UPDATE 2-Bombardier, Rostec in tentative turboprop aircraft deal

Wed Aug 28, 2013 4:38pm EDT

By Solarina Ho

TORONTO Aug 28 (Reuters) - Bombardier Inc signed a preliminary deal to sell 100 short-haul Q400 NextGen aircraft in Russia and set up a joint-venture assembly line for the planes in that country.

Bombardier, a Montreal-based plane and train maker, said on Wednesday it signed a letter of intent to sell 50 Q400 NextGen turboprop aircraft to the Russian state-owned industrial and defense conglomerate Rostec.

Rostec and its aircraft leasing subsidiary also agreed to secure orders for at least 50 more Q400s in the region, and Moscow-based leasing firm Ilyushin Finance Co signed a letter of intent to acquire those planes.

The sales are contingent on establishing a final assembly line for the aircraft in Russia, which would be a joint venture of Bombardier and Rostec, the Canadian company said. The companies hope to conclude a definitive deal in 2014, subject to various approvals.

Analysts said the deals would open the door to the lucrative Russian market for Bombardier and give the Q400 series a boost.

Bombardier said the orders for the 100 planes would be worth $3.39 billion at list prices.

Q400 planes are currently assembled in Toronto. Bombardier said the Toronto plant would continue to produce Q400s for all markets outside of Russia and maintain responsibility for the overall Q400 program.

"Toronto is the primary home of the Q400 aircraft and all of our production activity for the worldwide market - apart from Russia - comes out of the Toronto production site," said spokeswoman Marianella de la Barrera.

National Bank Financial analyst Cameron Doerksen, in a client note, said the deals "would go a long way toward revitalizing the Q400, sales of which have been very slow of late."

He added, "The Q400's range and speed make it well suited to the vast Russian and neighboring markets."

The Q400 seats 70 to 80 passengers and is designed to operate in extremely low temperatures.

Bombardier said if a final deal is completed, the Q400 assembly line in Russia would produce aircraft for Russian customers. The company forecast 144 percent growth in demand for 60- to 99-seat turboprops over the next five years in the region.

BMO Capital Market analyst Fadi Chamoun said in a research note, "We understand that there is no need for union approval for these agreements and, if finalized, would open up access to the Russian market for Bombardier, which we note is a relatively large and important market for the Q400."

Bombardier's Toronto plant had a backlog of 36 planes as of June 30, or 13 months of production, versus the company's backlog target of 18 to 21 months, Chamoun noted.

Bombardier says it has booked 475 firm orders for the Q400 and Q400 NextGen.

The union representative for the Toronto assembly plant could not be immediately reached for comment.

Bombardier and Rostec, which have been in talks since early this year, signed the preliminary agreements at Moscow's MAKS air show, which began earlier this week.

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