MIAMI — The Bombardier CSeries is on a hot streak. As we covered in the first episode of our podcast, the spring and summer of 2016 have been very good months for Bombardier and its flagship aircraft. A massive, validating order from Delta Air Lines for 75 of the smaller CS100 variant (though we expect Delta to eventually take some of the larger CS300s as well) has changed the narrative and trajectory of the program, building upon an earlier commitment from Air Canada. With this support, Bombardier crossed past its goal of 300 orders before entry into service, even after the 40 aircraft order from Republic Airlines was wiped from its production list.

The CSeries is now ready be delivered to SWISS this Wednesday, June 29, 2016 (and will enter service next month with the same airline) and won rave reviews from Star Alliance CEOs that flew the aircraft during the alliance’s annual gathering. Earlier this week, the government of Quebec followed through on its previous financial commitment to the CSeries by setting up a joint venture program and committing $1 billion for a 49.5% stake in the program with Bombardier. The news has not been 100% positive for the CSeries, as the aforementioned Republic order stills in a limbo and it’s possibly going to be cancelled, Bombardier took a $500 million charge on the Delta and Air Canada orders due to heavy discounting, and Air Canada hinted that it might play political football with its order as a way of winning concessions on some of the more onerous provisions foisted on it by the Canadian government during the days of its privatization and that persist to this day.

But by and large, it has been a string of positive news for Bombardier and the CSeries, which has settled the program to the point that it now appears sustainable and viable. And the question that naturally arises is whether this winning streak and the eminent sustainability of the CSeries as a program positions Bombardier as a threat to the Airbus – Boeing duopoly. That was certainly the interpretation in the headlines after the Delta order, and is the consensus amongst the mainstream media. But does the reality matches up to this hype? We are not so sure.

Bombardier comes closer to directly competing with Airbus and Boeing than anyone since McDonnell-Douglas

Nowadays it feels like Airbus and Boeing have had a stranglehold on the market for large airliners since nearly the dawn of time, but in reality this state of affairs has only been true for less than two decades, since Boeing’s merger with McDonnell Douglas in 1998. Throughout the 90s, Western competitors like Fokker (with its F100) and British Aerospace (BAe) had slowly fallen away, leaving McDonnell Douglas with its MD-11 and MD-95s as the last man standing. Bombardier and Embraer had already begun production of their smallest regional jets (the CRJ-100/200 and E145 respectively), but both E-Jets and larger CRJs were still years away from gaining tangible market share.

In the years since the Boeing – McDonnell Douglas merger, no Western manufacturer has come very close to threatening a core product line of either Boeing or Airbus. The 737-600 and A318 admittedly did not sell very well while the CRJ-1000 and E190/E195 were able to make inroads in mainline fleets, but neither aircraft family even hit its stride until after Boeing and Airbus had largely wound down the production of the 737-600 and A318.

Today, the CS300 at ~145 seats (in a single class configuration) competes head-to-head with the smallest aircraft in both the NEO and MAX narrow body families for Airbus and Boeing, respectively: the A319neo (~155 seats) and 737 MAX 7 (149 seats) respectively. Neither the A319neo nor the MAX 7 are big sellers, and some CSeries customers, including Lufthansa Group and Air Canada, have opted to order the Bombardier plane alongside larger members of the A320neo and 737 MAX families. So clearly the CSeries (and to a lesser extent Embraer’s re-engined E-Jets E2) have taken a bite out of the bottom of Airbus and Boeing’s respective narrow body families (remember that both direct predecessors, the A319 and 737-700 sold more than 1,000 copies) and rendered each a two aircraft family.

CS500 would be necessary to truly encroach on the duopoly’s turf

That is at least partially by design. Obviously Boeing and Airbus would be happy to have each sold a couple hundred more A319neos and 737 MAX 7s, but the core of the narrow body market has been moving upwards to aircraft at least the size of the A320neo (150 seats in a standard two-class configuration) or larger as demand growth in air travel markets around the world continues to surpass investments in airport and air traffic control (ATC) infrastructure. In fact, in arguably the most important air travel market in the world, Asia, the A321neo is the “Heart” of the narrow body market to ape a Boeing term.

This is the culmination of a decades-long trend of increasing seat capacity for the airplane that is the “core” of the narrow body market. In the 1980s, this was the 100-125 seat sweet spot where the Douglas DC-9 and Boeing 737-200 thrived, while in the 1990s and early 2000s it moved upwards to the 125-150 seat range of the 737-700 and A319neo. Over the last ten years, that has been pushed further upwards to settle in the 150-175 range of the A320 and 737-800, and over the next decade, it will likely move even further into the 175-200 seat area of the A321neo, 737 MAX 9, and a hypothetical middle of market (MOM) plane from Boeing.

Bombardier is undoubtedly the king of the 125-150 seat market, and arguably the whole 100-150 seat space (though the E-Jets E2 are a viable competitor for sure). But that is a small niche in the narrow body market, as airlines have placed more than nine times as many orders for 150-200 seat planes as for 100-150 seat planes of the next generation. So in that sense, Bombardier doesn’t necessarily pose a direct threat to the duopoly.

What would change the game would be a stretched CS500, adding perhaps 5-7 rows to the existing CS300 to seat 150-160 passengers in a two-class configuration. Such an aircraft would truly move Bombardier into the same market space as Airbus and Boeing, and our sense is that given the funds, Bombardier could build an efficient competitor to the A320neo and 737 MAX.

Stretches of already efficient platforms tend to create highly cost efficient airplanes, though they also can come with drawbacks in terms of operational efficiency, as a 5-abreast CS500 would be less efficient for boarding and deplaning than the 6-abreast 737 MAX and A320neo. But as a clean-sheet airliner with the same engines as its Boeing and Airbus counterparts, we believe that a CS500 could be made competitive with the A320neo and 737 MAX 8 on an operating cost basis.

Bombardier doesn’t have the cash to build a CS500

But while that is all fine on paper, the fact remains that Bombardier simply doesn’t have the cash to build a CS500 right now. The manufacturer continues to bleed cash in advance of the CSeries’ entry into service (EIS) next month, and the $1 billion bailout of a joint venture with the Quebec government will only bridge Bombardier until it can begin producing CS100s and CS300s. Early CSeries deliveries are also heavily discounted, and it will likely take another 6-8 quarters at minimum before the CSeries begins to generate positive cash flow on each delivery.

Thus for Bombardier to finance the CS500 from cash flows, the start of development (let alone EIS) would likely occur in 2019 or 2020 at the earliest. Bombardier could of course take on debt, though it is unclear whether the capital markets would look favorably at a multi-billion dollar bet against two behemoths by an entity that was so recently weak. There is always the chance that Quebec’s government or even the federal government in Canada sign off with the justification of added jobs, though the dollar amount required would be a non-trivial portion of their respective budgets. The broader takeaway is that independent of some sort of external capital, Bombardier doesn’t have the funds to build a CS500.

Part Two: Would Airlines go for the CS500?

In Part two of this analysis, the author will explore how a potential stretch of the CSeries, known as the CS500, could heat the narrowbody market competition and crack the existing Airbus-Boeing duopoly.

Will the Bombardier CSeries Crack the Airbus-Boeing Duopoly? — Part Two