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Analysis: Bombardier gambles on big order payoff with new jet

A Bombardier Cseries jet under construction is seen in this handout photo taken in Mirabel, Quebec in this June, 2013 handout provided by Bo
A Bombardier Cseries jet under construction is seen in this handout photo taken in Mirabel, Quebec in this June, 2013 handout provided by Bo

By Susan Taylor and Solarina Ho

TORONTO (Reuters) - Canada's Bombardier Inc is hoping to carve a new niche in the cutthroat airplane market with a fuel-efficient, medium-haul jet that makes its first flight this month, but its all-new CSeries needs an avalanche of orders to stave off bigger rivals.

Bombardier's narrow-body CSeries, aimed at a gap in the market, offers a lightweight carbon-composite frame like Boeing Co's 787 Dreamliner, and new, fuel-saving Pratt & Whitney engines.

But there are two big challenges: Persuading the market there's room for a plane positioned midway between regional jets and bigger commercial planes, and tempting customers to abandon the big players who have dominated for years.

"You're going up against some serious entrenched competition and if you have the balance sheet to get through that, and gouge out a position in the market, there's something here," said Richard Aboulafia, vice president of aviation consultancy Teal Group. "If you don't, then you're jumping into a volcano with an armful of money."

Bombardier invested $3.4 billion to create the CSeries, which has between 110 and 130 seats, plus a tightly packed version that can seat up to 160.

It expects 300 firm orders worth $19 billion by the time the plane enters service in mid-2014, up from 177 at present.

Next week's Paris Air Show offers a chance to boost the still-slim order book, although the jet won't be on display. Its maiden flight won't come until the end of June, following a six-month delay that Bombardier blamed on supplier issues.

Bombardier insists its CSeries is now on schedule. "I'm very comfortable with the first flight, I'm very comfortable with the entry into service," said Mike Arcamone, president of its commercial aircraft division.

Airbus and Boeing rule the world of bigger commercial jets, and will defend their turf with discounts and revamped planes, while Brazil's Embraer SA, the world's No. 3 planemaker, leads in sales of smaller regional jets.

Embraer has 142 firm orders for its E195, with 110-120 seats, and 556 firm orders for the E190, with 100-110 seats.

Boeing and Airbus have sold 3,449 of their rival planes seating around 150 people, although only a sliver of the sales are for smaller models that compete head-on with the CSeries.

It's a sign either that Bombardier has found a promising niche, or that the market simply wants different-sized planes.

'IN DENIAL'

Montreal-based Bombardier says the CSeries can corner about half of the 6,900 single-aisle 100- to 149-seat jets that airlines are expected to buy over the next 20 years, contributing $5 billion to $8 billion in annual revenue starting in 2018.

It's a badly needed boost for Bombardier. Plane sales were flat at $8.6 billion last year and train sales for the world's biggest trainmaker fell 17 percent to $8.1 billion.

Bombardier is betting buyers will bite once the plane starts flying and especially once it enters service.

Chet Fuller, sales chief of Bombardier Commercial Aircraft, argues the whole industry has been bruised by delays that plagued planes like Boeing's 787 Dreamliner and the Airbus 380 and has become more conservative.

But Airbus officials dismiss that.

"They have long winters in Montreal. They are obviously in denial," Airbus sales chief John Leahy said of the Bombardier targets. Also, the performance claims were too optimistic, he said.

The CSeries is the first all-new, narrow-body plane in decades, and Bombardier says it will cost less to buy and operate than rival jets.

Rather than compete with a new plane, Boeing and Airbus have added new engines to existing aircraft to create their next-generation 737MAX and A320neo narrow-bodied jets.

The CSeries plane is newer and lighter, but the added efficiency from the new engines on Airbus and Boeing jets has so far convinced most airlines to stick with established suppliers.

The two big players are betting their upgraded models will hold the CSeries and other competitors at bay until around 2030, when they may bring out completely new designs. They insist that the familiarity of existing jets will be a major selling point.

But experts say new engines won't be enough for the heavier Boeing and Airbus planes to match the long-term fuel efficiency and lower operating costs of new aircraft like the CSeries.

Analysts say discounts in the range of 50 percent from Boeing, Airbus and Embraer will help. At list prices, the 110-seat CS100 costs $63 million and the 130-seat CS300 $72 million.

The 126-seat Boeing 737 MAX 7 costs $82 million, and Airbus's 124-seat A319neo $92 million.

Two finance sources, who asked not to be named, said the CSeries would have to sell for something closer to $35 to $40 million to win big orders.

WON'T GIVE IT AWAY

Bombardier Chief Executive Pierre Beaudoin says he will not "give away" the CSeries, and the company has rejected deep discounts and other sweeteners.

If Bombardier gets a firm footing with the current CSeries, it could stretch the plane to add more seats and has trademarked the names CS500 and CS900, just in case.

Bombardier hopes the plane can reignite its stock, which is languishing at 2002 levels and a fraction of its 2000 peak of C$26.70. The stock was up 7 cents to C$4.74 on Thursday.

"Clearly, the CSeries is quite pivotal in terms of the short-term price reaction of the stock," said Greg Kocik, managing director of TD Asset Management, a top-10 shareholder that owned 11.25 million Bombardier shares at April 30, according to Thomson Reuters data.

"And definitely the long-term success of the company hinges on good execution of the CSeries program, but it's not like they're betting the farm on this one program. They're a diversified company."

(Additional reporting and editing by Tim Hepher, Alwyn Scott, Brad Hayes and Cyril Altmeyer; Editing by Janet Guttsman and Jeffrey Benkoe)

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