad timing and questionable decisions that conspired to leave Bombardier in the precarious position it’s in today. Some things were out of Bombardier’s control — the financial crisis and a slump in oil prices that made fuel efficiency less of a priority for airlines, for example. But Bombardier’s learned some hard lessons about its own capabilities. The question now is whether it has time to overcome a string of setbacks and salvage the CSeries, and with it, Bombardier’s reputation.
Two-and-a-half years after the CSeries program was launched, Bombardier had only received 90 firm orders, a dishearteningly low number for a supposedly transformative aircraft. In a moment of candidness, management tried to assuage investors with a Q&A-style interview in the company’s 2010 annual report.
Getty ImagesThe Bombardier CS300 sits on the tarmac at the International Paris Airshow in June.
“You’ve put a lot of eggs in the CSeries basket,” reads one question. “Analysts say the real risk for your new commercial jet isn’t competition but rather execution. What makes you think you can deliver on time when other larger aerospace manufacturers have failed to do so?”
Guy Hachey, then president of Bombardier Aerospace, offered this answer.
“Because we’ve designed our product development plan … to ensure that every step of the way, we deliver on all our timing commitments,” he replied. “We’ve given ourselves over five years (since 2008) to develop, test and deliver our first aircraft, which is ample time.” But it was already becoming apparent that it wasn’t.
Bombardier stubbornly stuck to its timeline until May 2012. Then targets grew vague, with the company saying entry into service of the smaller CS100 version of the aircraft would be approximately one year after its first test flight.
That first flight was eventually scheduled for June 2013 but more delays pushed it back to September of that year. Then, in January 2014, Bombardier revised its entry-into-service date again, to the second half of 2015.
That date was later pushed back to the first half of 2016, two-and-a-half years late, which is where it stands today.
“It isn’t just that the delay is the cause of their problems; it’s also a symptom of their problems,” says Richard Aboulafia, vice-president of analysis at aviation research firm Teal Group Corp., a long-time critic of the CSeries. “They could have moved faster if they had the resources.”
One big problem: Bombardier lacked the regional sales teams of its competitors, says one former executive who spoke on the condition of anonymity. That wouldn’t be rectified until the program was well underway. Meanwhile, Bombardier found its suppliers weren’t being helpful. A relentless competitive streak kept parts-makers from communicating with each other, he says. “Complacency is hard to change in aerospace … one of the biggest difficulties and challenges I found was how to get your point across to suppliers, and even within Bombardier, that what we did (wrong) yesterday has to be looked at and changed so we don’t repeat it tomorrow.”
A Chinese supplier contracted to build the fuselage proved not up to the task. Bombardier had to uproot the project and bring it back home to Canada. “When you do that, then you eat up a billion dollars quickly of tooling,” the executive says.
The problem wasn’t a lack of intelligence, but rather a lack of experience, says Scott.
“I would say that Bombardier’s people are just as smart from an intellectual standpoint as Boeing’s or Airbus’s or anybody’s,” he says. But they’d never built an airplane from scratch that incorporated so many new technologies. “There’s just really no substitute to having ‘been there, done that.’”
‘A lot of clouds’
Philippe Poutissou, former head of marketing at Bombardier Aerospace, says his team knew that Boeing and Airbus wouldn’t ignore the CSeries for long. They even tried to keep it quiet that the CS300 could carry 160 seats, enough to put it into competition with Boeing’s 737s or the Airbus A320. They marketed it as a 130-seat plane, trying to fly under the competition’s radar.
It didn’t work.
Bombardier was caught off guard by “how aggressively Airbus and Boeing defended their incumbent positions with customers,” Poutissou says.
In 2010, Republic Holdings Inc. became the first (and so far only) North American customer for the CSeries with an order for up to 80 aircraft. Republic, which operates regional flights for big U.S. carriers, had been a longtime Airbus customer.
The switch to Bombardier was “a real wake-up call to Airbus,” says Cameron Doerkson, an analyst at National Bank. Within a year, Airbus had convinced Republic to flip, ordering 80 planes from them instead. There were unconfirmed reports that Airbus had gone so far as to offer to pay Republic’s cancellation fee for the CSeries order. (The order is still technically on the books, but Republic’s CEO has made it clear he’s looking to get out of it.)
Scott had seemed unfazed initially by the possibility of Boeing and Airbus launching a counterattack against the CSeries.
“They’ve said themselves that they don’t see introducing a new aircraft until 2015 or later,” he said on a 2008 conference call. He was right. But despite a two-year head start for Bombardier, by 2015, Airbus had still beat the CSeries with its own competing model. It received certification last month for its A320neo, a 150- to 180-seat aircraft that also uses Pratt & Whitney’s “whisper” engine and burns 16 per cent less fuel than the older A320s — just a bit less efficient than the CSeries.
And Boeing is preparing a new, more fuel-efficient version of its 737, known as the 737 MAX, with first delivery planned for 2017. It, too, will compete for a portion of the same segment as the CSeries. Bombardier has been left to watch as Boeing and Airbus offer up aggressive pricing plans for longstanding clients who are more comfortable with brands they’ve used for decades, and the ones their pilots and mechanics already know their way around.
