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:: October 2015 Letter ::

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Dear Fellow Canadian Election Watchers,

In the words of noted American philosopher Mike Tyson, ďEveryone has a plan Ďtil they get punched in the mouth.Ē The CSeries plan was always a few Molsons short of a six pack (ďWhat could go wrong? Itís not like our competitors will react like crazed wolverines and weíll run out of money while executing on an overambitious program while starving our other business units for resources.Ē). It was bound to take a beating. But the blows landed heavy last month. Bombardier, it seems, has been reduced to approaching Airbus and Embraer as possible partners, in much the same way that Napoleon might have approached the English and Prussians as possible partners right after the battle of Waterloo. It would take divine intervention to recover from this.

Our ancient Greek pals to the rescue. They used the term deus ex machina (god from the machine) for the final act in a play in which the gods set things right through divine intervention. Here are six dei ex machina that could save the CSeries:

DexM 1: Airframe primes. If not Airbus and Embraer, perhaps Boeing or someone else? Prospects: Miserable. Iím completely baffled how anyone thought Airbus would be a possibility. And anybody at Airbus who thought a CSeries JV was a good idea needs a few pointers on how to think. The CSeriesí customers are all Airbus customers; if it dies, Airbus gets those orders, thereby bolstering its rate-sensitive single aisle programs. Keeping the CSeries alive would mean lower A319/320neo production rates while paying for a completely different jet and a completely different production line and supply chain. Embraer, of course, walked up to the same cliff as Bombardier. Unlike Bombardier, Embraer walked away from the cliff. As for Boeing, well, I still have a few corporate tchotchkes from the Boeing De Havilland days. When the company sold its old Canada division, they vowed to never return. Except to sell Super Hornets to the Trudeau government, of course.

DexM 2: China. AVIC, COMAC, or just some Chinese investment fund. Prospects: Intriguing, but I still say no. Iíll start by saying Iíve never believed that China was a serious prospect here; see my April 2011 and July 2012 letters for more on why. But at this point China could get a great deal on a really good jet, and all the talent, technology, and tooling that go with it. If China is really determined to get into this game, acquiring majority rights to the CSeries would be the mother of all intellectual property short cuts. In fact, if China does not make a move here, then we can stop taking China even remotely seriously as a future civil aerospace player. And as Iíve written for many years now, I donít take their prospects seriously.

DexM 3. Private equity, or someone else with cash. Prospects: Nil. Berkshire Hathaway recently invested $37 billion into PCC; just a quarter of that could rescue the CSeries. But Buffett made that investment because PCC has a steady stream of revenue and strong profits. The CSeries wonít have strong revenue few years, and it wonít be profitable for a decade, if ever. Compared with subcontractors and other industry players, aircraft primes offer much greater risk and much longer investment horizons, which are completely unappealing to money people. Remember when Fairchild Dornier was funded by Clayton, Dubilier & Rice and Allianz Capital? Everyone involved learned their lesson. Ironically, the remnants of Fairchild Dornier and its 728JET wound up in the hands of a now-dead Chinese fund known as DíLong. Thatís two DexM failures for one company.

DexM 4: Government intervention, either from Ottawa or the province of Quebec. Prospects: Mixed. If itís just Quebec alone, the resources available would not make a difference. If Ottawa provided assistance that would matter, but there it gets complicated. First, we donít know what new PM Justin Trudeauís position is here; his only CSeries comment is that heís okay with foreign investors taking a stake in Bombardier, ďin a way that respects and defends Canadian interests.Ē Second, government cash can stabilize and defend a troubled company (as with General Motors). Itís quite another thing to directly support the creation of a completely new and costly jetliner that competes with established manufacturers on world markets. That might have serious WTO consequences. Itís also the kind of thing that modern economies generally donít do anymore. But it certainly could happen, and itís the CSeriesí best hope.

DexM 5: Airline orders. A solid blue chip airline order would bolster confidence in the program and with investors. Bloomberg and others reported this month that United, Air Canada, and JetBlue were all looking at the CS100, with United contemplating a large order as a reward for a pilotsí union contract extension. Prospects: Not impossible, but Iím skeptical. Bombardier has been trying to sell to large airlines for over seven years. In fact, United announced almost exactly the same acquisition plan a year ago. Itís far from certain. Also, all of these carriers are looking at the CS100 and the E2. The CS300 looks like a great jet, but the CS100 is heavier and costlier than the competition. The CS100 offers more range than the E2, but how many carriers need, and will pay for, that range? And Embraer has a very large installed base. In fact, Embraerís E190-E2 has been using the CS100 as a punching bag for years now. What has changed?

DexM 6: BBD asset sales. The company now says that anything it owns is on the block. Just make an offer. The Transportation unit would be the likeliest unit sold, but Business Jets could be attractive to other companies too. Prospects: Maybe, butÖ. The big question: why have they been unable to sell these units earlier? Why did BBD walk away from a purported Chinese offer for part of their Transportation unit? And, at a certain point the question becomes, Does BBD want to sell the company to save the CSeries, or dump the CSeries to save the company? Every day it waits to make this decision, the harder it will be for BBD to recover from a CSeries cancellation.

Teal Groupís criterion for providing a production forecast is a greater than 50% chance of series production. Since we donít see a greater than 50% chance of a DexM, we have zeroed our CSeries production forecast and updated that report this month. Other WMCAB reports updated this month include the CRJ, C-5, Caravan, MS-21, and all the large cabin Gulfstreams. Have a great month.

Yours, ĎTil Trudeau Brings Back The Avro Arrow,
Richard Aboulafia
 

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