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AVIATION DOCTOR: Critical Analysis Beyond the

Headlines
Tomas Chlumecky: [Link]

TAGGED WITH ATR-72

ABSTRACT: Bombardier takes another credibility hit,

stock drops 25% in one day as investor confidence is
shaken and they are selling, another senior executive
departs, the Learjet 85 is “paused” with a $US 1.4 billion
write down, certifying 4 new jets at once costing $US
6.9 billion was “nuts”, the Q400 and CRJ’s programs are
near their end, another 1,000 employees are to be laid
off on top of 2,000 last year, corporate credit rating cut,
talk of a Q400 and CRJ assembly line in China, only 243
firm orders for the CSeries after 78 months of effort,
and probably 100+ will NOT take delivery, Alenia a major
CSeries subcontractor sues for $US 121 million, CSeries
EIS not till 2016, low fuel prices diminish the fuel
efficiency argument for CSeries, while it’s launch
customer is a secret ? sell Commercial Aircraft Division
to China’s COMAC and create Combardier ? capital
markets worried about liquidity and management,
Business Aircraft Division now discounting some
aircraft, Learjet cannot survive on only 33 Learjet 70/75
sales (+/- $US 335 million) a year, is it doomed ? sell it
off ? with a cashflow of only $US 800 million in 2014
will Aerospace have the cash to complete certification
and produce the $US 1 billion Global 7000/8000
business jets and the $US 4.5 billion CSeries ? time for
an outsider as CEO – again ?
Bombardier, the world’s only plane and train manufacturer continues to disappoint shareholders,
employees and customers, and on Wednesday, January 15th, we saw the wall crash down, when
Bombardier stock (TSX:BBD.B) crashed downwards by 25.85% in one day ($US 1.8 billion in market
capitalization) on volume of 57 million shares, to $CAD 3.07 from $CAD 4.14, ouch ! by Friday the
17th it went as low as $CDN 2.89 per share, investors are sending a strong message to Bombardier,
shape up the Aerospace business before the stock hits bottom or stick with trains !

UBS Analyst said last week “We continue to see BBD’s equity as over-valued, even after sell-off, given
significant off-balance-sheet liabilities on top of also significant on-balance-sheet debt, pension deficit,
and supplier/government advances. In all, we estimate BBD’s net debt to be greater than 8 x EBITDA,
problematic given our forecast for another three years of free cash outflows and big upcoming debt
maturity in 2016″.
Today is 69 weeks since the CSeries CS100 made its 1st flight (Sept 16, 2013), it took Airbus 69
weeks to deliver its newly certified A350-900 to Qatar Airways (on Dec 22,2014) from its 1st flight
(June 14, 2013), and probably another 60+ weeks for CSeries CS100 certification (end of 1Q/2016 by
my estimate), as they are only 1/3 of the way through the 2,400 hour certification program now. With
5 FTV ‘s (flight test vehicles) now flying up to 40 hours per month, they can get 200 flight hours a
month in, which means 8 months to certification from now IF all goes perfect from here on, and they
sadly never do.

Launched in July, 2008 the beautiful Bombardier CSeries airliner was suppose to be a “game
changer” (which it is not) but the competition out maneuvered Bombardier, and with only 243 firm
orders (63 x CS100’s and 180 x CS 300’s) in 78 months of marketing & sales it is struggling to sell,
EIS (entry into service) is 1 year away in my opinion, 2H/2015 , still no formal launch customer
announced, it is a ‘secret’ ?. The aircraft comes in two models, the $US 62 million CS100 with seating
between 110-125 (ABOVE PHOTO LEFT) and the $US71 million CS300 with seating between 135 and
160 (ABOVE PHOTO RIGHT), its EIS (entry into service) is 6 months after CS100, therefore 3Q/2016
by my calculation.

Bombardier believed a clean sheet aircraft was the way to go, new airframe and new engine would
produce a very economical aircraft, the incumbents Airbus, Boeing and Embraer decided that re-
engining was the way to go, and airlines have voted, with Embraer having 270 firm orders after 18
months, while the Airbus and Boeing have 6,284 firm orders for the A320neo and B737Max line, but
interestingly enough, only 109 A319neo’s and B737-Max7’s (both in the 100-149 seat segment) have
been ordered (1.7% of all neo’s/Max’s), possibly indicating the up-gauging by airlines has made that
segment a lot less interesting than it used to be.

The program MUST have a US customer, either American, Delta or United as it is a huge market
and no commercial aircraft has gone on to be successful without doing well in the US market,
please don’t count on Republic Airways order for 40 x CS-300’s, that was 5 years ago when it
owned Frontier Airlines, there is no need for a CSeries now with a regional airline. Bombardier has
now looking at $US 4.5 billion investment in the program, it will need orders of around 450 to
break-even, and that is years out, not sure why they keep talking about a sales ‘target’ of 300, that
has to be a 2008 number, today realistically it is 500+ units to break-even with much needed
discounts and the extra $US 1 billion in investment it requires to finish it.

___

Sadly, another 1,000 employees are laid off on top of the 2,000 last year and 1 of the 4 new aircraft
programs is “paused” (really it is cancelled), though the Lear 85 has been de facto “paused” since
last summer anyway, it started in 2007 and in 8 years it has managed to do very little with it in that
time, embarrassing for sure, almost a US equivalent of the COMAC ARJ-21-700 program. The
Learjet 85 had its 1st flight April, 2014 and will require a $US 1.4 billion write down, emblematic of
management’s “monumental incompetence” says Vice President of Teal Group, Richard Aboulafia.

The gamble to have the Lear 85 as the first Part 25 aircraft with carbon fiber fuselage and wing has
gone bad, the history of composites in business aircraft is not good, the all composite Beechcraft
Starship was a $US 1 billion mistake, later Beechcraft’s focus was on the fuselage only, like the
Premier 1A and the Hawker 4000, both were over budget, late to market and commercial failures,
and contributed to the fall of Beechcraft.

The issue as I see it, is that it was a competitor the $US 24.9 million Challenger 300 both with 8
passenger seats, equal speed (470 kts vs 481 kts) and equal range (3,000 nm vs 3, 100 nm), so
what heck was the plan for the Learjet 85 anyway ? it was the fact they had no plan and that is why
it dragged on for 8 years ! The aircraft would have rejuvenated its languishing Learjet brand, now
there is nothing new to come other than sub-contract work for the Global 7000 and 8000, the Learjet
brand is dying a slow death.

For those that did not catch this one, Bombardier is being sued for $US 121 million in damages by
Alenia Aermacchi (Italy) which builds the tail section of the CSeries, Alenia says it is due to the
sharp reduction in the rate of production of the CSeries, and that the low production rate will lead to
a drop in productivity which will result in higher than expected costs and a loss of earnings. This is
worrying, a major Tier 1 sub-contractor seeking damages from the OEM, I would like to know what
production rates Bombardier is now looking at, is optimism in the program dropping ? I have early
planned production rates of 22 for 2016 (not going to happen as certification will be delayed to
1Q/2016 most likely), 48 in 2017, 75 in 2018, 90 in 2019 that is 235 in 4 years, which will not cover
the current 243 orders before 2020.

In the meantime Raymond Jones, VP of Sales & Marketing left the company, another big departure
at Bombardier, this one survived only a year, probably not the best choice for the role, but other good
executives were good for the role, but decided to get out-never a good sign, especially when the
biggest program in the company’s history, the CSeries is struggling and costing now $US 4.5 billion
and certification is still far from complete, with only 800+/- hours of 2,4000 hours needed for
certification from Transport Canada, 2nd half of 2015 is not realistic, look for 2016 as being more
realistic.

As a comparison of how slow certification is going on the CSeries, the Airbus A350-900 had its 1st
flight June 14, 2013 and the 1st delivery to a customer, Qatar Airways was made on December 22,
2014, roughly 69 weeks after 1st flight, the CSeries made its 1st flight on September 16, 2013 which
is 69 weeks ago today (January 20, 2015), and today Bombardier is at best 30% of the way to
certification, yes they had engine problems, that is what happens in certification, the unknown
happens, look at the Boeing B787 Dreamliner and the whole battery issues they had that delayed
deliveries for months and months. Back in 2008 the program was estimated at $US 3.5 billlion and a
breakeven of 300 units became the sales target, now it is a $US 4.5 billion program, but Bombardier
keeps talking about 300 orders, it should be 400 now but Bombardier knows it will have to discount
the price (something it said in the past it does not have to do with the CSeries) but just like Airbus
and Boeing (will discuss in future blog) they will have to do so, and even a modest 25% off means a
realistic breakeven of 500 at least !