As the CSeries troubles mounted, the company sensed its competition seizing on them to spread worry among buyers that Bombardier might not even be around for future servicing. “Your competition is spreading rumours that this program is going to kill the company financially,” says one former executive. “It presented a lot of clouds for customers.”
The trouble was, the rumours weren’t that hard to believe: What had begun as an already ambitious and expensive initiative had begun to spin out of control. CEO Pierre Beaudoin estimated in 2008 that development of the CSeries would cost US$3.2 billion, split three ways between the company, its suppliers, and subsidies from Ottawa, Quebec, and the U.K., where Bombardier makes the CSeries’ wings. By early 2015, that budget had ballooned to US$5.4 billion. And Bombardier had nothing like the deep pockets of its rivals.
“I think there’s a lot of questions about whether the CSeries was an airplane they ever should have tried to build,” says David Tyerman, an analyst at Canaccord Genuity. “They simply may not be a large enough company with enough financial resources to be able to do a project of that size.”
And yet, having possibly bitten off more than it could chew with the CSeries, Bombardier then took two more big bites — announcing it would develop both a new Learjet and a new family of Global business jets at the same time.
“For a company of somewhat limited resources to take on three all-new aircraft development programs, that’s a huge strain on your engineering department and a huge strain on your balance sheet,” says Cameron Doerksen, an analyst at National Bank. One former executive described departments “literally fighting” for engineers and money. Cost overruns and delays were everywhere: Developing the new Learjet 85 ended up costing an astounding US$2.6 billion before it was finally cancelled this year; the first of the ultra-long-range Globals, still under development, had its delivery date pushed back by two years to late 2018.
“The CSeries was a huge challenge; you can’t overstate what a big challenge it was,” says Scott. “Then to take on the Learjet 85 and the Globals at the same time was probably too much.”
The Bermuda Triangle of airplanes
At Bombardier’s investor day this past November, commercial aircraft president Fred Cromer reiterated the company’s long-stated goal of capturing half the market for 100- to 150-seat planes over the next 20 years. According to Bombardier’s calculations, that would amount to 3,500 CSeries sold by 2034.
And Bombardier actually is on track to achieve its 50 per cent market-share goal. The actual size of that market, however, is very much in dispute.
Since 2008, the CSeries has accounted for 47 per cent of total orders in the segment; Brazil’s Embraer SA got most of the rest. But so far the entire market has amounted to just 519 planes. This particular segment has earned a reputation as “the Bermuda Triangle of airplanes,” known for making sales forecasts disappear, says Tyerman, the Canaccord analyst. “What was not clear at the time, and this was the debate right from the start, was whether there is really a market for that size.”
Dewar, the CSeries vice-president, disputes this. “There’s more than enough market for us to fill, without question,” he says. He points to U.S. Department of Transportation data that shows 77 per cent of commercial flights around the world take off with 150 passengers or less.
“They may be able to induce enough orders if they price the thing cheaply enough,” says Tyerman. “But what kind of margin will you make on that?” he asks. “What kind of profit will you make?”
With all the delays and runaway costs, hitting volume targets will be critical for Bombardier. U.S. aviation consultancy Leeham Co. estimated recently that the first 50 planes the company makes, starting next year, will be built at a loss of US$32 million each. Bombardier has acknowledged that the CSeries won’t generate positive cash flow until 2020 — and its US$3.2-billion writedown on the program was a tacit acknowledgement that the original investment is unlikely to turn a profit.
And yet, despite all the CSeries’ woes, no one in the industry disputes that Bombardier has ended up with an excellent aircraft, exceeding its original targets for fuel burn, payload, range and airfield performance. The CSeries has been confirmed as the quietest commercial jet in production.
“It will take five to 10 years … for customers and even flying passengers to really appreciate what the product can offer to the market,” says Fassi Kafyeke, senior director of strategic technology and advanced product development at Bombardier Aerospace.
Bombardier says that things are finally starting to turn around as the CSeries certification approaches. “I have seen huge momentum, change in interest, engagement from customers,” Dewar says. “Everything is falling into place.”
Scott, the former commercial division head, knows it could be a long time before Bombardier’s gamble is vindicated. He compares the program to Boeing’s 777, which was launched in the early 1990s and was also plagued by delays, cost overruns and tepid demand.
“It wasn’t until the middle of the last decade, around 2005 or so, that the program really began to shine,” Scott says. Eventually, the 777 rose to dominate its segment, “but it took a dozen years before Boeing could stand up and say, ‘You know what? We made a great decision.’”
Bombardier has a long way to go, digging itself out of debt and rebuilding confidence among investors and customers, before it can say anything of the sort. But one thing it can say with confidence is that it has transformed the industry’s technology.
Doerksen at National Bank believes that Boeing and Airbus would have taken significantly longer to put new, more fuel-efficient engines on their aircraft if it hadn’t been for the CSeries threat. And even the skeptical Aboulafia of the Teal Group acknowledges the size of the impact on the aircraft business. “You’re talking billions of gallons in fuel saved, you’re talking tons of emissions avoided, you’re talking much quieter airplanes,” he says.
Bombardier was looking for a transformative aircraft in the CSeries, and it found one. The CSeries has had a dramatic, often dire impact inside Bombardier, too. If the company overcomes its troubles to make a mark in a whole new league of aircraft, it can say it was worth it. It could be a long wait until it knows for sure.
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