Bombardier Inc at CIBC Eastern Institutional Investor Conference
Sep 17, 2014 AM EDT
BBD.B.TO - Bombardier Inc
Bombardier Inc at CIBC Eastern Institutional Investor Conference
Sep 17, 2014 / 06:40PM GMT
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Corporate Participants
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* Sebastien Mullot
Bombardier Inc. - CSeries Program Director, Bombardier Aerospace
* Yan Lapointe
Bombardier Inc. - Manager, IR
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Presentation
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Unidentified Participant [1]
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Thanks, everybody, and good afternoon. I have the pleasure of introducing Bombardier. From Bombardier, we have Sebastien Mullot, Director of Program Management for the CSeries; and Yan Lapointe, Manager, Investor Relations. I think people are pretty familiar with the Bombardier story. So I thought we'd kick it off right into Q&A.
Maybe, I'll start it off with good to see the CSeries playing backup in the year for the flight test program, trying to get a sense of what you expect moving forward. You've kept your entry into service timeline. So what should we expect in the program moving forward and what should we expect (technical difficulty)?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [2]
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(technical difficulty) as we could, but obviously there was (inaudible) still confident it will be meaning the EIS date that we had stated before.
In terms of the other aircraft, you can expect them to be back in the flight test in the next few weeks. I know it's the model here, but if you look at what happened at aircraft 2, it was followed very closely by aircraft 4. I don't want you guys to think that we will misread beyond on the same page for the other aircraft. But I don't want you to go back at your desk and think we are taking about a month there. I have a very good level of confidence. By the end of the year, we'll have all aircraft in the Flight Test program.
And the key for us now is really [carrying] flight hours, building productivity and accumulating hours. And it's been -- from what I've seen in the past 10 days, it's been pretty successful. We have been able to do a lot if we do a few hours on the aircraft and the flights have actually proceeded very well with no snag.
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Unidentified Participant [3]
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And maybe just an update on the (inaudible) FTV1, how is that coming along?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [4]
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It's coming along well. So on the FTV1, we had some repair to do on the wings, composite wings. So hey, I've got some news for you guys. We are getting some learning. We're already learning to repair composite wings. Nobody has done that before. So we're bidding our structural repair manuals. All kidding aside, repairs are getting well. The teams have been working very hard. We've got people from Belfast on-site and it's looking good. That aircraft, it's pretty much in good shape. We're waiting for the engines, the modified engines from Pratt. And it should be back in the year, certainly in the fourth.
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Unidentified Participant [5]
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Okay. Any questions from the audience? Maybe, you can speak to how the CSeries sales campaign has adjusted itself given some of the restructuring happening in aerospace, has that changed the tone of the conversations you've been having with some of the potential customers for this aircraft?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [6]
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Not really, no. I think that the restructuring at aerospace probably has a lot more to do with trying to put in place a leaner organization, an organization that puts a lot more focus on the execution, [positive] execution of the programs, giving a bit more autonomy and accountability to the business units. And when you present that wish to the customer, it makes a lot of sense. The fact that we are also embedding the -- I'd say the customer support organization, which used to be a stand-alone business into the other two businesses, business aircraft and commercial aircraft, from my standpoint running the sales campaign is going to be certainly helpful because now we really have an integrated view of the life cycle of the aircraft going to the customer, telling their customer that yes, we are here to sell an aircraft and it's the first time buy. Okay. But we are also here to support them and we take that complete view as one management as one unit. So when we present it that way, I think the customers get it. They are very understanding on that point.
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Unidentified Participant [7]
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Okay. And I guess a lot of focus has been on the fly by wire system on the CSeries [as flying] in direct mode, can you provide an update as to when we can expect that to fly normal mode and maybe just highlight the importance of that event to the CSeries program?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [8]
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Yes. Well, maybe I want to take a step back here and explain why would you fly in direct mode, it's normal, not a joke here, no pun intended. But you want to start first in your flight test program flying direct because you want to push the aircraft outside of its normal operational limits. In normal mode, that means that's the mode that you fly when you're in a normal commercial aircraft nowadays, on an Airbus or a Boeing, we fly by wire. There are some limits that are imposed to what the pilots can do and the pilots cannot really overrule those limits. The computer will tell them now you cannot go past that limit; otherwise, you're going to put your aircraft in danger structurally or you might still. So that's the way it is. So that's the normal mode.