The company says it has $US 3.8 billion in liquidity, enough to fund its 3 on going programs, but with
stock and credit rating downgraded capital will be more expensive to come by as debt is $US 7.6
billion, and the cost to protect debt from default in the next 5 years has jumped to 481 basic points
(4.81%) up by 125 basic points (1.25%) in the past week, making borrowing a whole lot more
expensive for Bombardier. Capital expenditure for Bombardier Aerospace is estimated at $US 1.6 to
1.9 billion for 2014, and no let up for 2015 as CSeries, Global 7000 and 8000 will require lots of
expenditure before their planned certifications in 2016 (CSeries, Global 7000) and 2017 (Global
8000), till then its all cash outflow, and the concerns about liquidity by capital markets.

The situation, is getting worst by the month, I have written several blogs on Bombardier (July 24,
2014) and the (June 10, 2014) blogs outlined the issues at Bombardier, and yes there is “something
is seriously wrong in Montreal”, and it lies at the top. Yes, a reasonable 84 commercial aircraft and
204 business jets were delivered in 2014, but the problem is the sustainability of the Commercial
Aircraft Division as the CRJ and Q400 products are slowly dying in the market, and the CSeries is in
a coma, waiting to be awakened, while signs of trouble are merging in the Business Aircraft Division,
poor Learjet sales, decrease in 300/350 orders as well as 605/650’s, with the high end still strong,
though backlog is decreasing while competition is increasing and global economic storm clouds
will bring trouble in 2015-2016 for the high end sector.

The mess was always going to come, as trying to certify 4 new jet aircraft costing $US 6.9 billion in
development costs at the same time was too ambitious for any aerospace OEM, the $US 4.5 billion
CSeries, $US 1.4 billion Lear 85, $US 1.0 billion Global 7000 and the Global 8000 all required
massive amounts of resources (cash, human resources, engineering) and time, and required that
the Business Division and the Q400 and CRJ line continue to sell and produce income, but that is
not what is happening, the CRJ and Q400 sales are dying out and the CSeries is dragging out so you
have less cash inflow and more cash outflow and no wonder investors are worried and selling their
stock.

The fact Bombardier has not yet moved on ‘refreshing’ its sacred Global 5000 and 6000 aircraft
when Dassault launched its Falcon 5X and 8X in the past year and Gulfstream launched its 500 and
600 at the NBAA in October, says a lot about the mind set at Bombardier, as the Global are where it
margins are, a segment that has done well while the light and medium segments suffered
reductions in demand from 2008. The French and Americans are going after the Global market, and
Bombardier chose to ‘refresh’ the Challengers instead, 605 is now the 650 and the 300 is now the
350 (bigger windows, 145 nm more range for an extra $US 1 million) ? maybe too dependent on the
eventual 7000 and 8000 to keep its dominance in the high end sector ? maybe.

It is time to point fingers at the CEO Mr. Pierre Beaudoin, as the National Post is the first to have the
balls to write about the ever growing list of critics of the CEO at Bombardier. The stock value of
Bombardier has gone from $CAD 8.90 when Mr. Pierre Beaudoing took the helm at the company on
June 4, 2008 and since then it has gone down 66%, and right now there are no signs of it coming up
anytime soon. With no major Canadian pension fund among its top 209 shareholders, the Canadian
champion of aerospace has lost its way, investors are selling their Class B shares, and even local
Caisse de depot et placement du Quebec, whose mandate is to contribute to Quebec’s economic
investment, is absent. Time for a new CEO from the outside, a restructuring expert that can turn the
Titanic around before it sinks ?
But the Class B shares traded on the stock market are outweighed by the Class A votes that carry 10
votes to each 1 vote for the Class B, in short, the Beaudoin family controls the company through its
64% of voting shares, so Bombardier is stuck with the 3rd generation Pierre Beaudoin at the top, no
matter how bad the situation gets.

The Q400 sales are a fraction of ATR sales, the CRJ is holding on due to the scope clause of 76
seats in the US market, but very little anywhere else. The CSeries has 243 orders after 7 years, while
Airbus with its A320neo has 3,621 firm orders after 4.1 years of sales and marketing and Boeing’s
B737Max has 2,663 firm orders after 3.5 years of sales and marketing. Even newcomer Mitsubishi
MRJ has 223 firm orders and Embraer’s E2’s have 270 orders having only launched sales &
marketing in June, 2013, only 1.5 years ago.
The above is the line up for the global commercial jet market between 80 passenger seats and 200
passenger seats till 2020. With 6 OEM’s in the group, all with good aircraft the big battle is going to be
in the 80 to 135 seat segment with 4 OEM’s competing (Bombardier, Embraer, Mitsubishi and Sukhoi)
, can they all survive ? that is the big question ! The Sukhoi is the weak link, mainly due to its Russian
origin, while Embraer and MRJ will battle it out in the 76 to 90 seat segment and Embraer and
Bombardier in the 100 to 135 seat market.

The battle in the 80-149 seat market has begun and at this point #1 is for now, is the early entry
Sukhoi SSJ-100 with 84 delivered (296 orders) #2 is Embraer (270 orders), #3 is Bombardier (243
orders) # 4 Mitsubishi (223 orders) , #5 is Boeing (60 orders) and #6 is Airbus (49 orders), in total
1,141 aircraft on order in this segment between 6 OEM’s.

It is again worth noting that the smallest segment that Airbus and Boeing compete is the 124 to 149
seat market where the Airbus A319neo has only received 49 orders to date, only 1.35% of all 320neo
family orders to date and the Boeing B737Max7 has managed only 60 orders to date, only 2.2% of all
Max orders, so a mere 109 orders in the market that the Bombardier CS300 will compete in, this will
be interesting, is this lack of demand due to the market not being there or no optimized aircraft for
that segment has yet to emerge ?

At the top end, is Airbus (TOP LEFT photo) with its neo (new engine option) line of 124 to 220
passenger seat A319’s, A320’s and A321’s with 3,621 current orders and Boeing (TOP RIGHT photo)
with its Max line of 737Max7, 737Max8 and 737Max9 with 2,663 current orders.

In the middle is the Bombardier CS100 (MIDDLE photo) and CS 300 line of 108 to 160 passenger seat
airliners, with 243 orders, it is still referred to as a “game changer“, yet clearly it is NOT, it is just
another aircraft out there using the new generation of fuel efficient engines, the quicker Bombardier
gets over its myopia and the fact it has been boxed in from the top and bottom, the better.

At the bottom end is the new Embraer line up of E2-175, E2-190 and E2-195 (BOTTOM LEFT photo)
with current order book at 270 for the E2’s and 1,339 orders for the E-170, E-175, E-190 and E-195
line of regional airliners being replaced by the E2’s in 2018+. The Mitsubishi MRJ-90 (BOTTOM
MIDDLE photo) is a new clean sheet aircraft for 78 to 90 passengers which currently has 223 orders.
The Sukhoi SSJ-100 (BOTTOM RIGHT photo) is a 78 to 85 seat aircraft from Russia with 296 orders
and a possible stretch to 115 seats.

___

As for the CSeries, with sales at 243 today with only 63 (26% of orders) for smaller CS100 while the
larger CS300 has 180 orders (74% of orders), it is clear to me that the CS300 will be a much more
attractive aircraft with 135 to 160 seats, its all about seat mile costs (CASK or ASM) today with
airlines, and the 160 version could be interesting for some LCC (low cost carriers), Lion Air of
Indonesia looked at it, but the huge discounts it got from Airbus and Boeing for ordering roughly 250
aircraft from each, surely priced the ordered A320neo’s and B737-Max8’s below the CS300 list price
of $US 71 million, I would not be far of if Lion Air paid less than $US 60 million (+40% off) for each
A320neo/B737Max8 in its deals somewhere in the range of $US 322,000 per passenger seat.

