BOMBARDIER INC at Scotiabank Transportation & Aerospace Conference
Nov 19, 2013 AM EST
BBD.B.TO - Bombardier Inc
BOMBARDIER INC at Scotiabank Transportation & Aerospace Conference
Nov 19, 2013 / 03:50PM GMT
==============================
Corporate Participants
==============================
* Sebastian Milot
Bombardier Inc. - Director of Program Management, CSeries
==============================
Conference Call Participants
==============================
* Turan Quettawala
Scotiabank - Analyst
==============================
Presentation
------------------------------
Turan Quettawala, Scotiabank - Analyst [1]
------------------------------
Sebastian Milot has been working with Bombardier for the last 13 years and has worked both in transportation as well as the aerospace side of their business. Since 2011 he has been the Director of the Program Management for the CSeries and is intimately involved with all aspects of that program. Thank you, Sebastian, for joining us today.
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [2]
------------------------------
Good morning.
------------------------------
Turan Quettawala, Scotiabank - Analyst [3]
------------------------------
My first question, on the CSeries, surprisingly, these days with the flight testing going on maybe you can give us a quick update, how it's going, how many hours are we in so far, flight time, number of flights, so on and so forth?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [4]
------------------------------
Sure. A brief reminder, we flew for the first time in September, September 16, so that first flight was actually uneventful. There was a lot of people around, big crowds to welcome us, but the flight test itself was a true flight test that we did was uneventful in the sense that we didn't have any surprises and the aircraft flew as anticipated.
So that was good news. We flew 2.5 hours. Since then we've had repeated flights.
We are now nearing our, we're getting into the 10th flight, and we've completed the 7th and 8th already. And we have done, also, a lot of testing on the ground.
If you combine both the ground testing and the flight testing we are about close to 200 hours of testing since the first flights. It's very important and I keep reminding people about the ground test because everybody's focused on the flight test, but the ground test is also an intimate part of our certification plan.
We've invested heavily in the on-the-ground testing facilities. We've basically fully assembled an aircraft there from a system standpoint and we are doing extensive testing on it.
It gives us a lot of flexibility, to be frank, Turan, because we are able to test parts that might be faulty on the aircraft on that on-the-ground testing facility and swap them out, make sure that they work, that we find a solution to the fix, introduce the fix on the on-the-ground testing facility and then move that to the aircraft. So, really, the flight test has been progressing as anticipated. I would say no major surprises from a design standpoint, we feel very good about the aircraft and we were working through some little snag and issues which is normal at that stage at that program.
And it's very important for us to get to the level of maturity on aircraft number one, so that we can introduce the other aircraft very soon after. And when they join the program, basically, they are at the same level and we can accumulate more hours.
------------------------------
Turan Quettawala, Scotiabank - Analyst [5]
------------------------------
So I guess this is flight number seven, is that right?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [6]
------------------------------
Yes, we did flight seven last Friday, I think, and over the weekend it was a bit more difficult. I'm sure you guys in Toronto have noticed that we had a bit of tough weather, so it was the same in Montreal.
But we should be back on track, back in the flight test mode this week. Really the intent is to have, I would say, almost on a daily basis flights. So it could be every other day, but ideally every day, and try to accumulate more hours on the aircraft.
We have been a bit slow at the beginning. That was part of the plan. We wanted to, also, do some of the ground vibration testing post-first flight.
I know people were asking, okay, what's going on? Is there something wrong about the aircraft? Why you go back and do a ground vibration testing?
Was planned. There is a number of things you need to do before you fly the aircraft for the first time, and there are number of tests that you can actually elect to do after. So that's what we have done and that actually allowed us to open the envelope really.
And I'm talking about opening the envelope, that's really the motive right now. It's being able to fly higher, to fly faster, and to fly in more twin engine conditions, basically.
------------------------------
Turan Quettawala, Scotiabank - Analyst [7]
------------------------------
Is the ground vibration testing is that all done now or should we still expect it to go --
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [8]
------------------------------
Yes, it's pretty much done. You could always go back to run vibration if you need to do some tweaks or validate some things that you observe in flight, but the bulk of the run vibration testing is behind us.
