National Post

How Bombardier’s CSeries dream got its wings clipped.

Years behind schedule and billions over budget, how the CSeries dream got its wings clipped

- By Kristine Owram

Even Bombardier Inc.’ s competitor­s stopped what they were doing to watch the CSeries fly. The long-anticipate­d, highly troubled Bombardier jetliner was finally making its debut at June’s Paris Air Show. There were line-ups for a- look at the aircraft’s inter ior. CSeries press conference­s were overflowin­g. But- the mo ment of truth was the flight demonstrat­ion, where everyone craned their necks to see if the so- called “whisper jet” would live up to its name.

T- he reviews were enthusi astic. “It really was extremely rewarding after all the hard work,” recalls Rob Dewar, vice- president of the CSeries program.

But not rewarding enough. As the show wore on, Bombardier was forced to sit on the sidelines and watch as its c- ompetitors racked up hun dreds of billions of dollars in new orders for their planes, while all the Montreal- based company had to show for the CSe-ries was an existing cus tomer, Swiss Internatio­nal Air Lines AG, deciding to upgrade part of an existing CS1- 00 or der to the larger CS300.

Bombardier had built a damn good plane. And nobody was buying it.

The CSeries had from the beginning been a gamble. If executed properly, it would pay off in spades. That hasn’t happened and the outcome remains, seven- and- a- half years later, just as uncertain. The CS1- 00 is expected to re ceive Transport Can- ada cer tification within the next few days. In a few months comes its first commercial flight. The CS300 is about six months behind that. But the CSeries has ravaged Bom-bardier, tear ing apart its leadership team, sapping its financial resources and seriously damaging its reputation with investors and customers.

Bombardier shares have lost more than 80 per cent in value since the day the CSeries program was launched in July 2008. The company racked up more than US$ 9 billion of debt and recently received a total of US$ 2.5 billion from the Quebec government and the province’s pension fund to stay afloat.

The CSe-ries comes to mar k- et two- and- a- half years be hind schedule and more than US$ 2 billion over budget. There hasn’t been a single new firm order in 15 months. In October, Bombardier took a US$ 3.2- billion impairment charge on the program. The executives who oversaw the creation of the CSeries are gone as the new CE O, Alain Bellemare, tries to rebuild after so many fiascos.

Bombardier had dreamed big with the CSeries. But, interviews with former and current insiders reveal, it was wholly unprepared for what i-t was getting itself into — un prepared for the assault that its fiercest competitor­s would unleash once they sensed the CSeries moving in on their t- urf; unable to properly man age its supply chain; and, worst of all, unable to stay focused on the program, as i-nternal battles broke out be t-ween executives over resour ces.

Bombardier was well aware of the challenges of developing a new aircraft from scratch, says Gary Scott, who led Bombardier’s commercial aircraft division before retiring in 2011. The company took note of Boeing’s well- publicized problems with its 787 Dreamliner — which arrived three y- ears late and billions of dol lars over budget — and gave itself what it assumed was a comfortabl­e cushion of time and money.

“Nobody at Bombardier was naïve about the challenge,” S-cott says. “They tried to miti gate every risk that they saw, but even with all that, it was still a bigger challenge than they could deal with.”

Moving into the big leagues

Things were simpler before the CSeries was conceived. Bom-bardier inhabited a com fortable niche in the global aviation industry, making a range of popular business jets and commercial aircraft for short-haul flights. But its core CR J family of regional jets was starting to age, and Bombardier latched onto the idea of something bigger: a rare opportunit­y to catapult itself i- nto the big leagues along side industry giants Airbus Group SE and Boeing Co.

For years, manufactur­ers h- ad sensed a gap in the mar k-et for a 100- to 150-seat trans continenta­l jet that could be used on secondary routes (think: Portland, Ore., to Charlotte, N.C.). Airlines were stuck r-elying on old, out-of-produc tion McDonnell Douglas DC-9s and MD-90s, or downsized versions of the too- large Boeing 737 and Airbus A320.

