My enemy’s enemy

While Bombardier was rumoured for some years to be keen to refocus on its non-commercial aviation business, the key impetus for the decision is a series of protectionist decisions by the United States government in favour of Boeing, as the result of a trade complaint that, initially, seemed like all the others that end up all sound and fury, but signifying nothing. A little launch aid here, a little investment incentive there, a big discount for early or large orders over there: it’s all part of the cut and thrust of commercial aircraft manufacturing, and is frankly nothing new to commercial aviation.

In this case, however, the US Department of Commerce levied preliminary duties bringing the total tariff to 300 percent, sinking a hole in the side of the C Series reaching the US market.

Boeing’s complaint has largely received opprobrium from the industry, including from large airline customers, not least since Boeing does not offer a competing product in the C Series’ size category, and itself receives governmental incentives and subsidies — like many, if not almost all, large manufacturers.

But the key problem for Bombardier was its largest single order, which comprised 75 firm aircraft, from Delta Air Lines in 2016. Without the ability to deliver these aircraft, the future of the C Series seemed in doubt.

Enter Airbus.

The C Series moves from “cute little airplane” to grownup member of the Airbus family

“Airbus SE and Bombardier Inc. are to become partners on the C Series aircraft programme,” announced the European airframer just minutes before it entered its regulatory silent period prior to its results announcement — a silent period, combined with French holidays, prevented Airbus from commenting with more than a brief statement to Australian Aviation.

The programme will be managed by the C Series Aircraft Limited Partnership (CSALP), which will, at closing, be controlled 50.01% by Airbus, 31% by Bombardier, and 19% by public investment arm Investissement Québec.

“CSALP’s headquarters and primary assembly line and related functions will remain in Québec, with the support of Airbus’ global reach and scale. Airbus’ global industrial footprint will expand with the Final Assembly Line in Canada and additional C Series production at Airbus’ manufacturing site in Alabama, U.S. This strengthening of the programme and global cooperation will have positive effects on Québec and Canadian aerospace operations,” the partnership said when announcing the news.

In terms of the partnership’s ownership structure, “Airbus will benefit from call rights in respect of all of Bombardier’s interest in CSALP at fair market value, with the amount for non-voting participating shares used by Bombardier capped at the invested amount plus accrued but unpaid dividends, including a call right exercisable no earlier than 7.5 years following the closing, except in the event of certain changes in the control of Bombardier, in which case the right is accelerated. Bombardier will benefit from a corresponding put right whereby it could require that Airbus acquire its interest at fair market value after the expiry of the same period. IQ’s interest is redeemable at fair market value by CSALP, under certain conditions, starting in 2023. IQ will also benefit from tag along rights in connection with a sale by Bombardier of its interest in the partnership.”

While Airbus executives initially raised expectations of an early European takeover of the whole C Series operation, later commentary walked back that line. Further details have emerged since, including the fact that Bombardier will spend several hundred million US dollars on the Mobile manufacturing aspect of the deal.

Crucially, “at closing, there will be no cash contribution by any of the partners, nor will CSALP [the C Series Aircraft Limited Partnership] assume any financial debt,” Airbus said when announcing the deal.

But why now? François Cognard, vice president for sales in Australasia and South East Asia at Bombardier Commercial Aircraft, tells Australian Aviation that “this partnership steamed from our strategic approach to ensure that the C Series aircraft realises its full potential and value globally. We think that it will greatly accelerate the commercial success of the C Series aircraft program. We explored this opportunity back in 2015. However, we were both in a different position than we are today. It is all about timing. Two years ago, we were both focus on developing new aircraft programs. This time, the stars were aligned. Now that Bombardier has completed the C Series and Airbus has certified both the A320 and the A350, we are more focused on the same areas of synergies. We have designed and put in service an innovative aircraft and we now need to focus on making sure that it becomes a commercial success.”

“This time, the stars were aligned.”
Francois Cognard

The future state of play for the Airbus-C Series tie-up still requires a crystal ball

Few things are entirely predictable at this early stage, and the deal is not yet done.

“It’s still an engagement, not a marriage”, said Air Lease Corporation and influential bellwether of industry opinion Stephen Udvar-Hazy of the tie-up.

So, what seems likely? First, and probably most important, Airbus has goals of keeping the C Series and its advances out of the hands of airframers in China and Russia in particular, who have long coveted the technologies for their own, less internationally persuasive, aircraft programmes. Stability for the C Series, too, is a gain, with flyers who love the spacious cabin interior and wide seats breathing a sigh of half-relief, half-anticipation to see which airline will next order the passenger-pleasing narrowbody.

The supply chain implications are also significant, particularly given the amount of involvement by UTC (parent of Pratt & Whitney) on the C Series, and indeed on the A320neo family programme, but also with Rockwell Collins (itself in the process of a tie-up with UTC, with the new parent potentially being known as Collins Aerospace).