Same thing for the, we did some landing gear, the shimmy testing. Basically you excite the landing gear as you make them vibrate, have the aircraft drive on little bolts on the ground.
So that's done, basically. We have done what we wanted to do there.
Landing gears are behaving as anticipated. There were no issues.
So a flight test is flexible. You've got to be able to react and I just -- but right now it's proceeding as per plan. We always like it to go faster.
I'm inpatient, I'd like it to go faster but on the other hand I think we have achieved a lot already and there were no major surprises, no surprises in fact. I keep saying it's almost a joke, one of the surprise on that program so far it hasn't been any, there hasn't been any surprises, major surprises.
------------------------------
Turan Quettawala, Scotiabank - Analyst [9]
------------------------------
Are you still flying in direct [locked out] and --
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [10]
------------------------------
Right. That's correct. We are flying in direct mode, in what we call direct mode. So we are not flying with the fly-by-wire with the full and little protection.
Again, that was part of the plan. The reason is you want the flight test pilots to be able to fly the aircraft directly. So you don't want to have any between the pilot and the aircraft itself so that the pilots can really feel how, get a feel for how the aircraft is behaving when they open the envelope up.
So we are still flying direct mode and we'll do a still a number of flights in direct mode basically up until the envelope is really opened. We're going to open the envelope.
We're going to do some what we call IFR flying so that we can go down in terms of the IFR minima. So the visual, we won't have to fly visual all of the time anymore.
And then after that we'll kick in -- we'll get the flight barrier more normal mode kicked in. But we're already testing, by the way, the five-hour normal mode, it's not like we don't know what it's going to do.
We've been testing it, we're testing the hell out of it, in fact, on the ground facility on the Aircraft Zero rig. So we have a pretty good idea of what it's doing and there is no worries there. But, again, we want to test the aircraft first to really understand its intrinsic capabilities before you inject the software in the normal mode.
------------------------------
Turan Quettawala, Scotiabank - Analyst [11]
------------------------------
And I guess at what point do you certify the fly-by-wire system?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [12]
------------------------------
There is no -- you kind of really disconnect system certification versus aircraft certification. So it is going to come together.
So it goes back to when do we certify the aircraft, which is probably a question you'll be asking. So we're still targeting to certify the aircraft approaching a year after the first flight, basically.
------------------------------
Turan Quettawala, Scotiabank - Analyst [13]
------------------------------
Okay.
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [14]
------------------------------
It's not an easy thing. It's not a walk in the park.
It's a challenging undertaking that we have to take on. But I believe that once we get the level of maturity on the first aircraft and are able to have aircraft two, aircraft three, we should certainly see a pickup in the number of hours flown and we'll accelerate then.
------------------------------
Turan Quettawala, Scotiabank - Analyst [15]
------------------------------
So I guess FTV2, FTV3 are they coming in by the end of the year or maybe early next year?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [16]
------------------------------
In the coming weeks, I think was the mode over there, right? You won't pin me down on a date this time around. We've been burned on the first flights, but I can tell you it's progressing well.
We're going through -- basically, the aircraft is assembled. It's finished from the manufacturing standpoint.
So we're going through the testing on the different systems, functional test procedures, validating that the systems behave according to the engineering requirements and then pretty soon we'll hand that aircraft over to the flight test group.
------------------------------
Turan Quettawala, Scotiabank - Analyst [17]
------------------------------
Okay. Are there any questions from the audience at all?
Maybe I will talk a little bit about the order flow. Congratulations, I guess you filed an LOI today in Dubai.
In terms of overall, though, can you talk a little bit about how things are going on the sales front? What sort of interest are you getting now that the plane is de-risked a little bit? Maybe you'll start there and then I can ask --
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [18]
------------------------------
First, the categories of customers we are dealing with right now, we had a few that were adamant about seeing the aircraft flying before they were going to commit. And you see some announcements today, so I guess they would fall in the category, people that wanted to see the aircraft flying and then say okay let's sit down and let's hash out the terms and condition details.