In direct mode, when you do flight test, you actually want to go past those limits because you want to know, so you don't want to be in the aircraft. I don't want to be in the aircraft, that's for the flight test pilots. They know how to do that, but they push the limit and you need to test the aircraft past the normal limit, past the certification limits to really understand the aircraft behavior. So flying in direct mode has been planned from the beginning and was planned and we've got to keep doing that and we will still do that even when we switch on the normal mode, at some point we'll probably switch it off and do some additional testing in direct mode.
So back to your question on when are we going to do that, first, the normal mode software has been testing underground in our underground testing facilities. Back in April, we got safety of flight thumps up from Transport Canada back then. The software were loaded up on the aircraft back in May. We are ready to fly normal mode back then when the engine incident happened. What we're doing now is basically first returning to flight validating that engine is fine, everything is working as predicted and it is and we are going to basically progressively turn on the normal mode. It's not like, you switch it on and answering we are good normal mode. What you do is you turn it on progressively and you expand your envelope again to understand what's happening. So that's what we're going to do progressively. So we expect some news on that we'll be reporting. We will analyze the data and report back to you and say, feel good; we feel that, now, we've expanded the envelope into normal mode. We consider we are good, so in the next few weeks.
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Unidentified Participant [9]
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Okay.
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [10]
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Again should be very short. It won't be another few months on that, I doubt it.
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Unidentified Participant [11]
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Any questions from the audience? Maybe talking about the normal mode process then, would you apply it to all the aircraft or would be specific to one of the flight test vehicles?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [12]
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No, we are going to I would say, open the envelope in normal mode on one of the aircraft. And then once it's done, basically it's already for all other aircraft.
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Unidentified Participant [13]
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Maybe looking at the CSeries campaign itself, the sales campaign itself, you had a good Farnborough in terms of conditional and options added to the backlog, but your firm backlog has stalled here a little bit. Can you talk to some of the headwinds you are facing in those sales campaigns? Is it related to the sales campaigns from the incumbent carriers in terms of the amount of A320s and 737s that are being sold? Is it the commonality in their fleet that they offer to airlines? What are some of the biggest push backs you are facing today in those sales campaigns?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [14]
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So maybe, going back to Farnborough, I was going to Farnborough bracing myself for the most horrible air show I had been to because we were planning to bring an aircraft there, we could not because of the engine incident. We actually had a pretty successful air show considering the conditions we went in. We were able to announce 66 orders and commitments. So for me, it was a positive air show within the conditions. You got to remember, we didn't have an aircraft, we were grounded and we had an engine incident. And notwithstanding that, we were able to come out with more orders and commitments.
Ability to firm up some of the orders, I would say it's quite normal that some customers would want to take a wait and see approach at least to understand what was going to happen on a flight test program, where we're going to be able to restart the program fairly rapidly, did we have a fix on the engine, and we've been in constant interaction with our signed customers. Obviously, we have been briefing them quite regularly share on the progress of that activity. We have also been briefing some of the most advanced customers in the sales pipeline, in the sales campaign.
So with that in mind, I'm expecting that we'll be able to firm up some of those LOIs that have been announced in Farnborough. I'm not going to give you a time frame for that. From an LOI to a firm order, it might take you six months. It's not unusual, sometimes longer, sometimes a bit less. And it has to do with the simple negotiation of the contractual terms. It's something that takes time and you don't want to rush into just to get an order because you're stuck with it after that for ten years. So --
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Unidentified Participant [15]
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Okay. Can you speak to -- are there specific milestones at some of these conditional orders or are these conditional orders from the airlines, are there specific milestones they're looking at, is it operating metrics, is it certification, is there something that you'll point to?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [16]
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No, not really. Again, I'm going back to -- it's purely contractual negotiation going through the motions of the [Ts and Cs] there, but in the LOI themselves, there is not a condition on, well, you got to fly I don't know in normal modes before we move forward, no, that's not the case.
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Unidentified Participant [17]
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Okay. Yes?
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Questions and Answers
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Unidentified Audience Member [1]
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(inaudible -- microphone inaccessible).