In short, the fingers need to be pointed at management or lack of. The situation has come down to a
future where Bombardier may not be in the Commercial Aircraft business 5 years from now, the CRJ
and Q400 line will be sold as it is becoming uneconomical and near the end of its life. The CSeries is
struggling for orders, and one day China may take the whole thing from Bombardier.

The 100-149 seat market is NOT as big as Bombradier forecasted and hoped for, time shave
changed, airlines are up gauging their fleets more seats equals better seat mile costs. The 4,800
aircraft in 2012 that were in the market will not increase to 8,700 as Bombardier hoped, no way will
we see 6,900 deliveries in this segment in 20 years, 345 aircraft per year ? come on it won’t happen,
at best 3,000 or 150 per year between Bombardier, Embraer, MRJ and a “stretched” SSJ (?).

Bombardier from the beginning of the CSeries was out to replace the 100-149 seat older B737-200s
(LEFT photo), DC-9’s (CENTER photo) and MD-80’s (RIGHT photo), well that has not worked. The
airlines like Westjet Airlines, SAS and American Airlines have moved on to bigger aircraft, they did
not order same sized aircraft, because they want to grow capacity by available seats per aircraft as
well as increased frequencies and new routes. West Airlines has B737-800’s, while Airbus has moved
to B737-800’s, A319, A320 and 30 x A320neos, American still holds on to 130 MD-80’s but has
ordered 100 x B737Max8’s and 59 x B737-800’s to replace them. The trend out of the 100-149 seat
market to the 150-200 seat market, so time to re-think and re-position how to sell the CSeries.

___

The order book for the Airbus A319neo is 49 while the Boeing Max7 order book stands at 60, that is
109 aircraft in this 100-149 seat market, or 1.7% of all A320neo’s and B737Max orders, that says a
novels about this segment, and it has nothing to do with downsizing the aircraft, its about market
demand, it is not there to the level forecast, simple. In the beginning Bombardier goal with the
CSeries was to replace MD-80’s, DC-9’s and B737’s, they belived in their forecasts too much, did not
study the aircraft order trends and see the changes in the industry, it is a whole lot different today
than whent he CSeries was launched, LCC (low cost carriers) focus on seat costs and FSC (full
service carriers) having to compete with them on seat mile costs, thus the trend to up-gauging
aircraft and you see it, 6,900 narrowbodies (A320neo and B737Max) sales versus 249 CSeries
orders.

Bombardier will have to re-position their thinking and honestly create a new Blue Ocean strategy on
how they will compete from here on, because what they have been ‘selling’ (off peak flights, point to
point, better economics, etc.) has NOT worked, the airlines are NOT buying it, the poor order book
says it all ! add in low fuel prices that change the economics of older airliners, and the CSeries sell is
going to be more difficult. The early Bombardier assertions that the CSeries will have: 15% lower
cash operating costs, 20% lower maintenance costs and significant improvements in emissions and
noise are passe, check mate from above and check mate from the bottom, the CSeries sadly is just
another commercial airliner in the 100-200 seat market, and has to find its value proposition and
compete on price, delivery, performance, economics, passenger appeal with the rest of the crowd
(ie. Sukhoi, Mitsubishi, Embraer, Boring, Airbus and down the road COMAC and even maybe Irkut).

As low fuel prices reduce the value proposition of a new fuel efficient airliner, airlines are re-
evaluating their life costs like the A320ceo versus A320neo (classic versus new engine option), as
airlines are looking at lower DOC (direct operating costs) where fuel has been around 30% to 35% of
the total DOC cost, and the equation may show for some that the cost of ownership and DOC’s may
have swung in favor of the existing aircraft versus new aircraft, and 2015 is looking to be a very
profitable year for airlines in general due to low fuel costs.
Flightglobal Ascend has calculated that the fuel savings generated by a $US 103 million (list price)
Airbus A320neo (new engine option) outweighs its lease costs difference versus a used A320ceo
until the price of oil falls to $US 55 per barrel. With oil in the $US 48 per barrel range, older, cheaper
and less fuel efficient commercial aircraft like the classic A319, A320, B737-700, B737-800,
E190/195, etc. may have better economics than new, more expensive and more fuel efficient
commercial aircraft like the A320neo, B737-Max8, E2-190/195’s, for now anyway while oil is low,
long term it is best to go with new aircraft.

Airlines may use this period to boost profits/cash, and there will be cases of aircraft deferral and
possibly cancellations at the major OEM’s, which Bombardier does not want to see, as it was
“hoping” (“Hope is NOT a Strategy”) that one competitive advantage it had was quicker aircraft
delivery, as Airbus, Boeing and Embraer have long lead times for deliveries.

Not all airlines buy the idea that new fuel efficient aircraft are the best way to go, ULCC (ultra low
cost carrier) Allegiant Air operates MD-80’s and A320’s and finds the $US 3.5 million MD-80 total
operating costs plus DOC’s competitive with the second hand $US 40+/- million A320 (new A320ceo
is $US 94 million and A320neo is $US 103 million, less discounts of course !), even though the MD-
80 burns 250 USG per flight hour more JetA, and requires more maintenance, but the difference in
ownership costs is greater than the DOC difference. DeltaAir Lines fleet strategy uses used aircraft,
only 2 years ago it finally stopped using the DC-9 and now has a large fleet of Boeing B717’s as it
believes in in minimizing capital costs as a priority when it can. Most recently, United Airlines was
looking to acquire second hand B777-200’s, low fuel costs can lead to shifting retirement plans and
deferring deliveries, as Air France-KLM did on Dec 19, 2014 when it deferred 10 x B777-300’s that
were to replace its B747-400’s, low fuel prices changed the equation, plus AF-KLM poor financial
situation where CAPEX (capital expenditures) need to be kept to a minimum right now.

Moving on, the revolving door of exiting aerospace executives says novels about the internal
situation, it all started with the early departure of Gary Scott then President of Bombardier
Commercial Aircraft on October 1, 2011, he was the man chosen to lead the CSeries, he was it’s
champion, but he bailed out on his own accord, just as the CSeries program was getting started,
very strange departure indeed, and raised lots of questions about the program, what scared him off
?

Some executives needed to go and some needed to stay, the politics of Bombardier is complicated,
insiders say too many people were promoted to positions that they are not qualified for (see
previous blogs on Bombardier). Putting people in positions they were not qualified for has been an
ongoing problem at Bombardier as you can see from my previous blog contributions, but the
departure of such high level executives after a short period, is worrying to prospects, customers,
employees and investors.

In a July 2011 article in McKinsey Quarterly “Do you have the right leaders for your growth strategies
?” pointed out that leadership quality is critical to growth, most companies don’t have enough high
quality executives. Excellent leaders are few and far between, I know that having worked with for
and with 60 companies in my career as executive, adviser, employee and business owner. It is a
challenge for growth oriented corporations because leaders with high competency scores make a
big difference for the corporation.

I have recently worked with a Canadian company where the the shareholders and President wanted
to grow the business, but had little competencies within its executive ranks how to pull it off, stuck
for years doing the same old thing, keeping the ‘status-quo’ and expecting different results – does
not work, with no idea of how to move forward. In order of importance your leaders need: 1. market
insight (looks beyond the present) 2. customer impact (takes action to add value) 3. strategic
orientation (defines strategy) 4. change leadership (advocates change) 5. developing organizational
capability (adding new competencies) 6. results oriented (uncompromisingly drives for higher
performance) 7. team leadership (involves team) 8. collaboration and influencing (motivates
others), too many executives promoted to positions that they are not competent enough to get the
job done properly. Promotion based on years of service does not work, a company needs to
assemble a critical mass of talent, which requires attracting and retaining excellent leaders, not
followers, ass-kissers or ‘golf buddies” but people with the right skills, competencies, attitude and
energy to make positive things happen.

If something does not dramatically change soon, this world famous manufacturer of planes and
trains, will be left with only trains !

In the past 14 months the long list of high level senior executive leaving Bombardier Aerospace has
grown (rightly or wrongly):

1. Chet Fuller, CSeries chief salesman, on December 3, 2013 replaced by Mr. Raymond Jones, as
VP Sales
2. Guy Hackey, CEO Bombardier Aerospace, “retires” July 2014 as 1,800 employees are laid off.
3. Philippe Poutisson, VP of Commercial Aircraft Marketing, gone August 19, 2014.
4. Raymond Jones, VP of Sales and Marketing at Bombardier Commercial Aircraft ‘departs”, after a
year in the position on January 8, 2015 just a week before ‘hell breaks loose” on January 15,
 2015.

