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Program Analysis: Bombardier’s Q400 Struggles May Persist

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Program Analysis: Bombardier’s Q400 Struggles May Persist

Program Analysis: Bombardier’s Q400 Struggles May Persist
September 29
14:57 2014

MIAMI — Bombardier faces an uncertain future for its Q400 turboprop after its Joint Venture (JV) with Rostec to place a Q400 NextGen assembly line in Russia was put on hold due to the current political climate. Reports have emerged that Russian authorities have delayed the partnership between Bombardier and Rostekhnologii, which also came with an order for up to 100 Q400s (50 firm, 50 purchase options) from Ilyushin Finance Co, a subsidiary of the state-owned United Aircraft Corporation. The two companies had signed a memorandum of understanding for the assembly line in August 2013, and construction was planned to commence in the Ulyanovsk region of Russia by the end of this year.

While Bombardier and Rostec have not formally shelved the project, increased geopolitical tensions between the West and Russia over the latter nation’s involvement in the growing crisis in Ukraine have affected economic ties, with the United States government leading the charge to impose economic sanctions on Russia. These sanctions have been mirrored by American allies, and while the Canadian government has not yet formally decried the Bombardier-Rostec deal, it has reportedly threatened to do so according to Airways sources.

Delays to the Russian assembly line are the latest blow to the Q400, which has a firm backlog of just 1.75 years of production (42 aircraft on order) plus 5 Q400 orders yet to be firmed from a Falcon Aviation LOI placed at the Farnborough Airshow. By comparison, rival ATR has a backlog of 325 orders for its ATR 42 and ATR 72 turboprops, enough to cover more than five years at current production rates.

Demand in the regional turboprop market is in excellent, as evidenced by ATR’s 144 firm orders since the beginning of the year, but Bombardier has not been able to convert that demand into new customers; relying on existing customers to maintain production with top-up orders. Despite the Q400’s merits as a regional jet replacement or alternative, it has yet to gain traction in the US market due to poor customer perception of turboprops. European regional airlines that could use the Q400 all have young fleets of the aircraft, and Flybe’s purchase of used United Q400s eliminates a potential customer for the type. In the rest of the world, the Q400 suffers from expenses. While it is cheaper to operate on a standalone basis than the ATR outside of 200 nautical miles (especially in a high density 86-seat configuration), it is also more expensive to acquire at a list price of $33.6 million versus $24.6 million. Even after each manufacturer applies its respective discount, the Q400 is still 36.5% more expensive to acquire.

For Asian airlines chasing growth whose passengers are agnostic about the time savings of the Q400 over the ATR 72, choosing the slower turboprop makes sense. For every 10 Q400s they buy, they can get 13 ATR 72s for the same price, allowing faster growth. And for airlines who serve more origin and destination (O&D) clientele, the ATR 72 is most often the best fit. This cost-benefit analysis has played out around the world in recent years, and with the exception of Nok Air, Ethiopian Airlines, SpiceJet, and WestJet (whose decision was uniquely impacted by the longer distances required of aircraft for its Encore subsidiary), ATR has won every time (more than 80% of head-to-head competitions).

Thus Bombardier was banking on Russia to be the program’s saving grace. Russia has already been a good customer for used CRJ-200 regional jets that would have otherwise been retired because of its nearly insatiable demand for passenger aircraft. Bombardier’s sales team has excellent relations with Russian carriers, and in addition to the Q400 deal, was banking on Russia to boost resales of older regional jets and potentially the next generation CSeries.

But without the Russian assembly line, it is unclear what Bombardier’s next steps with the Q400 are. There are no major turboprop competitions open at first tier global airlines such as Qantas, Japan Airlines, and the like. Smaller and more financially unstable airlines have less access to capital, and even low cost carriers (LCCs) looking to diversify are more likely to opt for the ATR 72, which has superior residual values, allowing for sale and leaseback to boost profitability.

Bombardier is banking on incremental changes such as increased capacity or a cargo combi to boost sales for the Q400, but these changes are largely superficial ones; unlikely to boost the backlog by more than 20 or 30 airframes. Bombardier’s best prospects may lie in China, where it is trying to implement a deal that mirrors its Russian one (an assembly line with an accompanying order for several dozen Q400s). The Chinese are desperate for Western aerospace technology and would likely incorporate some of the technology from the Q400 into subsequent editions of its Xian MA-60 turboprop.

But previous attempts at harmonizing relations between China’s state-owned manufacturers and Bombardier have fallen through, and it is unclear the status of Bombardier’s negotiations. There are several possible outcomes for the current Russian geopolitical crisis, and a reasonably quick resolution would allow Bombardier to once again push forward with a program-saving deal. But a more drawn out economic battle, coupled with Chinese indecision could be a terminal blow for the Q400.

Even at 24 aircraft per year, the Q400 production facility is operating significantly below its capacity. In the long run, Bombardier has plans for an updated Q400, perhaps with a boost in capacity and new, more fuel-efficient engines. ATR is hamstrung in increasing capacity because of its link with Airbus (who understandably wants to avoid competition, and a higher capacity Q400 with improved economics could sell very well. But, Bombardier has shelved development of that aircraft for the next three to four years as it grapples with product execution on the narrowbody CSeries jet. Without the Rostec deal, or a Chinese equivalent, it’s unclear that Bombardier would be able to keep the Q400 in production long enough to even have the ability to take the next step in the program’s evolution. Until the Russian crisis is resolved, Bombardiers faces uncertain skies on its Q400 turboprop.

 

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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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