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [2]
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It's not necessarily price based, it's also sometimes -- it's a risk approach. Sometimes, they want you to do something that we think there might be a risk attached to that. You want to push back and it's a bit of a tug of war and you get there in the end. But there is a lot more than just pricing in a contract negotiation in an airplane contract negotiation. But Yan and I were just joking about that earlier contracts and their [life] in our case for aerospace usually are 70 to 100 pages. If you take the engine, I think it's more like a [Dickens] books. So these are pretty hefty contracts that you have to negotiate. So there is a lot of opportunities to agonize on some points and we try to move forward and expedite some of them, but still it's pretty brutal sometimes.
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Unidentified Audience Member [3]
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(inaudible -- microphone inaccessible).
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [4]
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I'm not going to go into the details of the commercial terms, especially then I might give some ideas to some customers. So I will stay away from that.
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Unidentified Participant [5]
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That's great. Any other questions from the audience? Looking at the development of your book, you do have a lot of customers that are up-and-coming airlines, smaller airlines versus more established carriers. Can you talk about the strategy of how you'd like to evolve that book over time? And in the near term, are you primarily focusing on these smaller carriers because maybe lower-hanging fruit or maybe the pricing discounts you'd have to offer would be less?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [6]
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I think primarily what we're focusing on is on the diversified customer base. So we want to have a few marquee customers, established airline with a good reputation. We want to have geographic diversity. We want to be able to play to some of the niche market players. And we also want to serve or get on board a few lessors that are going to help us [demultiply] our sales effort really. And those guys, I would say, the lessors would probably come on board once you have enough of that critical mass of I would say traditional airlines or traditional operators. So that's really the strategies, having a good mix of customers.
We're also trying to balance order size. We (inaudible) after huge orders, the 100 aircraft type of order. We are never going to turn them down obviously. But if anything, would rather go to smaller-size order; otherwise, we are going to completely block our skyline with just a few customers, which is not what we want. We want to have a diversified customer base so that the asset is liquid in financial terms, so that the aircraft can be easily seen as an asset you can move around easily and so that financiers and lessor jump onto the program. So, that's sort of the strategy there.
And yes, sometimes, we'll be playing to newcomers, new players, people that are not linked with any existing existing, pre-existing fleet or are looking for a new business model, because obviously, they don't have any [ties] with previous fleet commonality issues and also because if you look at the success of other OEMs, if you pick the right up-and-coming airline, you might end up having in your portfolio a pretty big customer. Take example, AirAsia for Airbus. I think that's quite emblematic. AirAsia 20 years ago was not very well known, was a small airline; and now, they are probably one of the biggest, largest customer on the Airbus book. So that's something we are also looking at.
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Unidentified Participant [7]
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Yes. [Here in the front].
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Unidentified Audience Member [8]
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(inaudible -- microphone inaccessible).
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [9]
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Yes.
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Unidentified Audience Member [10]
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(inaudible -- microphone inaccessible).
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [11]
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So the answer is yes. They are more than looking at it because we already have two customers with letter of intent on the backlog that are from China. So one of them is CDB, China Development Bank operation, so it's a lessor. Obviously, Chinese lessor. Our primary focus is to use them to help us penetrate the Chinese market, but it's not the only one. They also actively engage in sales campaigns elsewhere as well. And the other Chinese customer that has expressed interest, that has a letter of intent was announced at Farnborough, it's Loong Air for 20 aircraft. So we're working to firm those up. So we will see; maybe we'll be able to have here a [contradictor] and get them firmed up before a certification, but it's likely, it's true that Chinese customers are a bit more conservative usually. So they like to see aircraft flying, they probably would like to see a certified aircraft, but already now we're in pretty advanced negotiation with two customers in China.
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Unidentified Audience Member [12]
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(inaudible -- microphone inaccessible).
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [13]
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Well, Republic today is a customer of ours. They have firm aircraft on our books. So we are not shopping their slots around.
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Unidentified Participant [14]
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Maybe looking at China, you have a marketing partnership with COMAC, has that developed as you had anticipated? Can you speak to some of the opportunities there to continue to build on some of the early successes you've highlighted in China and I think you moved away from some commonality that you had envisioned under the agreement, how does that impact that sales campaign in China?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [15]
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Well, I don't really see direct impact on the sales campaign. I'll come back to that, but on COMAC side, I would say we had a plan. I used to work in strategy doing strategic plans and one thing I've learned is that the best plans are the ones that are flexible enough to be able to adjust to the reality, the [digital] reality. We had a plan with COMAC, which was to push on several fronts, one included some [commonality] in the cockpit. It turns out that we are far advanced in our design of the aircraft and we're not going to make any changes to the design of the aircraft at that stage. They are actually moving down the line quite a bit already and they are at a stage where they don't feel comfortable making any alterations to their cockpit design which is fair. That's okay.