The problem is not only in the Commercial Aircraft, it now is spreading to its Business Aircraft
Division, which has been a strong performer till now, as the Learjet 85 already on hold since last
summer and in slow development since 2007, now it been ‘suspended’ and most likely will NOT ever
be certified. I fail to see what the hell Bombardier was thinking with the $US 17.2 million (2008
price) Learjet 85, today that would be around $US 20 million, and it would compete with the $US
24.9 million Challenger 300 and the $US 25.9 million Challenger 350 (which for an extra $US 1
million gives you bigger windows and 145 nm extra range ? wow.).

The Learjet 85 program has been ‘paused’ officially last week, though it has been in a ‘coma’ since
last summer, and after 8 years of troubles it now requires a $US 1.4 billion writedown, one needs to
ask why did they forward with it in the 1st place ? The Bombardier $US 24.9 million Challenger 300
specs (ABOVE photo) are very close to the Learjet 85 with the same number of passenger seats (8),
11 kts faster and 100 nm further range, so Bombardier knew there was going to be a problem
between the two.

The $US 17.2 million (2010 price) Learjet 85 would be around $US 20 million today with inflation and
it probably would compete and ‘cannibalize’ the Challenger 300 and the 2014 newer Challenger 350
(imagine $US 1 million more for slightly bigger windows and 145 nm in range !). Anyway, sad to see
any program get canned, yes the Learjet 85 is dead, and Learjet in Wichita is left with only the $US
11.3 million Learjet 70 and $US 13.8 million Learjet 75, of which only 15 were delivered in the first 3
quarters of 2014, so on track for 20 deliveries worth around $US 240 million, no wonder 600+ are
being laid off in Wichita, there is little work, and let’s face it the $US 10 million to $US 20 million
market is tough, the Learjets can’t compete without big discounts these days-yes discounting is
common at Bombardier, well known in the industry. My money is on the new $US 20 million Embraer
Legacy 500 in that segment to be the best seller.

___

The Learjet 85 is 8 passenger with max. operating speed of 0.82 Mach or 470 kts and a range of
3,000 nm, the Challenger 300 is a 8 passenger jet, 0.83 Mach or 481 kts and a range of 3,100 nm, so
what was its purpose in the product line ? Unless they thought they would keep it between the $US
13.8 million Leajet 75 (without the discounts now offered) and $US 24.9 million Challenger 300, but
then by my calculation is should be there are $20 million, but maybe too close to cannibalize
Challenger 300/350 sales, which have not gone well in 2014, or the Challenger 605/650., thank god
for big orders from the likes of NetJets and VistaJet (more on that in another blog, but it may not be
what it seems).

As of 3Q/2014 Bombardier has delivered only 15 Learjet 70/75’s (5 per Quarter) on track to equal
2013, as that segment is struggling since 2007 when 80 Learjets were delivered and has been
decreasing every year since to 21 in 2013. The Division cannot survive on 20 Learjet deliveries per
year worth $US 240 million, so will it be shut down eventually, it cannot be a 1 product Division with
the Learjet 70/75.

The Challenger line is also down in 2014, the Challenger 300/350 deliveries in 2013 were 55, only 35
delivered by 3Q/2014, same for the Challenger 605 where 32 were delivered in 2013 but only 20
delivered by 3Q/2014, so only the Global 5000/6000 are doing well with 55 deliveries by 3Q/2014
and surely will surpass the 62 deliveries in 2013, so 2014 will not be a great year for Bombardier
Business Aircraft, and they have to be worried about the global economic slowdown affecting the
sales of high end business jets, especially the new 7000 and 8000.

Gulfstream’s new $US 43.5 million G500 (5,000 nm range at 0.85 Mach) is due in 2018 and the
$54.5 milllion G600 (6,200 nm, 0.85 Mach) due in 2019 will challenge Bombardier’s high end
business jets, the $US 50.0 million Global 5000, the $62.0 million Global 6000, and the $US 60
million Global Express XRS, which have been excellent sellers with high margins, those days are
coming to and end, as the backlog for the aircraft is decreasing, new competition equals lower
margins and global economic slowdown means lower demand, the last slowdown did not affect
billionaires too much, and sales stayed high, this time around it is different as oi and commodity
prices are low, Europe is still economically struggling, China’s fast growth has slowed down and
Russia is under EU/US sanctions and a Ruble fall of 50% with light at the end of the tunnel for higher
oil prices ($US 70 per barrel) anytime soon.

Competition will intensify, margins will come down,as new aircraft are moving into the market like
the $US 65.0 million G650ER and Dassault’s new $US 58.0 million Falcon 8X. The Global 7000 and
8000 must be a success for the future of Bombardier, they will be the bigger and have more range
than any other business jet in production It is a gamble, the 7000 is priced at $US 75 million (2,637
ft3 cabin volume and 7,300 nm range) while the 8000 is priced at $US 71 million (2,236 ft3 cabin
volume and 7,900 nm range). They need a booming global economy to be successful, and that is
not what we are seeing right now, China is slowing down, Russia has many issues, and oil will not
rise above $60 a barrel till 2017 at best, so things there will be issues to deal with at Business
Aircraft in all segments.

Investors need to weigh everything, and right now Bombardier Aerospace at least is heading into a
big storm, it may be the perfect storm, economic slow down, problems with certification, CSeries
not attracting big airline orders, especially in North America and you have a crisis on your hands.

There are also lots of stories and questions in the market about the future viability of VistaJet which
has ordered 56 Global Express (+86 options) and 20 Challenger 350’s (+20 options) dozens of
business jets from Bombardier, but that is for another blog.

Bombardier has done very well over the years with its CL-600 Challenger business jet stretch,
creating the 50 seat CRJ-100/200, the 78 seat CRJ-700 (ABOVE photo), 90 seat CRJ-900 and 104
seat CRJ-1000 line of regional airliners. Embraer decided to create a new airframe with the E170/175
and E190/195 and slowly caught up to Bombardier with a better and more comfortable airliner. Still,
1,833 orders have been received for the CRJ line (as of Sept 30, 2014), with 1,746 delivered and a
few orders here and there are coming as AA, DL, UA the big 3 airlines in the US replace their 50 seat
regional jets with 76 seat regional jets (new pilot scope clause). With the arrival of the Embraer E2
line by 2018 the end of the road is not far off for the CRJ line, it will no longer be competitive, and
surely by 2020 it may not be produced anymore.

___

A change of executives at Bombardier is surely needed, as they are just NOT getting things done, the
CSeries sales are a disaster (242 orders, but 44% of those are questionable), the Q400 is a small
side show to ATR (150+ orders in 2014) and the CRJ line is at the end of its product life cycle as it
cannot compete with the current Embraer E-Jet and will be done when the new E2’s comes out.
They stretched the Challenger from a 12 seat business jet into a 100 seat CRJ-1000 and can’t do
much more with it anymore, all CRJ’s are the same CL-600 Type Certificate, just stretched.

AirFinance Journal rates 15 regional aircraft in based on 4 criteria (value for money, re-market
potential, operational success, residual value) all very important variables when running an airline or
an aircraft leasing company, in 2013 the rating was:

#1 E190

#2 E195

#3 ATR-72-600

#4 ATR-72-500

#5 E170,

#6 ATR-42-600

#7 ATR-42-500

#8 Q400

#9 ERJ-145

#10 CRJ-900

#11 CRJ-1000
#12 CRJ-700

#13 ERJ-140

#14 CRJ-705

#15 CRJ-200

The Survey also looked at the new E2’s from Embraer and while not in production yet, the E195-E2
will be #1, E190-E2 will be #2 and E175-E2 will be #4 after the E190, that in a nut shell spells out
what the market thinks of various regional aircraft, the sign is on the wall for the CRJ’s.

The reality is and I have said this previously many times, the CSeries has been pinned in by the
Airbus A320neo and the Boeing B737Max at the upper level of the 100-149 seat segment and at the
bottom end the new Embraer E2 line and Mitsubishi MRJ.

