BOMBARDIER INC at CIBC Eastern Institutional Investor Conference
Sep 19, 2013 AM EDT
BBD.B.TO - Bombardier Inc
BOMBARDIER INC at CIBC Eastern Institutional Investor Conference
Sep 19, 2013 / 02:00PM GMT
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Corporate Participants
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* Philippe Poutissou
Bombardier Inc. - VP of Marketing, Commercial Aircraft
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Conference Call Participants
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* Kevin Chiang
CIBC World Markets - Analyst
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Presentation
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Kevin Chiang, CIBC World Markets - Analyst [1]
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Good morning. My name is Kevin Chiang, one of the analysts here at CIBC. It's my pleasure this morning to introduce Bombardier. And from Bombardier we have Philippe Poutissou, Vice President, Marketing, Bombardier Commercial Aircraft, as well as Shirley Chenier, Senior Director of Investor Relations.
Philippe was appointed to his current position in September 2008 having joined the marketing department of Bombardier back in 2000. He joined Bombardier in 1995 as an aerodynamics engineer. So with us today for the commercial -- if any questions on commercial aircraft and the marketing efforts, Philippe will be more than happy to answer those questions. Any questions outside of that sphere, we have Shirley there. So anything related to business jets, transportation, Shirley would be more than happy to answer those questions.
I think we are quite familiar with the Bombardier story so I think we will jump straight into Q&A. So with that, if there's any questions in the audience, we can definitely start taking them now.
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Questions and Answers
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Kevin Chiang, CIBC World Markets - Analyst [1]
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Maybe I will start it off then. Philippe, it seems as though the CSeries orders have slowed a bit here over the past year. Maybe you can talk about how your sales campaign is going in terms of reaching your eventual call it near-term target of 300 firm orders and roughly 20 customers by entering to service and are you focusing on a specific carrier type currently? Are you focused on low-cost carriers, discount carriers, legacy carriers? If you can speak to that.
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [2]
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Yes, absolutely. Today, we are at 177 firm orders. We have commitments for 388 and when we say commitments, that includes the options, a few LOI and conditional orders that we are working to confirm. Our target is to get to 300 firm orders, so 300 units, from approximately 20 customers by the entry into service.
What I can say is that without revealing names and specific campaigns is that we do have line of sight to that goal so we have a pipeline of activity at various stages including quite advanced negotiations and still early marketing and we believe that goal to be entirely realistic.
In terms of customer types, the flexibility of the CSeries allows us to have discussion with many different customers in terms of what they can do for the business, for their business and their business model. We have tended to focus on opportunities where we are not necessarily going head to head into the heart of the large competitors' markets.
So we do a fair amount of research to assess which airlines have truly a need for that 100- to 150-seat airplane because we know that that's where we have the best product to win in those campaigns. And if we try -- the classic marketing thing is trying -- and move try and move the playing field into your playing field, if we tried and divert too much resource to fighting in campaigns and battles where the requirement is maybe a little bit more skewed towards a larger aircraft, we find that we lose sight of where we are most competitive.
But that said, typically we look at opportunities where the CSeries will coexist with other aircraft and larger aircraft. So the mantra of the low-cost carriers has always been keep it simple, single aircraft type and of course many have been very successful following that model but at the same time, we see the opportunity to diversify the low-cost model and actually take advantage of an entirely different set of opportunities that maybe they can't reach with their existing aircraft fleet. So we do have discussion with low-cost carriers.
And of course on the other end of the spectrum, the full-service carriers and the niche type operations are the ones that will see particular value in an optimized aircraft for that size. So we do spend a lot of time with network carriers who have a wide range of needs as well as niche carriers who need an aircraft with the characteristics that the CSeries brings.
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Kevin Chiang, CIBC World Markets - Analyst [3]
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And what are some of the hurdles you've faced as you've launched this campaign over the past couple of years convincing airlines to look at the CSeries? And has the large installed base of Airbus and Boeing or the commonality benefits that they do offer, there may be a greater impediment to this campaign than you had originally envisioned?
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [4]
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Well, clearly, when you come with a new product, there is a certain amount of demonstration that you need to make. So we can present our case. We can present our numbers but the aircraft evaluators on the other side of the table are going to introduce into their business case some contingencies and some margins taking into effect the risks around things like performance of the actual aircraft. So we are starting to take that layer of risk away by actually flying the aircraft and getting real data as opposed to simulated data.