Bombardier saw a huge amount of unfilled demand — its latest forecast still sees a market of 7,000 planes in that segment over the next 20 years. It also saw Boeing and Airbus distracted by new, long- range jet programs like the 787 Dreamliner and the A350. It leaped at its chance.

It started with a brief press release in early 2004 announcing that it had hired Scott, a former Boeing executive, to “evaluate the possibilit­y of proceeding with the creation o-f a new-generation commer cial aircraft.” It would come to be called CSeries — the C s-tood for “competitiv­e, contin ental, connector.”

In Scott’s mind, the CSeries was going to be to Bombardier what the 747 was to Boeing in the 1960s: high risk, but, in the end, transforma­tive.

“It damn near took them (Boeing) down; Boe- ing al most went bankrupt back in the late ’ 60s because of the 747 program and the fact that the industry took a dive at that time,” Scott says. “But they came through that as the true leader in commercial aircraft.”

By the end of 2005, Scott had taken his project from one employee to 600. The result: plans for “an airplane that w- as probably 10 per cent bet ter than anything that existed in the market,” he says.

Ten per cent wasn’t good enough. In 2006 Bombardier shelved the project and shrunk Scott’s division to a skeleton staff of 50 while it waited for the right technology to catch up with his vision.

Scott was staying in close touch with Pratt & Whitney, which was developing a new, more fuel- efficient engine technology, known as a high-bypass geared turbofan. It had been in the works for years but was still untested. As the e- ngine came closer to real ity, the vision for the CSeries came into focus — an aircraft that would use the new engine t- echnology, along with light weight composite materials, to significan­tly reduce fuel and operating costs.

“- We came up with this air craft concept that was just fundamenta­l. It was providing a 20 per cent improvemen­t in fuel burn,” Graham Webb, vice- president of commercial engine programs at Pratt & Whitney, says. Operating the CSeries, meanwhile, would cost airlines 15 per cent less than the competitio­n.

Webb, who has worked with Bombardier on the CSeries from day one, says the goal was to “set a new bar and a new standard for the rest of the industry.”

“If they were going to be successful in breaking into that market space, they were going to have to have a gamechangi­ng aircraft with gamechangi­ng technologi­es,” he says.

Convinced that it did, Bombardier officially launched the reborn CSeries program i- n July 2008, with first de liveries planned for 2013. A press release included supportive quotes from potential customers such as Deutsche Lufthansa AG and Qatar Airways. The aircraft leasing company, Internatio­nal Lease Finance Corp., said it was “very interested,” but needed “other major airlines” to get on board. Scott remembers interest coming in “from all parts of the world, really from every corner of the market.”

But- that didn’t turn into or ders.

O- nly one of t hose ori ginal potential customers — Lufthansa — ever followed t- hrough, with its subsidi ary Swiss Internatio­nal Air Lines becoming both the first CSeries customer and, next year, the first airline to fly the plane.

Over the years, contracts trickled in, but the program i-s languishin­g at 243 firm or d- ers, well short of the com pany’s target of 300 by the time the aircraft enters service next year. The last firm order was in September 2014.

And of those 243 existing orders, 108 face some degree o-f risk that could result in de lays or outright cancellati­ons, according to an analysis done earlier this year by aviation consultanc­y Leeham Co.

The story of the CSeries is one of bad luck, bad timing and questionab­le decisions that conspired to leave Bombardier in the precarious position it’s in today. Some things were out of Bombardier’s control — the financial crisis and a slump in oil prices that made fuel efficiency less of a priority for airlines, for example. But Bombardier’s learned some h-ard lessons about its own ca pabilities. The question now i-s whether it has time to over come a string of setbacks and salvage the CSeries, and with it, Bombardier’s reputation.

Two- and- a- half years after the CSeries program was launched, Bombardier had only received 90 firm orders, a dishearten­ingly low number f- or a supposedly transforma tive aircraft. In a moment of candidness, management tried to assuage investors with a Q& A- style interview in the c- ompany’s 2010 annual re port.

