Delta saves Bombardier’s bacon: Or do they?

Delta got a deal on 75 Bombardier (BBD.B) C-Series planes today.

How much of a deal? Bombardier won’t say, and that pretty much tells you how much of a haircut the Canadian aerospace manufacturer took to get a deal – any deal – in place.

From the company news release announcing the deal:

(Delta) has placed a firm order for 75 CS100 aircraft with options for an additional 50 CS100 aircraft. Based on the list price, the firm order is valued at approximately $5.6 billion.

I’m sorry, based on the list price? Is it so little that they’re ashamed to say? Are they keeping the discount quiet in the hope that nobody else will expect a similarly squeezed deal?

Bombardier does this ‘according to list price’ thing pretty regularly, which indicates they’re cutting sweet deals to get their workforce moving. Nothing wrong with that, but when you’re talking a $17 billion backlog (at list price), what they’re actually charging their clients is the difference between making a large profit or making a large loss. As a potential shareholder, you’re completely rolling the dice. Today’s deal could be a company saver, or it could tie the company to a low margin deal for the next two years.

Bombardier has faceplanted from one disaster to the next with the C-Series, but also with their light rail contracts. Toronto has been trying to get them to deliver $1.25 billion in promised streetcars for many months, even threatening to sue the company for its ridiculous delays. Bombardier, in a ridiculous turn, refused to meet with the city to talk about the issue. Because, Quebec.

Bombardier was supposed to deliver 73 of the streetcars in 2015. As the year was closing out, the number received was under 20.

“They probably expected what they were in for,” TTC councillor and chair Josh Colle told the Toronto Star when asked about the no-show.

Bombardier blamed a Mexican supplier for delivering substandard work, including “poorly cut doors and walls, peeling laminate and electrical shortcomings.” Frankly, I’m not sure how ‘We went for the cheapest supplier we could find and their work is surprisingly bullshit’ is a defense, but there you have it.

So taxpayers in Quebec bailed Bombardier out of trouble earlier in the year to the tune of $1 billion, and the federal government had been asked for a billion dollars more when, out of nowhere, Air Canada did a surprise deal to purchase some Bombardier planes, leading many to suggest AC was forced into an arrangement by them upstairs.

But today we’re supposed to assume that everything is now back on track. Only, is it?

When’s the last time you saw a company – any public company – that just received a deal as potentially large as 75 airplanes, with an option for 50 more, and didn’t boast about how much money they’re going to bring in on the deal?

The cost of the deal should be around $5 to 6 billion. $4 billion would be a hefty discount but still worth crowing about, when you consider it would at least keep the game in motion long enough to potentially do other deals.

But less than $4 billion, that would have guys like you and me doing the math and reasoning, ooh… that’s going to hurt, and for the next several years.

The C-Series has two main features, other than being able to screw Bombardier on price without too much hassle. First, it’s fuel efficient, which was a much bigger deal when fuel wasn’t dirt cheap and being produced in ever larger numbers. Second, it’s quiet, which is nice if you fly without headphones on.

I never fly without headphones on.

And what happens if Mexican suppliers once again can’t get the paint right? Will Bombardier be able to deliver 75 planes in the next three years? That’s one every two weeks, and presumably Delta is behind Swiss Air, who are ahead of them in the queue with Air Canada having signed a letter of intent for 45 more. Right now, the company is delivering 20 aircraft per quarter, according to most recent numbers, but there’s no indication as to whether those are C-Series aircraft or earlier, established CRJ’s, or even turboprops.

And what about future potential? If Alaskan Airlines suddenly woke up tomorrow morning with a hankering for some A1 Quebec/Mexican workmanship, how long would it take for them to squeeze some planes out of that pipeline? How much would Bombardier need to spend to ramp up production, or build a new workforce and facilities?

So many questions, so few detailed answers.

Bombardier stock recently plunged as low as $0.93 on the back of a host of problems, but in the last few weeks has gone parabolic, jumping from $1.35 to $2.47 in April alone. You’d almost think they found lithium, the way the stock is moving.

That’s good, I guess. But I suspect, when the actual details of this and other deals emerge, that stock price is going to turn turtle once more. I’m not suggesting you should short Bombardier, I’m just saying if you did, we could totally hang.

–Chris Parry

http://www.twitter.com/chrisparry

 

Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.

Leave a Reply

Your email address will not be published. Required fields are marked *