Then you have another category of customers which want to see the aircraft setting its first flight. But they also want the aircraft to accumulate more flight hours and get a sense, also, for the performance of the aircraft.
And finally you have customers that will say, well, it's all great and good but I want the aircraft to be flying, I want it to be certified and I want it to actually have been in operation for two years. Some of them will be very conservative and they will want to wait, which is sort of one of the side effects of the 787 story here.
So I think we have a few customer in the first category that we're working through to try to nail down the GNCs. So we talked about one earlier.
And the others I would suspect they would come probably more in the first half of 2014 once we are able to convince them some of the performance details and assessment. Performance wise, we want to manage expectations here.
The aircraft, so far, has been flying in a configuration that is not ideal for assessing performance. On the first aircraft, you have a lot of antennas, you have a what we call a trailing cone, a very strange cone that is trailing behind the tale.
We've flown a number of times with the gear down. We are not flying up to the optimal sealing. We went to 25,000 feet, but a normal airliner would be flying at 35,000 feet/39,000 feet.
So that's not the best conditions to measure the fuel burn, the performance of the aircraft. However, we do get a sense is the aircraft behaving as anticipated? And the answer is yes, but as far as confirming the true performance from a takeoff, landing, fuel burn standpoint, it's something that is going to occur more in the first half of 2014.
------------------------------
Turan Quettawala, Scotiabank - Analyst [19]
------------------------------
Mr. Beaudoin has always talked about not giving away the CSeries too cheaply and that's always been that balance between orders and pricing. Now that you're flying the tests are obviously going well here, should we expect pricing levels to improve on the plane or do you think the backlog still needs sort of a few more key holders here how far to result in a fighter program?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [20]
------------------------------
If I go back to what I just talked about in terms of the customer profile, I would say the pricing profile is going to be a bit the same in the sense that you'll have people coming in that are willing to take more risk.
So they will be saying, okay, I'm going to sign today, I still have a delay risk on the program, I still have a risk in terms of confirming the performance of the aircraft, I still have a risk in terms of understanding are they going to come in line to their maintenance and [spec] reliability targets? But they will sign on that. So for these guys that come at that stage of their program you will probably have to go a bit deeper and discount more.
It's really not as what we have done in the past for let's say Lufthansa or Republic that came very early but you'll have a discount. Now for the guys that will come two years after entering into service that game should be a different game.
Because by then the aircraft will be certified, it will have been vetted, performance will be confirmed. So all of these uncertainties would have been removed and uncertainty as a cost to us today.
We're paying the cost of uncertainty in terms of discounting a bit more. Once that's out, obviously the price will pick up.
The other element that is going to play in our favor in terms of pricing, I believe, is aircraft availability. You have seen big announcement, a [rough] announcement on the I would say 180-seater fronts, so the 320s, the Boeing 747, 800 and 900.
So they have sold a lot of aircraft, good for them. But that means that they probably will have a bit less capacity to entertain deals and delivery slots in the timeframe that we have, which is basically in 2014 up to 2020.
We will have slots that are available. We will have slots that are available for an aircraft that will have at least a double-digit cash operating cost advantage.
And Airbus and Boeing are less likely to achieve as many slots open or less, (inaudible). So we think we also have a timing advantage.
We'll have a cash reporting cost advantage, we'll have a timing advantage, and as we progress we'll see our risk profile going down. So combine all of that, that should help us on the pricing front.
------------------------------
Turan Quettawala, Scotiabank - Analyst [21]
------------------------------
So if I am understanding correctly your expectation on pricing then today versus what you already have in your backlog is that it should be better, correct?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [22]
------------------------------
From now on you should see the pricing going up, the pricing trend should be going up.
------------------------------
Turan Quettawala, Scotiabank - Analyst [23]
------------------------------
Maybe from a margin standpoint then, when you look at the first few planes they're obviously going to be negative due to the learning curve impact and I think that's pretty well understood overall. Can you give us a sense of, in general, how long do you think this could last in terms of the learning curve impact and similarly to the fact that you obviously have a low price backlog as well right now?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [24]
------------------------------
Well, I don't know if I would venture there. I would say, certainly, learning curve wise we'll have to, it's going to take us a few years to get to the bottom of the learning curve through I would say the steady-state standard hours that we are targeting.