Every OEM now is using either the new PW 1000G engine (A320neo, CSeries, Embraer E2’s, MC-21,
MRJ) or the CFM International LEAP engine (A320neo, B737Max, C919). You have old proven
airframes with new “tweeks” to the aerodynamics combined with new avionics and engines (ie. E2’s,
A320neo, B737Max) more than able to compete economically with the new airframe and engine
competitors (ie. MRJ, CSeries, C919, MC-21, SSJ-100).

So what Bombardier thought was going to be a big competitive advantage of 20% saving in fuel
costs, has fizzled out and there is basically no competitive advantage, in fact I would say the
advantage is with the incumbents with their vast number of existing well proven models in service
around the globe. The airlines are voting with their orders, they are not buying what Bombardier is
telling them, and with low oil prices the argument is getting harder.

The 100-149 seat market as discussed in my previous blogs is not what it once was or what
Bombardier forecast or hoped for and they have to face a lot more competition than they thought
they would, in short the 243 orders for the CSeries ( 63 x CS100 and 180 x CS300) after 6+ years of
marketing is an absolute sales and marketing disaster! Note the fact that 74% of current orders are
for the CS300 version, the larger aircraft will have more appealing economics, and will outsell the
CS100 4 to 1 in the end.

The 14 current customers are an odd collection of great companies, current operators, unknown
start-ups, speculators to questionable sustainable airlines, 9 look promising BUT 5 in my opinion are
not going to happen.
I believe that of the 243 orders on the books, 107 will NOT happen, for various reason (below), and
therefore I see only 136 “real” orders (56% of order book) at this time:

The CSeries customers who most likely will take delivery of their CSeries one day:

1. airBaltic, of Latvia, state owned, made its 1st profit last year in years (only $US 1.4 million) after
loses of $US 38 million in 2012 and $US 172 million in 2011 , and already talking about a IPO
(initial public offering) as the government wants out, so not really the time to be changing to an
all new fleet, and will anyone be interested ? It has 13 x CS300’s on order to replace its B737
Classics.
2. SaudiGulf Airlines of Saudi Arabia, a new start-up with orders for A320’s and 16 x CS300’s, up-
start versus Saudia ?
3. Braathens Aviation/Malmo Aviation of Sweden, has 3 x CS 100’s and 5 x CS 300’s on order,
already said it does NOT want to be the launch customer, too risky.
4. Lufthansa, the German national flag carrier has been a launch customer for de
Havilland/Bombardier on may aircraft types and models (from DHC-8’s to CRJ’s), it is the best
airline in the list with 30 x CS 100’s on order, most likely heading to its Swiss European Air Lines
subsidiary (though LH says it will not be the launch customer) to replace the 19 x 97 passenger
Avro RJ 100’s and most likely its Austrian subsidiary to replace the 7 x Fokker F70’s and 15 x
Fokker F-100’s, now that a deal with the pilots has been made.
5. Falcon Aviation, a Abu Dhabi, UAE charter operator with 2 x CS100’s on order.
6. Gulf Air, of Bahrain, the national carrier, once a large airline it is now a shadow of its past when
Qatar, Abu Dhabi and Oman each owned 25%, it has 10 x CS100’s on order and present has 28
Airbus A320/A3210 and A330’s and is trying to find a role and ‘niche’ for itself between Emirates,
Etihad and Qatar. I am not sold on the CS100 in the Middle East.
7. Korean Air, this one I do not understand, with 159 jets, the smallest being 19 x B737-800’s (plus
22 x B737-900’s) why the 10 x CS300’s ?
8. Macquarie AirFinance, of Dublin, 186 jets, 73 operators in 43 countries, this is a good lessor, the
order came Sept 26, 2014 at a badly needed time, Farnborough was a ‘disaster’ for CSeries and
high executives coming and going, so the order for 40 x CS-300’s worth $US 2.8 billion, we shall
see – neutral on this one.
9. PrivatAir, of Germany, flies 6 Boeing VIP/BBJ aircraft, why they want 5 x CS 100’s is beyond me,
but like Comlux with the SSJ-100, maybe want to do the VIP completions.

The CSeries customers who most likely will NOT take delivery of their CSeries for various reasons:
 1. Odyssey Airlines, London, England planned start-up, trans-Atlantic London City to Toronto Island
? with a planned 10 x CS 100’s on order ? I don’t think so, I fail to get it, I guess.
2. Republic Airways of the USA has had 40 x CS 300’s on order since Feb 28, 2010 when it owned
Frontier Airlines, which it sold in December, 2013 to Indigo Partners and now surely has NO need
for the aircraft as it is a ACMI provider to the BIG 3 (UA, DL and AA) with 241 regional aircraft
below the 76 passenger pilot scope clause. This order is DEAD, but for now CEO/President Bryan
Bedford won’t admit it. Presently operated 5 x Embraer 190’s (99 seats) for Caesars
Entertainment Corp., which is now in financial trouble.
3. Lease Corporation International, of Dublin, Ireland, it has only 15 aircraft in its portfolio (A320 to
B747-400F) and yet has orders for 3 x CS100 and 17 x CS300’s, something just rubs me the
wrong way with this one, professional intuition ?
4. Iraqi Airways, has 5 x CS 100’s on order, with IS in control of a large area of Iraq, the Kurds doing
most of the fighting against IS, Sunni versus Shia disagreements, Iraq is a failed state, whose
future is not certain as one state, and then the oil price ? its all they have to finance things with.
5. Ilyushin Finance of Russia, has 32 x CS300’s on order, forget it now, the Rostec deal to build
Q400’s is off, and Russian banks and government are under EU/US sanctions, times are tough
for Russia now with oil down 50% and the Ruble down just as much. Read my last 3 blogs on the
Russian aerospace industry, it says it.

The 1st Bombardier CS300 (135 to 160 passenger seats) was seen outside its Mirabel hangar in early
November, it is the 6th CSeries aircraft to enter final assembly, it is the biggest Bombardier aircraft
ever built, and from the few early orders, it has 180 orders or 74% of total orders and it will be the
$US 71 million CS300 that will make or break the CSeries program. The market segment which it
occupies (125-149 seats) has been a disaster for Airbus and Boeing, as to date only 49 x Airbus
A319neo’s and 60 x Boeing B737-Max7’s have been ordered or only 1.7% of all neo’s and Max’s
ordered (6,284). The BIG question for Bombardier, is it the aircraft themselves, shortened versions of
a successful airliner normally have not done well, DOC’s are really +/- the same, price is a little lower
but seat economics not as good or is it the market itself ? Bombardier forecasts show 6,900 new
aircraft in the 100-149 seat segment (345 per year average), which is highly optimistic and reality is
showing its not a even quarter of that right now, BUT the CS300 could ignite that segment, it is up to
Bombardier’s NEW sales & marketing executives to do a better job in selling its value proposition.

___

With the CSeries program now expected to cost around $US 4.5 billion and the decreasing
prospects for Q400 and CRJ sales, it is no wonder that Bombardier is looking to have a final
assembly line in China, especially since the Q400 line for Russia is off the table for good. According
to Mike Arcamone, President of Bombardier Commercial Aircraft, the idea is being seriously
considered in Montreal, as the reality is that the Q400 and CRJ have little future in them left, orders
will not be there to justify production beyond 2017, as few new customers are coming to the table,
only existing operators are topping up, not a good sign.

Yes, various manufacturing is underway in China on Q400 from the front, mid and aft fuselage at
Shenyang Aircraft Corporation (AVIC) to the CSeries center fuselage, but Bombardier is waiting for
orders to justify it, yet there is NO Q400 operator in China today, though a LOI exists for 30 x Q400’s
from new start-up, Sutong Airlines, and the last ATR-72 from Hainan is long gone, so no ATR’s in
China as well, the Chinese impose a 24% import tax on aircraft below 90 seats, so they just have
poor AVIC Xian MA60’s and MA600’s, and those were ‘copies’ based on the poor Antonov AN-26, so
you have a poor version of a poor aircraft, and in this case two negatives do not equal a positive !

Now Bombardier and COMAC (Commercial Aircraft Corporation of China) already have some
cooperative agreement on the new C919 (Chinese narrow body airliner in A320 category), the
Chinese need help if they want to be the 3rd largest commercial aircraft producer in the world (their
goal is to be #1, but they need to learn to walk before they can run), and for that they need
Bombardier.