They will have some concern over the liquidity and the financing market and whether it will be there for the product. And again as you build the customer base, you start to take away that concern and there are some that take many years to remove. The question around reliability of the aircraft, the question around how much does it cost to maintain in the long-term? That one will likely have to wait until the aircraft goes into service and proves itself with many hours of experience.
So we expected that. Obviously we have to do our best to demonstrate progress in all those three areas. The transition costs to make a fleet change is one that the airlines will always introduce into the evaluation and it is not a negligible cost but it's one that we believe the value proposition of the inherent properties of the aircraft can easily overcome.
So of course, our competitors are doing what they can in order to simplify transitions into their newer generation projects. We expected that competition so I wouldn't say there's anything unexpected. It has been said and I think it's been noted by many that the mainline competitors have been very aggressive to keep us out. Obviously that poses a challenge to us but it's also a good sign. It means that they believe that this is a real threat.
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Kevin Chiang, CIBC World Markets - Analyst [5]
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Any questions in the audience? Upfront here.
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Unidentified Audience Member [6]
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(inaudible - microphone inaccessible)
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [7]
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Sure so when we look at the long-term demand for commercial aircraft in that science category and we look at a 20-year delivery forecast, the 100- to 150-seat segment, which is nominally the one the CSeries will serve, requires about 7000. In fact, our forecast which has published, says 6900 deliveries. So give or take a few, it is 7000 aircraft.
The fleet that is operating in that segment today that will need to be replaced in that timeframe represents about 3000 of those airplanes and the remainder will come from growth in demand for air travel and obviously particularly driven by the growth in middle-class in markets in Asia, in Africa, Middle East, those types of markets.
We know that we won't be alone with product in that segment and we know that over those 20 years there may be others that come in there. But we believe that given that we are coming in with an all-new platform, it's at the beginning of its lifecycle, obviously once you get that aircraft into service, you look for ways to continually improve it.
We have set ourselves a target to go after 50% of that. And of course when we do our business cases on the program, we are a little bit more conservative than that but the opportunity is large. It represents in all about 10% of demand for global commercial air transport. So although we are nipping at the heels of large manufacturers and it is a big jump for Bombardier, at the same time it represents only about 10% of the overall market. So we think there's a space there to go after with the new product.
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Kevin Chiang, CIBC World Markets - Analyst [8]
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Over there on the left.
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Unidentified Audience Member [9]
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Just a question on timing. Right now the CSeries you are testing (inaudible) and I'm assuming you are sharing data with your client at some point (inaudible) aircraft. Is that sharing happening three months after beginning the program, six months? And how the potential orders for clients that are waiting for that data, how is that [related]?
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [10]
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We have a flight test program now that is normally 12 months. There's five aircraft that are going to join the CS100 flight test program. Each of those five aircraft has a role to play so they will -- the first aircraft is primarily around the envelope flying higher, faster, testing the stability. Then you have another aircraft that will do more performance tasks, one that will do the systems tasks, one that does the test of the interior. So not all the aircraft have a passenger interior.
So they all have a role to play and so at different stages along the program, we are going to get data on these different elements.
But clearly when it comes to the airline business case, they are going to take an assumption that we are going to certify the airplane and it's going to be safe. So they are not necessarily going to look for that type of data in order to make a decision around whether this aircraft will meet its targets. They are clearly going to look for fuel data, they are going to look for noise data, they are going to look for airfield performance data, a little bit of reliability data. Those are the types of things that they are going to want to see.
Our first aircraft is instrumented for fuel data. We know how much fuel it burned on Monday when it flew and we can already look and see whether that was in line with our predictions for that airplane. So today we probably have a higher level of confidence than we did last week. And as we fly more missions at different altitudes, different speeds, we will get increasingly more confidence.
That said, we will not do the actual tests that produces the numbers that will go in the book until a few weeks and months down the road but we can already go to the airlines and say from what we see so far, we are confident that we are meeting our predictions.