So probably I would say by the time we're getting the steady-state production with about 120 aircraft per year and then we'll be there. But I'm not going to dive into more on that peak, it's something that I first I'm not that conversant with, and second I don't know if I'm even allowed to go there.
------------------------------
Turan Quettawala, Scotiabank - Analyst [25]
------------------------------
Thank you for that. That's helpful, thank you. I guess maybe you can also talk a bit about with the CSeries you're obviously trying to displace some of your competition, whether it be Boeing, or Airbus or maybe Embraer, as well on the low end. Just can you give us a sense of what some of the key determining factors are here for an OEM to displace another one in an airline campaign just generally speaking?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [26]
------------------------------
To be honest I would rephrase that. We are not trying to displace them.
We are basically trying to offer the market a product that is actually purpose built and optimized for the segment. So I think there will be a recognition pretty soon from the market that there is only one aircraft that is optimized for the 100 to 150 seat segment and it's the CSeries.
And then you're not really talking about displacing anyone, you're just talking about offering the best product for part of your segment. And then people will realize that the A319, I'm not even talking about the 318 anymore, the A319 is not the right product for that segment. It's simply not the product for that segment.
The same thing for the Boeing 747-700 and same thing for E-Jet at the other end. So people, in fact, are starting to convey the message to us that we have the only product that is really tailored for that segment and is truly delivering the economics that they're expecting in that segment.
A lot of people today are going for much bigger aircraft in order for them to achieve the seat mile cost target that they have in mind. But in order to do that they have to basically place big aircraft, bigger aircraft, into a segment that might not be able to sustain 180 seats.
They are going in a segment that on average would be at a 130/140 passenger load factor, with an aircraft that is a 180 seater. So it works because today there is no other product in the market that allows them to do that and that would deliver the same seat mile cost economics.
Once the CSeries is there, and the CSeries is there, I think that paradigm is going to change. We will see a big shift there and it will be a natural filling the gap move. So we don't really have to displace them, we just have to show that why you go with something much bigger or much smaller when you have the perfect product for the segment.
------------------------------
Turan Quettawala, Scotiabank - Analyst [27]
------------------------------
I guess maybe sort of related to that a little bit are you seeing the new E2 Jet at all in your campaigns?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [28]
------------------------------
Not yet. I'm sure it will happen. It's fairly recent in the day that they announce it, so we haven't seen them yet.
I think from our own assessment we will still have significant cash reporting cost advantage and better performance. So better range, longer range, a cabin comfort that is going to be unmatched certainly compared to the E-Jet but also versus the bigger ones, the 220s or the 747 family.
We still have the best cabin comfort out there, providing a widebody-like level of comfort for a much smaller aircraft. So, answer is no we have not seen them yet, we will see them I'm sure.
Are we concerned about that? Not really because we still think that we'll retain a significant cash reporting cost advantage, timing is a mentioned as well, and certainly we have a much more attractive comfort level.
------------------------------
Turan Quettawala, Scotiabank - Analyst [29]
------------------------------
Maybe talking a little bit about the overall narrowbody market and I want to expand the segment a little bit sort of say 100 to 180 seat segment. A lot of the orders that you alluded to already, Boeing, Airbus have got a lot of the orders there and I guess the risk, if I understand it, is that the airlines will use maybe not the best aircraft but they will use the AC319 or the 737-7 for that segment. Can you talk a little bit about that risk and also maybe talk a little bit about where the interest is coming from currently?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [30]
------------------------------
So, going back to what I was saying earlier, people have gone for probably a more conservative approach or safer approach, which is okay. I know the product, I have been buying 320s in the past, I have a range in aircraft, so basically they're saying there is no risk, which we tend to challenge ourselves.