“You’ve put a lot of eggs in the CSeries basket,” reads one question. “Analysts say the real risk for your new commercial j-et isn’t competitio­n but rath er execution. What makes you think you can deliver on time when other larger aerospace manufactur­ers have failed to do so?”

Guy Hachey, then president of Bom- bardier Aerospace, of fered this answer.

Because “we’ve designed our product developmen­t plan … to ensure that every step of the way, we deliver on all our timing commitment­s,” h- e replied. “We’ve given our selves over five years ( since 2-008) to develop, test and de liver our first aircraft, which is ample time.” But- it was al ready becoming apparent that it wasn’t.

Bombardier stubbornly stuck to its timeline until May 2012. Then targets grew vague, with the company saying entry into service of the smaller CS100 version of the aircraft would be approximat­ely one year after its first test flight.

T- hat first flight was even tually scheduled for June 2013 but more delays pushed it back to September of that year. Then, in January 2014, Bombardier revised its entry-into-service date again, to the second half of 2015.

That date was later pushed back to the first half of 2016, two- and- a- half years l ate, which is where it stands today.

“It isn’t just that the delay is the cause of their problems; it’s also a symptom of their problems,” says Ric-hard Abou lafia, vice-president of analysis at aviation research firm Teal Group Corp., a long-time critic of the CSeries. “They could have moved faster if they had the resources.”

One big problem: Bom- bar dier lacked the regional sales teams of its competitor­s, says one former executive who spoke on the condition of anonymity. That wouldn’t be rectified until the program was well underway. Me- an while, Bombardier found its s- uppliers weren’t being help ful. A relentless competitiv­e streak kept parts- makers from communicat­ing with eCaocmh- other, he says. “placency is hard to change in aerospace … one of the b- iggest difficulti­es and chal lenges I found was how to get your point across to suppliers, and even within Bombardier, t-hat what we did (wrong) yes terday has to be looked at and changed so we don’t repeat it tomorrow.”

A Ch- inese supplier con tracted to build the fuselage proved not up to the task. Bombardier had to uproot the project and bring it back home to Canada. “When you d-o that, then you eat up a bil lion dollars quickly of tooling,” the executive says.

The problem wasn’t a lack of intelligen­ce, but rather a lack of experience, says Scott.

“I would say that Bombardier’s people are just as smart f- rom an intellectu­al stand point as Boeing’s or Airbus’s or anybody’s,” he says. But they’d never built an airplane f- rom scratch that incorporat ed so many new technologi­es. “- There’s just really no sub stitute to having ‘ been there, done that.’”

‘ A lot of clouds’

Philippe Poutissou, former head of marketing at Bombardier Aerospace, says his team knew that Boeing and Airbus wouldn’t ignore the CSeries for long. They even tried to keep it quiet that the CS300 could carry 160 seats, enough to put it into competitio­n with Boeing’s 737s or the Airbus A320. They marketed it as a 130- seat plane, trying to fly under the competitio­n’s radar. It didn’t work. Bombardier was caught off guard by “how aggressive­ly Airbus and Boeing defended their incumbent positions with customers,” Poutissou says.

In 2010, Republic Holdings Inc. became the first ( and so f-ar only) North American cus tomer for the CSeries with an order for up to 80 aircraft. Rep-ublic, which operates region al flights for big U. S. carriers, had been a longtime Airbus customer.

The switch to Bombardier was “a real wake- up call to Airbus,” says Cameron Doerkson, an analyst at National Bank. Within a year, Airbus had convinced Republic to flip, ordering 80 planes from t-hem instead. There were un confirmed reports that Airbus had gone so far as to offer to pay Republic’s cancellati­on fee for the CSeries order. ( The order is still technicall­y on the books, but Republic’s CEO has made it clear he’s looking to get out of it.)

Scott had seemed unfazed initially by the possibilit­y of Boeing and Airbus launching a counteratt­ack against the CSeries.