And the political situation, particularly in Canada where the name Boeing is now almost anathema as a result of the Boeing-driven trade dispute, and in the UK where significant parts of the C Series are manufactured, cannot be overlooked either.

Some movement around the edges of that trade dispute, which has seen condemnation from the many in the industry — including key Boeing customers — is also likely, particularly since the Airbus-C Series announcement included final assembly within the United States. While Boeing and some observers noted at the time of the deal that the Mobile aspect is unlikely uniquely to resolve the issues, it will go a long way with key elements of the protectionist movement within US government decisionmakers.

As an Airbus spokesperson put it, “US tariffs for aircraft assembled in the US and for US carriers? Debatable. What’s for sure is that it’ll be good for US jobs and the local economy. It’s really too early to give details about production split between Canada and the US. The next hurdle is regulatory approval which could be around mid 2018. Until then, it’s business as usual and Airbus will compete to win orders.”

Probably not too hard, though, if Airbus wants to ensure the C Series can approach the higher end of its market.

The C Series and the A319neo allow Airbus to attack the market from both ends

It’s clear that Airbus sees the 150-passenger market as sizeable, although neither sales of the smaller members of the A320neo nor Boeing 737 MAX families of aircraft have proven the case. Airbus is not currently planning to produce an A318neo, with the double-shrunk A318ceo not proving a big sales winner since its introduction nearly two decades ago. Even the A319neo has not sold well, with only 51 aircraft ordered according to the most recent set of A320neo family programme numbers provided by Airbus to Australian Aviation. Boeing, meanwhile, boosted the size of the 737 MAX 7 from the current 737-700 to provide another option for airlines to hit the 150-passenger sweet-spot to enable airlines to use three rather than four crewmembers to operate a narrowbody, and even this has not sold well.

This is often referred to as the “too much airplane” problem, where frames that find wild success in larger options are, proportionally, less efficient and economically attractive to airlines than their smaller siblings. The C Series, where the central aircraft of the family is the 130-160-passenger CS300, has also seen some success in the 108-133-seat CS100 variant, with the Airbus acquisition making the eventual development of a larger CS500 more likely. That CS500 would likely seat 150 in a two-class layout, with 40 or so additional passengers in a max-pax configuration.

For the 100-150 seat segment, Airbus believes, more than six thousand aircraft will be required over the next twenty years, although Bombardier’s François Cognard tells Australian Aviation, rather surprisingly, that “we don’t have the specifics by size” for the C Series’ part of that.

Declining to discuss the specifics of the combined strategy, “we will continue to showcase and position the CS300 as the perfect small single-aisle aircraft for longer range mission,” Cognard says. “The C Series is highly complementary to Airbus’ single aisle aircraft family, which were designed for more than 150 passengers. Our combined product portfolio will allow us to serve customers better. At the end of the day, the customer will be able to have the choice and select what’s best in terms of efficiency for specific missions.”

The segment itself is currently filled by the A319, a few scattered A318 aircraft, the Boeing 737-700, -500 and -300, plus a variety of aging regional jetliners or small airliners at the smaller end of the scale like the Boeing 717, Avro RJ/BAe 146, Embraer E-Jet, or the Fokker 100 (see Australian Aviation, September 2017, for more on the Fokker).

Something must replace these smaller jets, although the market is not flooded with choices. The C Series is by far the most comfortable option, with its 18”-wide window and aisle seats, plus a 19”-wide middle seat on the side with three passengers. It also offers short field performance like the Avro and Embraer, crucial for niche markets like those of C Series launch customer Swiss.

It seems likely that the CS100’s niche is set, but the overlap between the CS300, any proposed CS500, and the A319neo remains murky. This may not necessarily be a problem: airlines want an airframe at the 150-passenger sweet spot, but for their own individual layout of passenger accommodations and combination of recliner seats up front, extra-legroom economy, and regular economy.

A premium-heavy carrier may well find a 150-seater A319neo fits the bill perfectly, especially if it can drive efficiencies by already operating a fleet of A320ceo and A320neo family aircraft, without needing to itself operate smaller aircraft, particularly when constrained by scope clauses as in the United States. A low-cost operation may find value in a 150-seater CS300, with a few rows of extra-legroom economy reducing the airframe from its maximum 160-passenger layout. A regional niche operator may hit that 150-seater mark with a small set of business class recliners up front. An eventual CS500 allows smaller players who favour the C Series to upgauge to a larger airframe for key routes without needing to add an A319neo operation into their cost base.

Airbus will add its sales muscle at a key time — both for the C Series and for Airbus

Clearly, part of the Airbus move is to open global doors that a small airliner manufacturer in Québec cannot.

