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Delta Confirms Large Bombardier CSeries Order

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Delta Confirms Large Bombardier CSeries Order

Delta Confirms Large Bombardier CSeries Order
April 28
10:19 2016

MIAMI — In a move that will certainly shock the large Airbus and Boeing commercial aircraft duopoly, Delta Air Lines has announced today an order for 75 Bombardier CSeries 100 aircraft, the largest in the history of the manufacturer.

The order, which also includes 50 purchase options, is nominally worth over $5.3 billion based on the $71.8 million list price of the CS100, though our sources at the Montreal-based aircraft manufacturer revealed that Delta will receive a massive discount ranging between 65 and 70% off of the list price. Deliveries are scheduled to commence in spring 2018. Delta will also enjoy flexibility rights, including the ability to substitute the larger CS300 aircraft.

“These new aircraft are a solid investment, allowing us to take advantage of superior operating economics, network flexibility and best-in-class fuel performance,” Ed Bastian, Delta’s incoming CEO remarked said in a statement.

Bombardier and Delta Air Lines executive teams, led by Allain Bellemare (center-left) and Ed Bastian (center-right) (Credits: Bombardier)

Bombardier and Delta Air Lines executive teams, led by Allain Bellemare (center-left) and Ed Bastian (center-right) (Credits: Bombardier)

A strong fit for Delta’s network

The CSeries is a suitable aircraft to grow (in the short run) and replace the 100-150 seat narrowbody fleet, as it offers superior economics to all of these aircraft at the prices that Delta was able to acquire them.

The McDonnell Douglas MD-88 is the largest potential aircraft for replacement with an eventual CS300 order or conversion. These would play a similar role to the existing Airbus A319s in Delta’s fleet (the Boeing 737-700s operated by the carrier are used for specializes “hot and high” operations, among others.)

Delta’s network has a high proportion of short-distance flights that these aircraft, particularly out of Atlanta (the dominant hub for both the MD-88 and the Boeing 717), and to lesser extent from Detroit and Minneapolis St. Paul. The CSeries is an excellent replacement on these short haul flights, with operating economics to pull that off, besides offering more flexibility with an operational range of 2,600-3,000 nautical miles.

The CS100 is truly a transcon capable aircraft in a small package, and that will give Delta the ability to experiment with long and thin routes. In particular the CS100 could be valuable in adding mid-continent and trans-continent routes from the west coast hubs of Los Angeles and Seattle, and in filling in even more dots from the megahub in Atlanta.

Delta sticks to its guns with fleet acquisition strategy

There are several different philosophy’s for airline fleet purchases and while Delta has been characterized in the past as dependent on older generation or used aircraft, in practice it is actually an airline that looks for undervalued or inexpensive opportunities and judges overall cost including the cost of capital (not just operating economics).

This already resulted in a buy for the Airbus A350 and A330neo back in 2014, and has once again yielded a new generation aircraft with the CSeries. The key determinant here was absolutely price (and fitting one of Delta’s need,) and Delta arguably would never have more leverage over a desperate Bombardier than it did right now.

And there is definitely some game theory built into this process. Airbus and Boeing likely offered the current generation A319 and 737-700 respectively at a sharp discount to Delta. This was undoubtedly attractive for the economics, but it is in Delta’s interest to have more viable aircraft manufacturers out there (better leverage for negotiation), so perhaps that added to the allure of a Bombardier buy.

Has Bombardier broken into the duopoly?

Delta’s order, together with the earlier Memorandum of Understanding subscribed by Air Canada, is enough market validation for the CSeries that it will at least begin to make Airbus and Boeing sweat. For nearly two decades, since Boeing merged with McDonnell-Douglas in 1998, the two major airframers have dominated the large (>120 seats) narrowbody and widebody aircraft markets, with no other manufacturer gaining more than a 5% share in planes above 120 seats.

This dominance began when the Boeing 737 Next-Generation family was launched in 1998 to join the Airbus A320, as the McDonnell-Douglas MD-80 was on its final legs. In the intervening years, neither Russia (the MS-21) nor China (the C919) managed to build a credible competitor and no one else even tried.

Simultaneously, Bombardier and Embraer were building scale (although not necessarily profitable business models) on the back of regional and small mainline jets ranging from 50-110 seats. Particularly, the Embraer E190 found a home as the smallest model in larger fleets that also featured 737s or A320s. But neither carrier really crossed paths with Boeing and Airbus, lacking the financial might to do so… until Bombardier took the plunge with the CSeries.

The CSeries is truly a great aircraft from a technical and economic perspective, leveraging the same engine technology as the A320neo and 737 MAX with a decades younger clean-sheet fuselage and other optimizations that Airbus and Boeing cannot match to date.

Even though the CSeries has had a rough go of it from a sales perspective due to a mixture of market factors and its own missteps, it wins pretty much any head-to-head contest with an Airbus or Boeing airplane in the same class.

We personally have spoken to three or four airlines, which have held off on pulling the trigger on the CSeries for fears about Bombardier’s financial future, and questions over whether the aircraft would ever reach critical mass of production.

Hopefully for Bombardier, Delta can be for the CSeries what Eastern Air Lines was for Airbus and the A300 back in the 1970s. We are big fans of the CSeries and its operational capabilities and economics, and we believe that it would be a good fit for several airlines in the United States and around the world. Delta may just be the order to kickstart the CSeries program.

Now, we expect to see more good news for the program, perhaps as early as the Farnborough Air Show this July, which will coincide with the Entry into Service with SWISS, now scheduled to take place on July 15.

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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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