UPDATE 3-Bombardier CSeries jet delayed by at least nine months

Thu Jan 16, 2014 4:55pm EST

By Solarina Ho
    TORONTO, Jan 16 (Reuters) - Bombardier Inc warned
on Thursday it will delay putting its new CSeries jet into
commercial service until the second half of 2015, a potentially
costly setback in its plans to challenge Airbus Group NV
 and Boeing Co.
    Bombardier said the delay is necessary so that it can
undertake a longer-than-expected test phase to ensure overall
systems and software on the narrow body aircraft are mature. 
    The news sent the shares of the Montreal-based planemaker
down more than 8 percent at one point to their lowest level
since early May.
    The delay is the latest setback for the world's fourth
largest planemaker's ambitious plan to dominate the growing 100-
to 149-seat market. In that category, it is pitting the CSeries
against the smaller aircraft made by industry giants Boeing and
Airbus.
    The highly anticipated, completely new CSeries is built
using lightweight composite materials and other technologies
designed to make the jet burn much less fuel, be significantly
quieter, and have sharply lower operating costs for airlines.
    The plane's development costs now stand at around $3.9
billion, but analysts warned the delay could drive that figure
up significantly.
    "Management hasn't hit any of their major important
milestones, so they have a credibility issue right now," said
Scott Rattee of Stonecap Securities. "You'd hate to think we're
going to get into November 2015 and then have another delay."
    Bombardier declined to comment on the financial impact but
said it was still "aiming for" C$3.9 billion. The company might
offer more details when it reports fourth-quarter and full-year
results on Feb. 13.
        
    EARLIER DELAYS
    In an earlier setback, the CSeries' inaugural flight was
delayed three times, or by about nine months, before taking
place four months ago.
    Bombardier had scheduled the jet to go into service one year
from the first flight. Analysts, however, had become
increasingly skeptical of that timetable, predicting the plane
would not enter service until sometime in early 2015. 
    The delay announced Thursday is longer than even some of the
more bearish expectations.
    "We're taking this very seriously," said Bombardier
Aerospace spokesman Marc Duchesne. "At the end of the day,
(customers are) telling us, hey, as long as you deliver an
aircraft that's meeting its promises ... we're fine."
    It's not unusual for jetliner programs to fall behind
schedule. Production problems pushed first deliveries of
Boeing's high-tech 787 Dreamliner and Airbus's A380 superjumbo,
the world's largest jetliner, years behind schedule.
    Bombardier had promised the CSeries was going to be
different, but the latest setback, combined with the earlier
ones, puts its delays within the ballpark of its competitors.
    At least one early CSeries customer said it was talking to
Bombardier about the consequences of the delay.
    "Of course, we are not amused," said Nils Haupt, a spokesman
for DT Lufthansa, the parent company of launch
customer Swiss International Air Lines.
    Haupt said compensation is usually part of the contract
between airlines and manufacturers in the event of such delays,
but he did not elaborate on the contract with Bombardier. He
said the airline has contingency plans.
    "We have always seen in the last years, delays in delivery.
Of course, we wouldn't hope for that ... It's happened, we have
to deal with it," he said. "It is not the end of the world."
    Engine supplier Pratt & Whitney said in an email it remained
confident the CSeries will be a success.
    
    MORE COSTS, MORE TESTS, MORE ORDERS
    Several analysts said the latest delay will definitely push
program costs north of $4 billion, but estimates varied from a
few hundred million dollars to more than $1 billion, depending,
in part, on when in 2015 the plane will enter service.
    "The latest delay could add over $1 billion to the cost the
entire program - which will significantly hurt (Bombardier's)
ability to expand Aerospace margins," Peter Arment, an analyst
at Sterne Agee, said in a client note. Arment based that view on
his estimate that Bombardier's current cash burn rate on the
CSeries is more than $200 million per quarter.
    The company's board reviewed the program's timetable on
Wednesday, Duchesne said, and decided that postponing deliveries
until at least July 2015 was prudent to ensure all was in order
with the plane's systems.
    RBC Capital Markets analyst Walter Spracklin said the
avionics and fly-by-wire systems are a key areas of concern.
    The first CSeries plane to be tested flew on Thursday from
its manufacturing site in Mirabel, Quebec, to Wichita, Kansas,
where the test team is headquartered. Duchesne said the move was
made to ramp up flight test hours. Bad weather in Mirabel had
hampered some of the testing.
    A second test plane flew for the first time earlier this
month and the third is expected to fly within weeks.
    At least one analyst said getting orders for the CSeries is
far more crucial to Bombardier than production delays. On
Thursday, the company announced a deal worth up to $2 billion
with Saudi Gulf Airlines to buy 16 CSeries jets with options for
10 more. 
    "We believe a more realistic timeline for EIS (entry into
service) is positive from the company's sales-effort standpoint
as it would provide increased visibility for customers
considering placing orders," BMO Capital Market's Fadi Chamoun
wrote to clients.
    The CSeries, which is aiming to win 300 firm orders by the
time it enters into service, now has 198 firm orders.
    The delay, however, will be an opportunity for Boeing and
Airbus to try to dissuade airlines from going with a new plane,
some analysts said.
    The CSeries' projected improvements have prompted Airbus and
Boeing to launch new versions of their older single-aisle
models, with new, fuel-efficient engines.
    Bombardier shares dropped 7.7 percent to close at C$4.17 on
the Toronto Stock Exchange on Thursday.
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