The four initiatives on which COMAC and Bombardier will be collaborating as part of this initial
phase are commonality on: 1) the cockpit human-machine (crew) interfaces, 2) the electrical
system, 3) the development of aluminum-lithium standards and specifications, and 4) areas of
customer services in terms of technical publications and co-location of teams. All four projects are
expected to be completed over the next 12 months and in conjunction with the C919 aircraft
development schedule.
This first collaborative phase further reinforces the strategic long-term relationship between
COMAC and Bombardier and demonstrates the complementary nature of the C919 and CSeries
aircraft programs. Both parties will continue exploring other possibilities for cooperation with
regards to aircraft program commonalities, joint procurement, synergies in development and
customer services, as well as collaboration on Bombardier and COMAC programs.

Since COMAC cannot buy Boeing, Airbus or Embraer, it can possibly buy Bombardier’s Commercial
Aircraft Division in a few years, when there is no CRJ and Q400 line and if the CSeries is not the
winner Bombardier hoped for. Then like with Canadair, they can sell Downsview Airport for probably
$US +1 billion to some developer, and focus on business jets in Montreal, maybe ? probably.

The current cooperation is about advancing commonalities between the CSeries and the C919,
sales, marketing, customer service, technical publications, parts distribution, etc. so there is a lot of
help from Bombardier to state owned COMAC (Commercial Aircraft Corporation of China), which
just certified its 78 seat ARJ-21-700 (a modernized DC-9-15), and there is a plan to stretch it into the
ARJ-21-900 a 98 seat version.

On top of the C919 the Chinese are planning the C929 a widebody airliner in cooperation with with
Russia’s UAC (United Aircraft Corporation), and therefore it is not a big stretch to see some M&A
(merger & acquisition) activity in the future between the two manufacturers, a future line up of C919
(vs A320, B737Max, MC-21), CSeries (vs Embraer E2 190/195, MRJ, SSJ) and the MA700 turboprop
(vs ATR) would be a realistic line up for anyone considering the #3 position. Time will tell, but I do
not think I am too far off with my prediction.

The CRJ-900 has been ordered by China Express Airlines for 25 units while LCC Loong Air has a LOI
for 20 x CSeries. There is an opportunity in China for turboprops, the MA60 and eventually the Xian
MA700, but imports have kept small regional equipment out of the market as anything below 25
tons pays 17% import tax, roughly $US 5.5 million for a Q400.

The problem is why would China be interested ? China just finally certified its ARJ-21-700 after 9
years behind schedule, it will seat 90 in a 1 class seating arrangement and competes with the CRJ-
900/1000, the Chinese will have to learn how to support aircraft now, something new to them. The
Chinese are working on their new 70 passenger fly by wire Xian MA700 regional turboprop which
‘should’ fly in 2017 and ‘should’ be certified by 2019, that will compete with the Q400, as it will be a
‘combination’ of the Q400’s speed and the ATR-72’s economics. China needs to learn about support,
and now that the AR-21 is finally certified, it will look to other OEM’s for guidance and help.
One way to get the know-how is to buy and OEM, and it will never be Boeing, Airbus or Embraer, but
a struggling Bombardier could be on the table, sell the Commercial Aircraft Division and keep the
business jets-for now.

The $US 34 million 78 passenger Bombardier Q400 has done very well, with 514 orders and 471
deliveries (as of September 30, 2014). Backlog now is around 1.7 years only (42 aircraft). It was
designed to be a fast turboprop with 360 kt max. cruise speed and be able to compete with regional
jets in the 300 nm to 500 nm sectors. Unfortunately it got squeezed in by regional jets at the top end
and by the ATR-72 which has been constantly improved at the bottom end. Airlines have found that
below 300 nm the ATR-72-500/600 is more economical than the Q400 and above 400 nm the
regional jets are more economical. The aircraft has been discounted a great deal to compete with the
$US 24 million ATR-72-600, with huge discounts in Canada to Porter Airlines and WestJet Encore,
just to keep the ATR-72 out of Canadian airlines. Sadly, it never really penetrated the US market in
any large numbers, presently there are only 2 operators (Horizon Air x 52 and Island Air x 2), Republic
Airlines has swapped its Q400’s with FlyBE (UK) E170’s. In Canada there are 5 Q400 operators
(Jazz/Chorus x 21, North Cariboo x 2, Porter x 26, SkyRegional x 5 and presently 16 at WestJet
Encore for a Canadian total of 70, but Westjet Encore may take up to 29 more (for a total of 45). In the
US market they did not use the aircraft for its speed, just capacity, as average block times are 60
minutes, the aircraft does best with block times of 90+ minutes to take advantage of its fast speed.

Sadly, the Q400 is not competitive with the new ATR-72-600 on economics, and while it struggles for
a few orders, ATR sold 150+ aircraft this year, 90% were ATR-72-600’s and production is going to 100
a year (90 x 72’s and 10 x 42’s), since Bombardier left the DHC-8 turboprop market in 2009, ATR has
solidified its position in that market, and doing very well, even parent Airbus is now taking note.
Backlog of Q400 around 42 aircraft, ATR backlog 320+, says it all !

___

Bombardier needs to dump the CRJ and Q400 line in the next few years, it closed down the DHC-8-
100 line 2005 and the DHC-8-300 line back in May 2009, now ATR has the whole 48 to 78 seat
turboprop market to itself, and 2014 was a banner year for ATR, with 150+ orders and a backlog of
320 aircraft, with production heading for 100 per year by 2017.

We not hear much about the $74 million Global 7000 and 8000 business jet development and
certification, it obviously is also draining cash from the company, and it was always a big risk
launching the 2 programs, as the possible customer base is very small and with the current political
and economic situation around the world, you have Russians avoiding western business jets,
China’s business aviation market is cooling down, and oil prices below $50/barrel will reduce the
available cash to oil producing countries like Saudi Arabia, UAE, Kuwait, etc. and cause budget
problems in Nigeria, Venezuela, Iran, etc. and we will see that impact the high end of the business
jet market, which has done so well since 2008 while the smaller jet segments struggled to recover.

The Global 7000 and 8000 have a very narrow market range, there are at present 1,645 billionaires in
the world (1/3 inherited the wealth), and these airplanes are for billionaires and possibly the top
1,000 private and public corporations in the world, so at best 2,645 prospects of which some have
Boeing BBJ’s, 787’s, 747’s, 777’s or Airbus ACJ’s, A340’s and even A380’s and some of these aircraft
with VIP interiors can hit $US 500 million. The world is now focusing on the income disparity, where
last week Oxfam reported that the top 80 wealthiest individuals in the world, control the same
wealth as the bottom 3.5 billion people, and that the top 1% control 50% of the wealth, the backlash
against the ‘system’ is beginning, and the crony capitalism between big business and government,
we are going to see a backlash against this inequality in the years to come and the high end of the
business market may see signs of it first.

In the past 18 years, both Airbus and Boeing have done reasonably well with their ACJ (Airbus
Corporate Jet) and BBJ (Boeing Business Jet) sales, with orders of 394 aircraft or roughly 22
aircraft per year between both OEM’s. This segment includes Government VIP aircraft as well and
the aircraft order the breakdown (as of mid-2014) is :

Airbus with 178 orders or 45% of orders (19 x A318, 67 x A319, 17 x A320, 1 x A321, 3 x A300, 3 x
A310, 41 x A330, 14 x A340, 1 x A350 and 1 x A380).
Boeing with 216 orders or 55% of orders (11 x B737, 159 x BBJ, 1 x BBJ Max, 5 x B757, 8 x B767, 6 x
B777, 14 x B787, 3 x B747-400, 9 x B747-8).

SIDE NOTE: Yes, a $US 414 million (list price, airline configuration Airbus A380 with 5,930 ft2 of
floorspace) has been ordered by His Royal Highness Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud
who is the founder and chairman of one of the world most successful and diversified financial
investment enterprises, Kingdom Holding Company (KHC), with total assets of around US$ 25 billion.
and named by Forbes Magazine as one of the most creative investors in the world. Prince Alwaleed is
the only private owner of a Boeing 747-400. The price of the A380 and the VIP completion is estimated
at $US 600 million, which contains within its 3 floors a conference room, concert hall, elevator into the
airplane, and even a garage.

THIS ABOVE MENTIONED A380 VIP ORDER, HAS BEEN CANCELLED, AND AIRBUS HAS GONE OUT
OF ITS WAY TO LET EVERYONE KNOW THIS.

