MIAMI — The Bombardier CSeries has been on an incredible hot streak in the last five months. But has its recent surge positioned Bombardier as a genuine competitor to the Airbus – Boeing aerospace duopoly? In the Part 1 of our analysis, we explored the possibilities of Bombardier to become a potential threat to break up this duopoly. Now, let’s examine the likely competitive response from the two titans of global aerospace to a hypothetical CS500.
Game theory suggests that Boeing (and Airbus) would rain down almighty hell upon Bombardier
But for a moment, let’s assume that Justin Trudeau manages to find the required financial resources and Bombardier gets the funds to build a CS500 for EIS in say 2020 or 2021. At first glance, this would seem to be an existential threat to Boeing and Airbus, as the A320neo and 737 MAX 8 have collected more than 70% of the sales for the combined family. And indeed, the CS500 would be a very strong player in the space. Boeing and Airbus would still have a several years long head start in sales for their jets and the advantages of their much larger parts distribution and maintenance networks.
But the CS500 could very well wrack up 1,500+ orders, particularly if Bombardier is aggressive in offering the CSeries to airlines in second and third tier developing markets like Africa, and the ‘stans (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan) in Central Asia. While not all of these markets will experience an expansive and aggressive air travel boom, it is inevitable that at least a few of them will hit. And like Airbus’ playbook with the A320 starting in 1989, a similar strategy could position Bombardier to win massive follow-on orders.
The 737 MAX 8 and A320neo would still likely outsell the CS500 by several thousand frames, but Bombardier would be set up to compete aggressively with the next generation of Airbus and Boeing narrow bodies (perhaps with a re-engined CSeries or even a clean sheet airplane). Bombardier would ascend to become a third global competitor on the large narrow body stage.
But Boeing and Airbus are well aware of this danger: Boeing in particular watched as Airbus enacted the exact same strategy over the last two and a half decades to become the world’s leading aircraft manufacturers. Both companies are probably better positioned against a hypothetical CS500 than Boeing was with a subpar 737 Classic against the A320. But the danger of an in-production CS500 is real enough that both carriers would probably avoid making the same mistakes that Boeing did.
The biggest weapon in each original equipment manufacturer’s (OEM’s) arsenal is its ability to offer massive discounts on its aircraft with the benefit of billions of dollars of cash reserves and profitable wide body programs (at least outside of the A380 and 747-8) to help smooth over declines in narrow body cash inflows. We need look no further than the screaming deal of less than $25 million per frame that Boeing offered to United Airlines on 25 737-700s earlier this year to stave off a purchase of the CSeries. Said pricing was also extended to Delta, though the latter airline needed a solution in the 100-seat space (and had game theory considerations of its own).
So, undoubtedly, Boeing and Airbus would attempt to chase away potential CS500 customers with discounts and other sweeteners. The flip side is that discounts are expensive, potentially costing Airbus and Boeing millions of dollars in cash flows on every frame. With the heart of the market moving higher and higher, if both Boeing and Airbus could count on customers increasing their purchases of the 737 MAX 9/MoM and A321neo over time, there might be a justification for some sort of cap on the discounts that each would offer on the A320neo and 737 MAX 8.
As with the 737-800 versus the A320 in the current generation of aircraft, plenty of customers would still opt for the more expensive Airbus and Boeing products, and each could focus on more profitable variants in the same family.
A scenario in which Airbus comes to this conclusion given the runaway success of the A321neo is at least plausible, but the problem for Bombardier is that Boeing simply can not afford to make the same sacrifice. Earlier in the piece, we stated that the CS300 had made the A320neo and 737 MAX two variant families and while the former is a valid assertion, truthfully the 737 MAX is more or less a one-variant aircraft family at this point. So complete is the dominance of the A321neo over the 737 MAX 9 in terms of performance capabilities and operating costs that Boeing simply cannot afford to let another competitor muscle in on its 737 MAX 8 cash cow.
And so, Boeing would inevitably declare a pricing war on Bombardier, offering discounts that would make the 737-700 deal for United look like a fleecing of the airline. Regardless of how Bombardier managed to finance the CS500, there is no way that its backers would be willing to provide the financial or (in the case of the government) political capital necessary to outlast one of the world’s dominant corporations.
Airlines would buy a CS500
The lack of financial support for a potential CS500 is a lost opportunity. Airlines, including first-tier global ones like Lufthansa and Delta, would potentially buy the CS500. Their rationale, like Boeing, comes down to game theory. For the airlines, a discounted deal offered by Boeing or Airbus would undoubtedly save them hundreds of millions of dollars over the best pricing that Bombardier could offer, benefiting the bottom line substantially. But the flip side is that the airlines have a massive interest in breaking up the duopoly, as they have paid billions of dollars more to Airbus and Boeing for airplanes over the last 20 years than they would have in a market with three viable competitors.
Certain far-thinking airlines such as Delta (for whom this was arguably a consideration when buying the CSeries) who are profitable enough to satisfy shareholders would almost assuredly buy the CS500, and there is a chance (though probably less than 20-30%) that Bombardier could find enough of these airlines to get the CS500 off the ground. Those odds, sadly, are not worth the risk for Bombardier for at least the next 3-4 years, though we would not rule out Bombardier launching a CS500 late in this decade.
Bombardier is still on the upswing
While Bombardier may not yet be positioned to do battle with the global aerospace duopoly, the last six months have still been a spectacular success for the Montreal-based OEM, particularly with rival Embraer laid fallow by Brazil’s economic crisis. We are hearing strong indications that there will be more positive customer news for Bombardier at next month’s Farnborough Air Show. The CSeries is about to fly commercial passengers two years ahead of the EJet’s EIS, and as a whole we are bullish on the CSeries program. A profitable program that sells more than 1,500 frames in its lifetime is not at all a bad consolation prize for missing out on a chance to challenge Airbus and Boeing for at least the rest of this decade.