“The C Series has now been in service for over a year and has flown more than 1.5 million passengers, and I am excited to witness the mounting interest for the C Series as airlines are witnessing its outstanding performance,” Bombardier’s François Cognard enthuses to Australian Aviation. “I am confident that this partnership with Airbus will further accelerate our discussions with them. In the industry, we can all agree that Airbus is a marketing and sales powerhouse. Bombardier will benefit from Airbus’ global reach. They have a strong customer base in all key regions of the world and a support network that is a key element that airlines take in consideration when selecting an aircraft for their fleet. On the one hand, we will benefit from a strong sales force and extensive customer support network. On the other hand, because they have such an impressive order book, we will also benefit from a procurement standpoint. Simply put, we will gain more volume, while reducing production cost.”

Simply put, we will gain more volume, while reducing production costs. FRANÇOIS COGNARD

Airbus’ scale also includes home-ground advantage in a number of markets, not least because it has final assembly lines or major manufacturing hubs in France, Germany, China, the United States, Spain, and the UK. With the C Series acquisition it will now add Canada to that list. Many of Boeing’s objections to the C Series as a foreign interloper — however spurious and protectionist they may seem to some observers — are mitigated to some degree by Airbus’ decision to base at least some C Series assembly in its Mobile, Alabama facility.

It is indeed an unexpected twist of fate that Mobile, a larger competitor to the 737 MAX family by orders of magnitude, should be the key winner out of Boeing’s trade fracas with Bombardier, although Bombardier’s François Cognard confirmed to Australian Aviation that “the Mobile line will be dedicated to the aircraft for US airlines.”

Airbus’ sheer weight will also be a plus for the C Series. To start with, the A320neo and C Series programmes can work together on supplier negotiations, although it must be stated that neither of the programmes has covered itself in glory on this front, whether with managing enginemakers or interiors suppliers. The argument that the combination of the world’s largest airliner programme with one of the smallest will be the proverbial straw that breaks the supplier camels’ backs is not entirely convincing.

The personalities involved, however, may be. Longtime Airbus sales chief John Leahy, he of the “cute little airplane” jibe about the C Series, announced his retirement at this year’s Paris Air Show, and he will be keen to go out with a bang, whatever the eventual date of his departure ends up being. A series of large orders for the C Series, either in conjunction with other Airbus products or not, would be the capstone to Leahy’s career. His successor — whoever that may be, now that erstwhile anointed successor Kiran Rao has ruled himself out and the airframer is looking externally — will be keen to establish themself in Leahy’s shoes, leading to more impetus for sales. Airbus has certainly never been shy of making big deals to make a big splash, so look for news at the regional air shows leading up to Farnborough 2018.

The crux is how the rest of the market settles

“This partnership has no impact on our Q400 and CRJ programs,” Bombardier’s François Cognard insists. “We remain committed to both programs and we are driving their transformation. We have recently gained more traction for our regional aircraft. There was a lull in the market, but things are picking up and the recent order from Spice Jet for up to 50 Q400 signals that there is a need for higher-performing and larger turboprops like ours. As for the CRJ, we have launched the new Atmosphere cabin and it will be the norm for all our deliveries starting in the second quarter of 2018.”

The key question is, of course, what the angle is for Bombardier to remain involved in the commercial aircraft market, and indeed Airbus’ acquisition of the C Series may well be the first step in Bombardier cutting its commercial ties. It’s not beyond the realms of possibility that COMAC sees value in the Q400 programme, nor that there is some residual value left in the CRJ, which feels very long in the tooth. It’s also unclear how closer working between Airbus and Bombardier will affect the turboprop market, given that Airbus is a part owner of the Q400’s principal competitor, ATR. Could a gap in the market here spur the introduction of a new competitor, despite much writing on many walls in many languages about the margins in the commercial aircraft business?

The response from Boeing, and indeed Bombardier’s primary competitor Embraer, will also be key. The two companies have worked together in the past, including on the KC-390 medium airlifter and on other similarly sized ventures that have yet to be revealed publicly. Indeed, part of Delta Air Lines’ objection to the Boeing trade dispute was that Boeing’s inadequate response to its request for proposals were smaller Embraer E-Jets. Will Embraer launch a further stretch of the E-Jet programme to compete with the lower end of the C Series and to bridge the gap to the 737 MAX 7? Will Boeing launch a 737 MAX 6.5? Will Mitsubishi’s MRJ get involved somehow? None of these options seems particularly compelling, but partnerships can often spur unexpected developments.

Chinese and Russian airframers, too, will be watching the situation closely. The fledgling MC-21, C919, ARJ21 and indeed the CR929 are likely to benefit, albeit slightly, from even the perception of fewer players in the market. Airbus’ acquisition of the C Series — “acqui-hire” or not — may feel like a loss given the numerous rumours of a Chinese takeover, but these players are in it for the long haul, and may gain a greater overall benefit from developing their own fixes to overcome the hurdles they currently face.

All eyes will be on the wedding plans during the period of the Airbus-Bombardier engagement to see ardours are cooling, feet are getting cold, or whether the attraction remains as mutual as it now seems.