The Learjet 85 (ABOVE photo) has been in trouble a long time, for 8 years Bombardier worked on it
with it’s 1st flight only in April, 2014 and now it needs a huge $US 1.4 billion writedown, an expensive
project that most likely will not ever be certified, as Bombardier has too much on its plate right now.
The Learjet 85 was to fill a hole between the Learjet 70/75 and the Challenger 300/350 and would
have given new life to the Learjet brand which is sad shadow of its former days. The problem was as
Bombardier had to realize that the Learjet 85 would have competed with the Challenger 300/350’s,
with same performance, number of passenger seats but probably a lower price than the Challengers.

It was foolishness to go and certify 4 major jet programs at once (Lear 85, Global 7000, Global 8000
and the CSeries) and this was expected. What does the future of Learjet hold now ? only 20 Learjet
70/75 will be delivered in the 2014 year ($US 240 million in revenue), some sub-contract work on
Global 7000 and 8000 but with 600+ lay offs now and no new Learjet, the brand is very uncertain
future !

___

The Lear 85 has been in trouble for a long time, it was to fit between the $US 13 million Learjet
70/75 and the $US 21 million Challenger 350, it was not weak demand, as it was not certified and
like the CSeries taking its time through certification, people get worried when they see turmoil in a
company, they surely are not eager to buy from it. The departure of Raymond Jones, sure has not
helped, I like Richard Aboulafia’s comments on this “Either top management is doing the classic,
‘Geez’ we’d better get rid of people to make it look like we’re not the problem, or it’s everyone
around them saying, ‘I don’t want to down with the ship”.

The last thing Bombardier needs is a reduction in demand in the large business aircraft market, that
is its bread and butter for the future, and we Canadians are proud of Bombardier, but sad to see it
mismanaged and loosing ground to bad decisions and too much internal politics. Maybe, it is time
to look for an outside CEO, they tried it in 2003 with Paul Tellier, but after 23 months into his 36
month contract he was out, something has to change, because things could be getting worst, and
the market will decide what value to put on Bombardier. The company has lost its way, as you read
in previous blogs, mismanagement is rampant in middle ranks, Quebecois nepotism has put ill-
qualified people into positions that they should not be in, a poor corporate culture, and Canadian
and UK tax payers have helped this company a great deal along the way, with $US 800 million in
loans ($US 350 million from Federal government, $US 300 million from UK government and around
$US 150 million from the Quebec government) which Bombardier says is within the WTO rules ?

This company exploded on to the global aerospace scene very quickly having bought Canadair in
1986, Short Brothers in 1989, Learjet in 1990 and de Havilland in 1992, in just 6 short years it went
from zero to a major aerospace manufacturer, and if it is not careful in the next 3 years it can
implode just as quickly !

Till next time, thank you.

COMAC and Bombardier Sign Definitive Agreement to Establish

Commonality Opportunities Between C919 and CSeries Aircraft

March 21, 2012ShanghaiAerospace, Press Release

1 of 1 :

Low Resolution (90 KB)High Resolution (200 KB)

Further to the framework agreement signed on March 24, 2011, Jin Zhuanglong, Chairman,
Commercial Aircraft Corporation of China Ltd (COMAC) and Pierre Beaudoin, President and Chief
Executive Officer, Bombardier Inc. signed today a definitive agreement covering program
commonalities between the C919 and CSeries aircraft. More specifically, the two leading aircraft
manufacturers have agreed to cooperate on four distinctive projects to be executed as part of the
first phase of COMAC and Bombardier’s long-term collaboration on the C919 aircraft and the CSeries
families of commercial airliners.

The four initiatives on which COMAC and Bombardier will be collaborating as part of this initial
phase are commonality on: 1) the cockpit human-machine (crew) interfaces, 2) the electrical
system, 3) the development of aluminum-lithium standards and specifications, and 4) areas of
customer services in terms of technical publications and co-location of teams. All four projects are
expected to be completed over the next 12 months and in conjunction with the C919 aircraft
development schedule.

This first collaborative phase further reinforces the strategic long-term relationship between
COMAC and Bombardier and demonstrates the complementary nature of the C919 and CSeries
aircraft programs. Both parties will continue exploring other possibilities for cooperation with
regards to aircraft program commonalities, joint procurement, synergies in development and
customer services, as well as collaboration on Bombardier and COMAC programs.

“I am delighted that, leveraging on our corporations’ mutual strengths, synergies are being
developed into mutually beneficial, tangible initiatives. This will certainly contribute to enhancing the
competitiveness of not only the C919 andCSeries aircraft programs, but also of COMAC and
Bombardier’s overall businesses,” said Mr. Jin, Chairman, COMAC.

“I am pleased to see the framework agreement signed in March last year reaching this important
milestone,” said Mr. Beaudoin, President and Chief Executive Officer, Bombardier Inc. “We are
confident these four initial projects will build on the complementary nature of our respective
products and expertise while helping to maximize both parties’ cost savings and market shares.”

By signing this definitive agreement, Bombardier and COMAC are embarking on a first step to create
opportunities for customers of the CSeries and C919 aircraft to realize cost benefits from the
operation of both aircraft families.

January 20, 2015

ABSTRACT: LIAT “The Caribbean Airline” on the Brink

of Doom – BUT Still in Denial and Brushes Off Calls for a
MAJOR Restructuring, why is it that the Caribbean is a
graveyard for airlines ? no local airline has been
financially successful for any length of time if there is
no government ownership, and even then they go bust !
I think it comes down to poor management and political
interference and corruption ! where are the accounting
books for LIAT ? hundreds of millions of EC taxpayers
dollars have gone into the airline, where did it all go ? a
black hole that no one dares to look into ? well the EC
countries are running out of money, some close to
defaults on loan and bond obligations and LIAT will have
NOWHERE to turn to for money, and then ??
Today, Mr. David Evans takes over as CEO at LIAT “The Caribbean Airline”, 7 months after the
previous CEO, Capt. Ian Brunton resigned over his attempt to turnaround the forever struggling
regional airline that serves 22 destinations with around 112 flights per week and a current fleet of
DHC-8-300’s and ATR-42-600’s and ATR-72-600’s as it is going through a fleet change over to 12
ATR-42/72 aircraft in 2014.

This is an airline that is sadly in very bad shape, now majority owned by Government of Barbados,
and 9 other Eastern Caribbean Governments, mainly St. Vincent & the Grenadines, St. Lucia and
Dominica. The entire Eastern Caribbean, except oil producing Trinidad and Tobago, have been in
economic stagnation since the global economic crisis of 2008 when LIAT carried 1.1 million
passengers, last year around 850,000 were carried, a reduction of 23% in inter-island traffic since
2008. In the end they will see that there are no savings in fuel costs, yes maintenance costs will go
down with new aircraft, but with lease and finance obligations, monthly costs will substantially
increase with the new fleet.

In with the new ATR-72-600 and out with old DHC-8-300 – can you tell the difference ? LIAT’s
Chairman and Board hope so, because its a very costly $US 260 million in a new fleet when they can’t
afford it and employees salaries are late every month.

Sadly, CEO’s have come and gone at LIAT and the various island states rarely cooperate to the
detriment of citizens of the island states. Having worked with several Government airlines in Eastern
Europe and Africa, I know the challenges of trying to balance state interests with economic
interests, and price these state owned airlines pay for Government incompetence, interference and
corruption (Read my blog: NO More State Aid to Government Owned National Airlines, Fly on Your
own or Go Bankrupt 2/2013).

Now in 2012, Capt. Ian Brunton came to LIAT as CEO from being the previous CEO at Trinidad &
Tobago’s Caribbean Airlines (CAL), an operator of 2 x B767-300’s, 11 x B737-800’s and 6 x ATR-72-
600’s and the acquirer of Air Jamaica in 2011, sadly the combined airline has been loosing around
$77 million a year. That merger with Air Jamaica has not gone well, sadly it is not a unified airline
and nothing seems to unify the island states, be it Federation, CARICOM or even West Indies Cricket,
too many divisions exist for common unity in the islands, and each island nations is out for its own
interests. The islands don’t get along with Trinidad and Tobago, it has oil revenues and there is
some jealousy in play here, some believe Capt. Ian Brunton came to LIAT from Caribbean Airlines
only to speed up its demise so that Caribbean Airlines can swoop in and take over LIAT’s routes,
while CAL wants the routes, and the ATR choice at this time is very suspicious on many levels, in the
end it was the Board that approved the deal and approved the CEO from Trinidad.

