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Air Canada Orders the CSeries

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Air Canada Orders the CSeries

Air Canada Orders the CSeries
February 18
11:30 2016

MIAMI — Air Canada is Bombardier’s beleaguered CSeries newest customer, sparking hopes of an order resurgence for the financially troubled aircraft manufacturer. As previously reported, Air Canada has signed a letter of intent for 45 Bombardier CSeries aircraft with purchase options for 30 more airframes. The aircraft will be delivered between 2019 and 2022. Along with an earlier order for 61 Boeing 737 MAX narrowbodies, this purchase will complete Air Canada’s narrowbody fleet renewal plans for the foreseeable future.

Politics plays a role in Air Canada’s buy

The timing of Air Canada’s order, coming on the heels of a nearly 15-month order drought for the CSeries, naturally raises the question of political factors playing a role in the purchase. Beyond the standard pressure on airlines around the world to purchase aircraft from national manufacturers, the specific dynamics of Bombardier’s current financial situation definitely played a role in the order.

The Quebec government is now one of Bombardier’s largest shareholders, having acquired 49.5% of the assets of the CSeries program in return for a $1 billion cash infusion. And it just so happens that on the same day that Air Canada buys the CSeries—completely by coincidence—Quebec drops an outstanding lawsuit against Air Canada for reneging on previous agreements to keep its maintenance operations in Quebec.

Also by complete coincidence, the Canadian government, which has a strong indirect political interest in Bombardier’s viability as an independent, Canadian company, is now moving to reduce some of the more restrictive provisions of the Air Canada Public Participation Act, which will allow the airline to consolidate and eliminate redundant operations that were required to be spread across the country as a condition of the privatization of the airline in 1988. The takeaway from all of this, is of course that carriers such as Emirates are never, ever going to get more flights to Canada.

Sarcasm aside, it’s hard to argue that politics played a major role in Air Canada’s purchase. We understand that the airline was also considering adding either Boeing 737 MAX 7 aircraft to its existing MAX order or buying the Embraer E-Jets E2 to replace a mix of Embraer E190s and Airbus A319 aircraft. And when comparing two products that are relatively equal, and a third from a manufacturer (Boeing) that had commonality and pricing power on its side, the political benefits were enough to tip the scales in favor of the CSeries.

But a business case exists for the aircraft

This last point is critical. Air Canada would not have added the CSeries to its fleet if it was an aircraft inherently inferior to the E195-E2. Indeed, the CSeries is a strong fit for E190 and A319 replacement. The E190s in particular operate shorter haul, high frequency routes like Boston – Toronto; but they also operate on much longer routes such as from Calgary to Ottawa, Montreal, and Toronto, and even from Ottawa to Cancun. Canada, as a whole, is a huge country with plenty of domestic and long and thin route pairs domestically and on trans-border long flights. The CSeries is an aircraft perfectly suited for such routes.

Air Canada is getting a great airplane, and even in the current fuel environment, the double digit reduction in fuel consumption offered by the CSeries does matter. The normal tradeoff, which is what is driving the demand for used aircraft, is that in a low fuel environment capital costs become relatively more important while fuel costs become relatively less important. That is to say, the operating cost gap for a new CSeries over a used and inexpensive to acquire A319 narrows, and in some case reverses. But Bombardier likely gave Air Canada an excellent deal on these aircraft as it was desperate for positive momentum on the program, so Air Canada will undoubtedly get an aircraft with excellent operating costs.

Will other major North American airlines follow suit?

This is undoubtedly a huge victory for Bombardier, even if some of the shine is taken off of it due to the appearance of political pressure playing a role in the order. Beyond the specifics of the order, there is some value in raw numbers. Bombardier has publicly set a target of achieving 300 firm orders before entering into service. The 45 aircraft order from Air Canada put the logbook at 288, and that alone will inspire confidence from airlines and investors alike.

Beyond the raw numbers game, certainly winning a big order from a major global player is a  telling factor, and Bombardier will look to build upon this momentum by winning orders from one or both of US legacy carriers United Airlines and Delta Air Lines. The CSeries makes a lot of sense for Delta but given the airline’s reluctance to disburse cash for fleet growth, Bombardier would have to offer a very sweet deal to place the CSeries in Atlanta. United just ordered 40 Boeing 737-700 aircraft, and stays in the market for a 100-130 seat jet, and the CSeries would be a good fit there as well. Overall, we are more optimist on the prospects of a United order based on comments from our sources at both airlines, but we put the likelihood of an order from any carrier in the next year at below 40%.

 

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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