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Kevin Chiang, CIBC World Markets - Analyst [11]
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Any other questions? Maybe you can talk about your pricing and your financing strategy related to the CSeries. There has been some I guess reports out there suggesting that Bombardier is not being aggressive enough in assisting in the sales campaign, either taking a steeper pricing discount or being more favorable on assisting with the financing. How do you view that strategy and what type of adaptability do you have to adjust that to reach some of these targets?
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [12]
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Sure, sure. So a lot of those comments come from the lessors and from the customers so they are self interested. But at the same time -- early on in the program for us, we have a limited availability of product and we think we have a great value proposition to offer and as I explained earlier, we also recognize that we have a certain amount of risk that the customer will price in when looking at the evaluation and looking to take a decision on our aircraft.
So in our commercial strategy, we've got to balance all of that. But as we say internally, one of our biggest assets in the first few years of the program is the delivery positions in the ramp up because if an airline is able to secure an early delivery position and get an aircraft with the benefits of the CSeries before their competitor, we think that's a big advantage.
So as opposed to our competitors who have very, very high production rates and a lot of flexibility around when they can deliver an aircraft to their competitors, to their customers, we have what we believe is an asset that we need to take advantage of in terms of the ramp up.
That said, we are going to -- we do reward the early customers with aggressive commercial proposals because they have the confidence and the willingness to sign up with us early in the program and be with us as partners as we develop the aircraft. But that's all a balance that we need to play with.
In terms of the financing for the aircraft and the liquidity, obviously, one of the roles of export credit is to assist in creating that liquidity in the marketplace and we believe we have a good program with EDC, with the UK and now even with the participation of the Chinese export credit in Quebec as well that we can offer a good package within the rules of the aircraft sector understanding to start to generate that liquidity. But it's also very important for us to keep the leasing community well apprised of the aircraft and its progress because we know that they will be a significant distributional channel going forward.
What we have seen from the lessors so far is quite encouraging. We have a couple of lessors already on the program. And lessors, they basically look to get in early and take advantage of those early positions, to be holding a position before others so that when someone wants an early position they have it available and they can charge a premium for it. Or they look to have an asset that is well distributed with a large customer base.
So the pattern that we have seen so far is not unexpected. We have a couple lessors that are on the program early. We have many lessors that are watching closely and very interested and they come back to us and they say, well, we are happy to do sale lease back type transactions and we like to see the customer base grow and we think that they will be there in the long term.
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Kevin Chiang, CIBC World Markets - Analyst [13]
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Okay, perfect. Any questions?
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Unidentified Audience Member [14]
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Just maybe one comment that in talking with investors, there are some significant investors (inaudible) and I hear the comment once in a while that you're not going to give the plane away and -- I'm not too preoccupied that they get big orders right from the get-go. I'd rather see them wait a little bit but get a bit of a better pricing. So I guess that fits with (multiple speakers).
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [15]
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Yes, so these mega orders that you see at air shows, 100 aircraft plus 100 options, that has a really, really long tail. So that order will be delivered -- 100 aircraft order plus 100 options, you will be delivering in 2020, 2021, 2022, aircraft that you will have priced in 2013 which means that if you are at an early stage of the program where the airline is factoring in risk and trying to take advantage of the early stage to get a great price, you are going to have to live with that 10 years from now when you are still delivering aircraft based on the deal you did in 2013.
So that's why you want to be very cautious about doing that when you are in a launch phase.
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Unidentified Audience Member [16]
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And when the CSeries will be at a more advanced stage, more normal sales cycle, internally, do you expect to make better margins on that than others or other planes? Or you expect that to be more in line with your commercial sales?
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [17]
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So if I understand the question correctly, we expect that as the CSeries enters service and proves itself and demonstrates that it's a very valuable asset for the airlines, we expect that it will command a premium.
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Unidentified Audience Member [18]
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It's going to be a high-margin (multiple speakers).
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [19]
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But that said, certainly relative to what we see as product that's out there today. But that said, in terms of the pricing fluctuations, of course, the market is always dynamic with cycles and so we've got to ride those cycles as well.
And then of course, from a manufacturing perspective, our focus is going to be on getting cost out as we go down the learning curve and as we start to ramp up production.
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Kevin Chiang, CIBC World Markets - Analyst [20]
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Any other questions?
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Unidentified Audience Member [21]
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How many units do you need to sell to break even(inaudible)?