“They’ve said themselves that they don’t see introducin­g a new aircraft until 2015 or l-ater,” he said on a 2008 con ference call. He was right. But despite a two- year head start for Bom- bardier, by 2015, Air bus had still beat the CSeries w- ith its own competing mod el. It received certificat­ion last month for its A320neo, a 150to 180- seat aircraft that also u- ses Pratt & Whitney’s “whis per” engine and burns 16 per cent less fuel than the older A320s — just a bit less efficient than the CSeries.

And Boeing is preparing a n- ew, more fuel- efficient ver sion of its 737, known as the 7M37 AX, with first delivery planned for 2017. It, too, will compete for a portion of the same segment as the CSeries. Bombardier has been left to watch as Boeing and Airbus offer up aggressive pricing plans for longstandi­ng clients who are more comfortabl­e with brands they’ve used for decades, and the ones their pilots and mechanics already know their way around.

Nobody at Bombardier was naïve about the challenge.... They tried to mitigate every risk that they saw, but even with all that, it was still a bigger challenge than they could deal with.” — Gary Scott, who led Bombardier’s commercial aircraft division before retiring in 2011 It isn’t just that the delay is the cause of their problems; it’s also a symptom of their problems

As the CSeries troubles mounted, the company sensed its competitio­n seizing on them to spread worry among buyers that Bombardier might not even be around for future servicing. “Your competitio­n is spreading rumours that this program is going to kill the company financiall­y,” says one former executive. “It presented a lot of clouds for customers.”

-The trouble was, the ru m-ours weren’t that hard to be l-ieve: What had begun as an al ready ambitious and expensive initiative had begun to spin out of control. CEO Pierre Beaudoin estimated in 2008 that developmen­t of the CSeries would cost US$3.2 billion, split t-hree ways between the com pany, its suppliers, and subsidies from Ottawa, Quebec, and the U.K., where Bombardier makes the CSeries’ wings. By early 2015, that budget had ballooned to US$ 5.4 billion. And Bombardier had nothing l-ike the deep pockets of its ri vals.

“I think there’s a lot of questions about whether the CSeries was an airplane they ever should have tried to build,” says David Tyerman, an analyst at Ca- naccord Genu ity. “They simply may not be

a large enough company with enough financial resources to be able to do a project of that size.”

A-nd yet, having possibly bit ten off more than it could chew with the CSeries, Bombardier then took two more big bites — a-nnouncing both a new Lear jet and a new family of Global business jets at the same time.

“- For a company of some what limited resources to take o- n three all- new aircraft de velopment programs, that’s a h-uge strain on your engineer ing department and a huge strain on your balance sheet,” says Cameron Doerksen, an analyst at National Bank. One former executive described d- epartments “literally fight ing” for engineers and money. Cost overruns and delays were everywhere: Developing the n-ew Learjet 85 ended up cost ing an astounding US$2.6 bill-ion before it was finally can celled this year; the first of the ultra-long-range Globals, still under developmen­t, had its delivery date pushed back by two years to late 2018.

“The CSeries was a huge challenge; you can’t overstate what a big challenge it was,” says Scott. “Then to take on the Learjet 85 and the Globals at the same time was probably too much.”

BERMUDA TRIANGLE OF AIRPLANES

At Bombardier’s investor d-ay this past November, com mercial aircraft president Fred Cromer reiterated the company’s long-stated goal of capturing half the market for 100- to 150- seat planes over the next 20 years. According to Bombardier’s calculatio­ns, that would amount to 3,500 CSeries sold by 2034.

And Bombardier actually is on track to achieve its 50-percent market- share goal. The a-ctual size of that market, how ever, is very much in dispute.

Since 2008, the CSeries has accounted for 47 per cent of total orders in the segment; Brazil’s Embraer SA got most of the rest. Bu- t so far the en tire market has amounted to just 519 planes. This particular s-egment has earned a reputation as “the Bermuda Triangle o-f airplanes,” known for mak ing sales forecasts disappear, says Tyerman, the an accord analyst. “What was not clear at the time, and this was the debate right from the start, was w-hether there is really a mar ket for that size.”