So we jointly agreed not to pursue any further the commonality initiative on the cockpit side. However, we are still actively working with them on other fronts, namely on the customer support and services front, we're still looking at how we can jointly work together to provide some of our expertise on the customer support that we have accumulated over the years on the other programs.
We're also working at corporation on the marketing and sales side and also looking at some of the supply base opportunities. So there are still a few other venues that we're exploring and we're constantly looking at other potential areas where we could really cooperate as well. So it's not a frozen framework and you say, okay, we're not going to do that, that's the end of it, no, [it evolves]. How does it help us on the sales front? It's tough to say because in China, I don't think there is ever a one-to-one relationship. It's never as simple, it's never as linear as the way we think, I guess, in the Western world. What I know is since we've been partnering with COMAC, we at the same time have been able to lend some letter of intent with CDB, letter of intent with Loong Air. So at least, we didn't see any doors closing in China for the CSeries. And that's as far as I can go here.
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Unidentified Participant [16]
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Any question in the audience? Maybe, speak to, I know a lot has been made about the sales campaigns over at Airbus and Boeing with their re-engined planes but with Embraer now entering the fold with a re-engined E-Jet, how has that changed the competitive dynamic as you look to build on the CSeries backlog here?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [17]
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Yes. I think it's the third good news. So we had good news in 2010 when Airbus announced that they would be re-engining and they were selecting also the GTF. We had good news when Boeing announced that they would be re-engining. We have the third good news, Embraer is re-engining. Why is it good news? Because from the outset, from the get-go, at the start of their program, we had anticipated somebody coming out with a clean sheet design. My gut feel at the time and I'm glad I've been proven wrong was that Boeing would be coming up with an entirely new design in the narrow-body segment and they would push that through the door in 2017-2018. So none of that has happened. Everybody has elected to re-engine, which is great because when you re-engine an aircraft, you're not able to get the same level of savings efficiency than you get with a clean sheet design like the CSeries. So from that standpoint, we are still managing to keep a competitiveness gap with those people.
On the E-Jet side, while there is a timing element here, they are targeting 2018 for their entry into service. So there is a timing advantage we will be benefiting from. They also, I think, have realized that their current E-Jet platform was really limited from a capability standpoint. So they had to go and revisit a lot of their systems and [relink] not only just put a new engine, but relink the aircraft. But notwithstanding these changes, which by the way, we will achieve a lot of the commonality that they have with the existing aircraft. Notwithstanding those changes, the capability of the aircraft will not come close to the CSeries capability. So we'll keep a nice gap in terms of cost efficiency and we'll have a more capable aircraft. So overall, I feel pretty good about the competitive landscape. Could have been worse.
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Unidentified Participant [18]
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And when you look at your view of the marketplace for the narrow-body segment in the 100 to 150 seat area, you've talked about there will be roughly 7,000 planes over the next couple of decades, Bombardier aiming for 50% market share. Are those realistic targets still in the sense that, are you seeing more airlines maybe upgauge their narrow-body, maybe more so than you had anticipated originally, maybe going from 320s to 321s or Dash-8s to Dash-9s on the 737 platform?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [19]
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Yes, it's been the mantra starting from Airbus to try to move people up and see that there was no market in the 100 to 150-seat segment. I think sometimes, they call it the Bermuda Triangle. When I look at the numbers, there is a continuity from the original aircraft to the larger narrow-bodies in terms of market demand, number of departures. I don't see a gap there. It's not like 70, you arrive at 100 and it stops and then starts over at 180. Why would that be? There is continuity. There is actually quite high demand in the 100 to 150-seat segment. So that was our review from the get-go, that hasn't changed. And we see really a big demand still in that segment.
If we look at the orders placed in that segment, when we're truly comparing ourselves with an equivalent aircraft, be it an Airbus 319 or Boeing 747-700, we see that the CSeries has actually achieved that 50% market share. So granted, the orders numbers are not as big as in the upper end of the segment, but we never expected them to be. It's not the same size of market. We know that above 150 up to 220, it's a much bigger market, but we still see a big opportunity in the segment that we've targeted and we've been able to demonstrate so far that we're able to catch that 50% that we're targeting. So no change there. We feel comfortable about that.
