Airbus Will Close Its CSeries Takeover Early

Adam Levine-Weinberg, The Motley Fool

Updated Mon, Jun 11, 2018, 7:10 PM

Last October, Canadian transportation conglomerate Bombardier (NASDAQOTH: BDRBF) shocked the aerospace industry by agreeing to hand over control of its struggling -- but still promising -- CSeries aircraft program to Airbus (NASDAQOTH: EADSY). The goal of this deal was to boost the sales and profitability of the CSeries program by putting Airbus in charge, as Airbus has substantial scale advantages in the aerospace industry compared to Bombardier.

This deal was originally scheduled to close sometime in the second half of 2018. Last week, the companies announced that they have received all the necessary regulatory approvals and plan to execute the transfer of control to Airbus on July 1. That will put Airbus in good position to start making deals at the biggest air show of the year, which is coming up next month.

A good airplane in need of a boost

Bombardier's CSeries jet offers an impressive combination of range and fuel efficiency for its size, giving airlines a great option in the 100-150 seat aircraft category. However, sales never really got off the ground.

Initially, management was too conservative about pricing, losing huge numbers of orders to Airbus and Boeing, which offered "good enough" products at much better prices. Later, a series of development delays added to Bombardier's woes. The 2014-2015 oil price crash further eroded the CSeries jets' value proposition. As a result, Bombardier ended March with 343 firm CSeries orders -- some of which are likely to be canceled. (For comparison, Boeing has nearly 4,400 unfilled orders for its 737 MAX, and Airbus' A320neo family has an even bigger backlog.)

A rendering of an A320neo and a CS100 flying side by side

Bombardier has had a lot of trouble selling its CSeries jets. Image source: Airbus.

Rather than paying cash for its 50.01% stake in the new C Series Aircraft Limited Partnership, Airbus will provide much-needed in-kind support. Airbus will take over the sales and marketing functions for the CSeries program, it will manage procurement, and it will be in charge of customer support for CSeries operators.

It might seem like Bombardier just gave away majority control of its most important aircraft program for no reason. However, Bombardier didn't have the scale and expertise needed to make the CSeries jets successful. By contrast, Airbus is capable of turning the program around.

There's a huge sales hole

Bombardier recently secured a firm order for 30 additional CS300 jets from Air Baltic, which was the first operator of the larger CSeries model. Otherwise, order activity has been quite slow recently -- due in part to uncertainty related to the upcoming ownership transition.

Indeed, after accounting for orders at risk of being canceled, the "true" number of CSeries firm orders is around 300. Meanwhile, the main CSeries assembly plant is ramping up to a planned production rate of 10 aircraft per month. Airbus also plans to build at least four CSeries aircraft per month for the U.S. market at its facility in Mobile, Alabama.

In theory, this means that CSeries output would ramp up to more than 150 aircraft per year by the early 2020s. However, there aren't nearly enough firm orders in the backlog to support this level of production. Thus, boosting the backlog must be Airbus' first priority.

Time to sell some planes

The July 1 transfer of control to Airbus is ideal because the 2018 Farnborough Airshow starts on July 16. This is the biggest industry event of the year. Numerous aircraft deals are likely to be announced, and the Airbus sales team will have lots of opportunities to talk about the CSeries jets with potential customers.

Several U.S. airlines appear to have serious interest in the CSeries family, running the gamut from budget carrier Spirit Airlines to legacy carrier United Continental. It will be important for Airbus to win a major deal from at least one of these carriers to show that it is serious about selling the newest aircraft program under its corporate umbrella. This could help drive sales to smaller, lower-profile airlines later on.

Airbus also has a massive existing customer base, unlike Bombardier. The Airbus sales team probably has a sense of which customers are interested in adding smaller jets to their fleets. It should move aggressively to court those potential buyers.

Thus, the transfer of control to Airbus could be just what's needed to make the CSeries program sustainably profitable. But it's not guaranteed. Airbus still needs to work hard over the next year or two to position the CSeries as an attractive alternative to the 737 MAX and A320neo families for airlines that don't need as much capacity.

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