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [22]
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So that's something that we don't disclose. It's part of the business case and it's part of the confidential information. But as I said, we think that there's a significant potential. This is an aircraft that we are going to be producing at higher rates than we have on our current regional aircraft program just because the market size is larger than our regional aircraft programs.
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Kevin Chiang, CIBC World Markets - Analyst [23]
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Any other questions? Up front here.
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Unidentified Audience Member [24]
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Why don't you tell us about the outlook for the regionals.
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [25]
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Yes, so the regional market is one where we are positioned with the Q400 and the CRJ. We are the only ones that have the two technologies available. That market has seen some challenges recently increase in fuel price affect small aircraft more than it affects large aircraft. But in the same way that the growth in demand for air travel coming from new regions is going to drive some demand for the CSeries, eventually, that cascades into demand for smaller aircraft as well.
So if you think about the airlines and whether it's Latin America or Africa or Asia, what they are going to go after first is low hanging fruit. They are going to go after the large volume routes, they are going to go after major economic centers and typically you need larger aircraft. As they develop their networks and as you get regional economies growing, demand for air travel starts to flow into smaller sectors.
So we do see a demand for regional air travel in markets where that type of aircraft is not heavily penetrated. So for example, some of the things we've been doing in Russia, we announced some LOIs and MOUs around the Q400 in Russia working with local -- with [Russ] technology in order to even look at how we could do an industrial cooperation. That's really to take advantage of that demand for regional air travel in those types of markets.
That said, the biggest market for regional travel will remain the large deregulated markets which today is the US, US and Canada and Western Europe and in those markets, we are primarily in a replacement cycle. We look at replacement cycle. And in the US, we are seeing one of those cycles right now so we had orders from Delta, United and of course everyone is anticipating something from American shortly. But it will go -- that market will be mostly based on the timing of need for replacement of the aircraft.
There's a healthy demand there. We think that we are well positioned with two programs and for the time being we have some runway to continually improve those programs and stay competitive with whatever else is coming in that segment.
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Unidentified Audience Member [26]
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(inaudible) just a follow-up, your regional jets reportedly cheaper to run than Embraer's?
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [27]
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Absolutely.
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Unidentified Audience Member [28]
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Yet Embraer seems to win the orders (inaudible). competitive situation why do you think airlines are not choosing your product?
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [29]
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So you can look at winning and losing orders at different dates. If you say well what happened in the last six months, what happened in the last 12 months, what happened in the last two years? Certainly with the CRJ700 and 900, we have been the market leader there. In fact, about two-thirds of the orders for that size of regional jet went to the CRJ.
On the larger regional jet where the CRJ1000 is now positioned and Embraer has the E190, they took advantage of being first in the marketplace and they built up that program quite well and we are going to have to admit that they've done a very good job.
But going forward, there's a lot of dynamics that play in the types of campaigns that I believe you are referring to in North America. So we won a large order from Delta in December. We had one previously, a large order from Garuda, which was a very competitive situation. And when you turn around and look at what is the next order, there's a different situation in terms of delivery availability, there's different needs for that airline. So it goes back and forth. So Embraer won the United case for now.
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Kevin Chiang, CIBC World Markets - Analyst [30]
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SkyWest, United and Republic chose the ERJ. Do you envision them coming back to the market for any additional regional jet needs to potentially lift the CRJ order book? Or do you think they are basically done here with what they've ordered so far?
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [31]
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So SkyWest is a great customer, of course. They have about 425 CRJs of all types in their operation. They have obviously placed an order for some E-jets which they are going to be operating with I believe with United and they have taken some form of an order on the next generation E-jet. In fact, they took some form of an order on an MRJ.
It is a large airline. They have many different needs and we will keep working with them. As I said, they are a good customer and certainly, they are continually telling us what they'd like to see us do with the product, whether it is changes to make the aircraft more economical to operate or the ways in which we support them and we work with them to try and achieve those goals.
So we certainly believe that there's an opportunity to sell more airplane to SkyWest.
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Kevin Chiang, CIBC World Markets - Analyst [32]
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Any questions? In the front.
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Unidentified Audience Member [33]
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Can you comment a little bit further on the American Airlines renewal?