Reengineering an aircraft is not simple. There is a lot of risk associated to that. And I would be cautioning people that you might see some surprises in the reengineering as well.
But that's what people wanted to do. I guess sometimes it's easier to go to your board and mention okay I go with Airbus, or Boeing for that matter.
What might happen, though, is that in the end we're going to make some forays. We are making forays on the customer front. So airlines might end up having to compete against the CSeries and I don't want to be in that place.
I don't want to be them when they have to compete against us, against the airlines that have chosen the CSeries because bear in mind a 10% cash or printing cost advantage in the market where airlines have very thin margin is going to be a killer for them. So I think we'll see that.
We will see once the aircraft is flying, when it's starting operations and a few players are using it in some roots, I think the others are going to feel the pain. And that's going to create a natural interest in the market.
And we're already seeing that, as I said. We have seen comments from customers saying, okay, well you know it's not about the 319 anymore. It's about, okay, am I better off going with a 320s than a CSeries?
Well, in some cases, yes. We are not here to say the 320 is a bad aircraft.
It's a great aircraft if you have the roots that support the number of passengers that fill the aircraft. But if you don't have that, if you don't have that market left, if you have slim, clean roots, well maybe want to reconsider and think a bit more, a bit harder about the CSeries.
------------------------------
Turan Quettawala, Scotiabank - Analyst [31]
------------------------------
I guess maybe I'll ask a little bit more about just overall maybe you can talk a little bit about the campaigns and not necessarily the CSeries but what's -- I think American Airlines, is you know, and I know it's on the CRJ front, but that's an ongoing sort of campaign there. You've had some success I guess with the Q400 here at Dubai. Just maybe overall commercial aerospace if you could talk a little bit on order flow and where you think things are going there?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [32]
------------------------------
Again, I'm CSeries focused so I'm not necessarily the best position to speak about CRJ and Q. I'm sure I'm very happy to see a good order flow coming on the Q.
I think people are realizing that it's a great aircraft, very efficient as well. Again, very good level of comfort and very quiet aircraft. On the CRJ we have had some successes in the past year. We have some orders from Delta and also glad when I walk into the factory and you are able to see all these Delta airplanes being built.
American Airlines we'll see what the decision is, I think it's imminent. But on the other hand, when you walk the factory again you see Delta, but you see also some interest from other airlines that we were not necessarily used to see here or to deal with.
So you see Garudas, you see Arik Air, you see some China Express customers. So I think the key, also, is we've been able to diversify our customer base and to go into geographies where we traditionally were not as present but where we are doing actually a pretty good job today.
So that's on the other front that's what I could say. CSeries I think I talk about it.
I think it's world tracking through our plan. We have 20 customers and 304 models by EIS. I think we're probably going to get to the 20 customers even faster than they generate orders itself but we are tracking while there. So no concern.
------------------------------
Turan Quettawala, Scotiabank - Analyst [33]
------------------------------
Okay. What is your biggest concern? The market seems to be worried about a bunch of different things, but what do you think in your position?
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [34]
------------------------------
Biggest concern is probably, obviously, you are not out of the wood until you have certified you aircraft. And the recent history show that even after you may still have some risk. But I think we will get through that.
Honestly, Bombardier has certified more than 25 aircraft in the past 28 years, I believe, so it's not like we don't have the capability. In fact, we're probably most capable people in the industry.
So getting through that we'll manage. The schedule it's hard, we'll fight but in the end we'll manage as well because if we don't have any surprises we'll manage through that.
So my concern if I think more long-term is actually being able to build enough aircraft to satisfy the demand. So when are going to be able to turn the tap and go faster and build more aircraft?
That's long-term for the viability of the program that's what I am concerned about. How fast can we get these babies out in the market so that we can get a good market share and establish the product?
------------------------------
Turan Quettawala, Scotiabank - Analyst [35]
------------------------------
Okay. Well I think that's pretty much it. Thank you very much for all your help. Thank you.
------------------------------
Sebastian Milot, Bombardier Inc. - Director of Program Management, CSeries [36]
------------------------------
Thanks a lot. Have a good day.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------