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Unidentified Participant [20]
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Okay. Any questions? Maybe will bring it back to an original question in the audience, in terms of, you had spoken briefly about the Republic order and I know there's been some news flow around the risk to that order. We have the Russian sanctions that could impact your CSeries backlog as well. When you look at the risk to your backlog, how do you see the continuity in that skyline and how do you look at that risk given some of the other variables out there that may take some of those orders away?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [21]
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So in Republic, I mean, what I can tell you is that they're engaged on the program. We do have a regular interaction with them. They've always stated that this you need or a potential use for the CSeries. They also always say that they don't see the CSeries used as a regional aircraft in their networks. So we'll have to leave to them to define how they want to use the aircraft, but as far as I know, for us, it's a firm order and there is no discussion about canceling that order. So it's a customer, solid customer for us.
Russia, well, there are some geopolitical issues happening nowadays on that front, we are not the only one impacted. I mean it's true across the board for all airframe manufacturers, but the relationship with IFC is very good, very strong. They're a very savvy customer, very savvy buyer; and we certainly hope that the geopolitical situation is going to ease because they are very eager to place the CSeries and they have a lot of very good release, I would say, particularly in some of the former CIS geographies. So I can see a lot of traction on that front when things settle down a bit there, but we have time for that. They have placed an order. It's not like the deliveries are happening now. So --
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Unidentified Participant [22]
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Okay. And maybe Yan, if you can provide an update in terms of on the same note with the Russian sanctions on the Q400 joint venture, how that's progressing and how discussions are progressing given some of the tension there?
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Yan Lapointe, Bombardier Inc. - Manager, IR [23]
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No, I think the timing was unfortunate. Obviously, negotiations with our partners in Russia to establish a final assembly line were going extremely well. I think today, things are a bit slower. I think it's more difficult because there is risk both ways, it's difficult to engage, to make long-term planning in the current environment, current situation. Today, there is no sanctions to be presenting it, although it's more a question of what do you want to do. We are talking about establishing a final assembly line in Russia to deliver hundreds of aircraft for the future. So obviously, we will need the situation to ease a little bit, at least to have better visibility on the future, but negotiations are continuing. I think both parties, we are interested in closing that. Rostec is extremely interested in closing it. The Q400 is the perfect aircraft for the Russian environment. I think in terms of turboprop, it has the range and it's the operation to operate in cold environment for long distance; it's a great aircraft for the country. So hopefully, things will ease a little bit so we can close it.
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Unidentified Participant [24]
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Okay. We have a couple more minutes for any last-minute questions. Maybe I'll move it on to transportation, the division, the long-lost division of Bombardier unfortunately.
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [25]
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Yes, [they are].
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Unidentified Participant [26]
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Can you talk to some of the emerging market opportunities? It seems like Mexico, India, Turkey is talking about high-speed rail. How are some of the opportunities there and how BT is positioned to potentially take advantage of those?
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [27]
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I think [being BT], we're the leader in rail around the world. So obviously, we've seen it for a while. I think there are significant trends worldwide for a growing rail market. I think each of those situations, I think the need is there. I think we see more and more political will. I think we see that especially in India, for example. I mean people have identified need in India for a long time for a new passenger rail. I think there is a renewed political desire. So, definitely hope to see a lot more tenders going forward. I think we are well positioned.
If you look at India where we already have a wholly owned manufacturing facility in India, we have been making trains in India for a long time. We've actually built a brand-new facility several years ago for the Delhi Metro. So we were established there, but we've been building locomotives in India for a long time. So we're well positioned. We have a very large footprint worldwide. So I think we're well positioned. I think we see growth in the rail business even in Europe where I would say the GDP growth is not as good as other region. There has been very good demand in the last couple of years. So I think the outlook is good on transportation. So we feel very good about the worldwide demand and I think we have a very desirable leadership position. I think we're well positioned. We are the one being invited to bid on tenders and customers want us to be there. And we have an amazing portfolio of products. So --
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Unidentified Participant [28]
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Perfect. And unfortunately, we've run out of time. Thank you very much. We have, let's say, a 15-minute break and we are back here at 3.25 with New Flyer Industries. Thank you.
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Sebastien Mullot, Bombardier Inc. - CSeries Program Director, Bombardier Aerospace [29]
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Thank you.
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Yan Lapointe, Bombardier Inc. - Manager, IR [30]
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Thank you.
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