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [34]
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So American Airlines has the opportunity as a result of their bankruptcy and restructuring to introduce a number of larger regional aircraft. Of all of the North American airlines, they had had a very strict [school] clause limiting them to flying 44 and 50 seats. They had an opportunity to fly a small number of 70-seaters which they had purchased from us. So they had purchased 47 CRJ700s and as a result of the restructuring, they are going to get an opportunity to reshape their regional flying to introduce more large regional aircraft. So there's no secret there.
Of course, they are looking at what we can offer, they are looking at what the competitors can offer and we think that we have a great proposition for them but of course they have two things that they need to do at the same time which is present their plan to exit bankruptcy and also do a selection of which aircraft they will take.
We of course would hope they make that decision shortly. It has been complicated by the challenge, the anti-competitive challenge, the Department of Justice, but at the same time we continue to be in discussion with them. We think we've got a good proposition and we will see if it's a favorable outcome. But at this point, I can't comment on where we are in the negotiation.
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Unidentified Audience Member [35]
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But how big is that potential renewal or size of that (inaudible)?
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [36]
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I don't have the numbers off the top of my head but it's probably of the similar order of magnitude of what you saw from Delta and United this year. So Delta was for us was 30 firm and 40 options and United was something I think a little bit bigger than that but in that order of magnitude.
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Kevin Chiang, CIBC World Markets - Analyst [37]
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In the back there.
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Unidentified Audience Member [38]
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(inaudible - microphone inaccessible)
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [39]
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Yes, absolutely. It's a good question. So commonality essentially refers to flying different models of a same family of aircraft in order to reduce the overall operating costs of the aircraft. And so very simply put, there's maybe half a dozen elements that if you take advantage of you can drive the cost of operating a single family of aircraft lower than operating multiple family of aircraft.
The number one is the pilot pool. So if you have a single pool of pilots flying a CRJ700, a CRJ900, and a CRJ200, first of all, because you are pooling the fleet, you actually need fewer pilots overall for the same number of aircraft because you always have additional pilots for vacation, for training. So you can shrink the size of the pilot pool. And you also will minimize the downtime in retraining the pilots when they move from one type to the other or you can take advantage of the fact that you don't need to specifically tag a pilot to an aircraft type. You can say you can fly the 50-seater today, the 70-seater tomorrow.
There's also benefits on the spares side if you have common parts, common engine is a big one. And then there's also the potential on the commercial side to optimize the way you dispatch the aircraft. So rather than say at the beginning of the schedule this has to be a CRJ700 and this has to be an Airbus 320 or this has to be a competitor to the CRJ900 that we also have in our fleet, you can also say, look, I will change on very short notice from one aircraft to the other. As I watch my bookings fluctuate, I can send a larger aircraft to the gate and actually sell a few more seats because it's not very complex to change all the technical piece around it.
So it's something that the manufacturers take advantage of. We took advantage of it clearly on the CRJ. It's one of the big selling advantages of the CRJ and it's something that Boeing and Airbus are taking advantage of on their families.
So we have to overcome that. You overcome that by creating a platform that is significantly more efficient than the members of the family that are on the outskirts.
So what commonality does is it actually mitigates against the off design of the ins of the family. When you design an aircraft, you size the wing and the fuselage and the engines to serve a certain mission and then the family members are always compromises because you need to say well, I'm going to try and keep it as similar as possible without -- but carry more passengers of fewer passengers.
So there's a benefit but there's also compromises on the ins of the family and where we've positioned the CSeries, we've designed for 100 to 150. The A320, the 737, 800, as they are built today are optimized in the larger segments. So they are smaller versions have some compromises. Those are offset by commonality.
So it's all part of the evaluation and some airlines choose to put a lot of value to it and they can take advantage of it in the way they are structured. Other airlines, it's more difficult. So for example, if you have many different bases, commonality can be very, very useful. But if you are operating from a single base, you are a hub and spoke carrier, you have all your spare parts and all your equipment is in one place, it's not as valuable.
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Kevin Chiang, CIBC World Markets - Analyst [40]
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That's great. And with that, we have run out of time so thank you very much, Philippe, Shirley.
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Philippe Poutissou, Bombardier Inc. - VP of Marketing, Commercial Aircraft [41]
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Thank you.
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