Dewar, the CSeries vicepresid­ent, disputes t his. “There’s more than enough

market for us to fill, without question,” he says. He points to U. S. Department of Transporta­tion data that shows 77 per cent of commercial flights around the world take off with 150 passengers or less.

“They may be able to induce enough orders if they price the t-hing cheaply enough,” says Tyerman. “Bu-t what kind of mar gin will you make on that?” he asks. “What kind of profit will you make?”

W-ith all the delays and run away costs, hitting volume targets will be critical for Bombardier. U. S-. aviation consult ancy Leeham Co. estimated recently that the first 50 planes the company makes, starting next year, will be built at a loss of US$ 32 million each. Bombardier has acknowledg­ed that the CSeries won’t generate positive cash flow until 2020 — and its US$3.2-billion write down on the program was a tacit acknowledg­ment that the original investment is unlikely to turn a profit.

And yet, despite all the CSeries’ woes, no one in the industry disputes that Bombardier has ended up with an excellent aircraft, exceeding its original targets for fuel burn, payload, range and airfield performanc­e. The CSeries has been confirmed as the quietest commercial jet in production.

“It will take five to 10 years …- for customers and even fly i- ng passengers to really ap preciate what the product can offer to the market,” says Fassi Kafyeke, senior director of s- trategic technology and ad vanced product developmen­t at Bombardier Aerospace.

Bombardier says that things are finally starting to turn around as the CS-eries certifica tion approaches.

“-I have seen huge momen t- um, change in interest, en gagement from customers,” DeEwar says. “very-thing is fall ing into place.”

S- cott, the former commer cial division head, knows it could be a long time before Bo-mbardier’s gamble is vindi cated. He compares the program to Boeing’s 777, which was launched in the early 1990s and was also plagued by delays, cost overruns and tepid demand.

“It wasn’t until the middle of the last decade, around 2005 or so, that the program really began to shine,” Scott says. Eventually, the 777 rose to dominate its segment, “but it took a dozen years before Boeing could stand up and say, ‘ You know what? We made a great decision.’”

Bombardier has a long way to go, digging itself out of debt and rebuilding confidence a-mong investors and custom ers, before it can say anything of the sort. But one thing it can say with confidence is that it has transforme­d the industry’s technology.

Doerksen at National Bank believes that Bo- eing and Air b-us would have taken signifi cantly longer to put new, more fuel-efficient engines on their aircraft if it hadn’t been for the CSeries threat. And even the skeptical Aboulafia of the Teal Group acknowledg­es the size of the impact on the aircraft business. “You’-re talking bil lions of gallons in fuel saved, you’re talking tons of emissions avoided, you’re talking much quieter airplanes,” he says.

Bombardier was looking for a transforma­tive aircraft in the CSeries, and it found one. The CSeries has had a dramatic, often dire impact inside Bombardier, too. If the company overcomes its troubles to make a mark in a whole new league of aircraft, it can say it was worth it. It could be a long wait until it knows for sure.

I think there’s a lot of questions about whether the CSeries was an airplane they ever should have tried to build ... They simply may not be a large enough company with enough financial resources to be able to do a project of that size — David Tyerman, Canaccord Genuity

 ?? Bombardier ?? The CSeries has torn apart Bombardier’s leadership team, sapped its resources and seriously damaged its reputation.
Bombardier The CSeries has torn apart Bombardier’s leadership team, sapped its resources and seriously damaged its reputation.
 ?? SOURCE: BLOOMBERG NEWS AND KRISTINE OWRAM, FINANCIAL POST
GIGI SUHANIC / NATIONAL POST ?? BOMBARDIER INC. BBD/B/TSX
SOURCE: BLOOMBERG NEWS AND KRISTINE OWRAM, FINANCIAL POST GIGI SUHANIC / NATIONAL POST BOMBARDIER INC. BBD/B/TSX

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