I have worked in the Caribbean many times with various airlines and it is probably one of the hardest
places to get things done because, everyone thinks they are right and there is great resistance due
to pride to change anything, to the detriment of the Eastern Caribbean, look where it is today,
economic stagnation, tourism in decline as tourist find cheaper alternatives in Cuba, Mexico,
Dominican Republic, and locally no new initiatives to change any of that. I was invited in February
2014 to participate on Island Media Communication Inc.’s “Time to Face the Facts” a local
live/interactive programe on Caribvision hosted by Jerry George as an expert on the Caribbean
airline industry, an industry that has seen so many airlines go bust.

Just in the past few years (ie. RedJet, Carib Aviation, Cardinal, Nevis Express, Caribbean Star/Sun,
Air Caribbean, BWIA, Air Jamaica, Guyana Airways, Dutch Caribbean Airlines, Curacao Express, etc.).
Even now, Bahamasair and Cayman Airways are just holding on, while Caribbean Airlines which
recently bought Air Jamaica struggles as it has foolishly decided to get B767’s and fly trans-Atlantic
to London, just like BWIA did and ultimately paid the price for that move.
Colorful Air Jamaica- sadly gone

With Ian Brunton’s arrival at LIAT, instead of dealing with the normal Restructuring issues of a
troubled company, 1. Focus on Liquidity (short term cost cuttting, stop the bleeding, top down
actions 2. Focus on Sustainability (performance enhancement, ensure profitable growth, improving
the business 3. Focus on Growth (strategy re-defined, future direction, leverage improved
capabilities, LIAT goes out and leases 8 brand new $US23 million a piece 68 seat ATR-72-600’s (at
around $US 180,000 per month EACH) and BUYS 4 new $US18.5 million 48 seat ATR-42-600’s
($100 million with training, spares, etc.) to replace its 16 DHC-8-100’s and DHC-8-300’s because they
are too old and therefore too maintenance intensive and burn too much fuel, though that not really
correct and when you are bleeding cash as LIAT is and cannot pay salaries on time, a questionable
move for sure.

Taking on $US 260 million in new aircraft when you can’t even pay salaries on time ? the DHC-8 fleet
is getting on in age, average age is 20 years old, but still has life in it, JAZZ in Canada has 64 of the
DHC-8’s (100’s and 300’s) and they are now 25 years old on average, and will be around for some
time still. LIAT argued the new ATR-72/42 are more fuel efficient, well they are not, powered by the
more powerful PW 127 engines, the ATR-42-600 burns 1,246 lbs on a 200nm trip, the ATR-72-600
bursn 1,363 lbs on the same 200nm trip, while the DHC-8-300 with the PW125 engine burns 1,214
lbs on a 200nm trip, so more fuel efficient the ATR’s are not and one wonders why the
misinformation from LIAT.

LIAT’s DHC-8-300 old but still more fuel efficient than the new ATR’s

As a former aircraft salesman of business jets and regional commercial aircraft, I know there are
very large commissions out there on deals made, what was the driver of such a decision at such a
precarious point in time in LIAT’s history ? The added burden of financing costs and new lease
obligations to the tune of about $US 1.4 million a month, will increase CASM (cost per ASM) over
the replaced DHC-8 fleet, as maintenance savings from a new fleet cannot overcome the added
finance and lease obligations, making route profitability even worst than before ! My estimate of
LIAT’s CASM was $0.320 before the fleet change when average fleet seating was around 48 seats
per aircraft (DHC8-100’s and mostly 300’s), now average seating will be 61.3 seats per aircraft (up
28%) which should lower CASM, but the added financing/lease obligations will keep unit CASM
about the same, but trip costs are higher and LIAT has to fill more seats per flight to breakeven.

As an example, BGI-GND (Barbados-Grenada) a 171nm one way leg (342 nm round trip), current
round trip fare is $324.96, a gross yield $0.950/RPM (very high), yet net fare is only $171.00 as
taxes are $153.96 per round trip or 47% of the total gross fare !, tax as a % of net fare is 90% ! so net
yield is $0.500/RPM, which means that if LIAT’s CASM is $0.320/ASM (probably higher
$0.36+/ASM), the break even load factor on the route is 64%, which is 32 passengers with the DHC-
8-300 and 43.4 passengers for the ATR-72-600, in other words you need to carry 35% more
passengers with the ATR-72-600 vs DHC-8-300 to break even (in this example). Now LIAT’s break
even passenger loads will be higher through out the system to different degrees, and now you see
why the situation at LIAT has deteriorated even further, forget the fuel savings and maintenance
savings, the cost per ASM has gone up and not down with the ATR’s. Sadly, LIAT had the choice to
go for refurbishment of its DHC-8-300 fleet, an offer was apparently made by Bombardier to
refurbish the oldest DHC-8’s and left it open for 2-3 Q400 aircraft for the longer sectors to San Juan,
Santo Domingo or Curacao, why they did not choose that not sure, but it would have saved a lot of
money for sure.

The above example, and I have analyzed 24 different routes with some being even worst for LIAT,
demonstrates 2 very BIG problems for LIAT. First, the HIGH taxes, when you have 47% of a ticket in
taxes, then no wonder ticket prices are high (yield $0.950/RPM in the above case) which OFF
COURSE effects demand. We know from simple principals of Price Elasticity that aviation is elastic,
which means that for any price increase, total demand and thus total revenue goes down and when
price goes down demand and total revenue go up. LIAT suffers from being taxed too much by the
local governments and that has to change. Short haul routes have a price elasticity of 1.2 to 1.5
which basically means reduce fares by 10% and you get 12-15% increase in elasticity of demand.

Therefore, the Eastern Caribbean Governments need to lower taxes and that will spur on demand, a
50% reduction in those taxes may generate roughly 22% decrease in ticket price, which could drive
demand up by 33%, we have seen what low cost airline Rynair has done in Europe with very low
fares and it is now the #1 airline in passenger numbers in Europe, as its low fares have stimulated
millions of new air travelers every year. I am worried that the new CEO David Evans stated that the
Caribbean tax burden is not significantly high compared to other parts of the world, which I have
not seen anywhere yet where 40-50% of an airline ticket is taxes, yes lighten the tax regime and
governments will increase demand thus the tax ‘take’ back to government. The reason the Eastern
Caribbean tourism is struggling today, is that it cannot compete with the low cost destinations
elsewhere in the regions (ie. Cuba, Mexico), high taxes are a BIG part of the competitive
disadvantage, and they need to wake up fast, because they are in their 6th year of economic
stagnation according to the EC Central bank.

A major issue is also the number of employees, 850 for 12 turboprop aircraft with a total seating
capacity of 736 seats, or 71 employees per aircraft, which by the way is the same as WestJet
Airlines in Canada which currently has 113 aircraft and 8,000 employees, so something is not right
with the employee numbers, productivity is way too low. The airline has become a big employer in
the islands, and from my experience one really should not have more than 50 employees per aircraft
of this size, so 600 employees at most, ideally I think 500 would be sufficient, with productivity
improvements, in short 350 employees need to be laid off, that will help a great deal in restructuring
LIAT to be competitive on its own.

Winair’s DHC-6-300’s could fly LIAT’s “social” routes

Secondly, the problem for LIAT now is that by having bigger aircraft and more seats/flight, the
weaker routes will be worst off, the above example showed LIAT now needs 11.4 more passengers
per flight on the BGI-GND route. LIAT presently reports 39 of its 112 weekly flights are money losers,
so the situation with the ATR’s has now gotten worst for those routes. Its time to bring in small
airlines as code share partners to fly some of those routes as partners, something LIAT did for
awhile with Carib Aviation, which went under because LIAT took its pilots and was behind on
payments to the small regional. So back to LIAT and the mess it is in.
Winair contracts Guadeloupe based Air Antilles Express’s ATR-42 to fly to Dominica

Off course, Capt. Ian Brunton is a pilot, and the first thing he focuses on is the aircraft at a time the
airline has little money left. The change over did not go well during the summer of 2013, pilots nd
mechanics in training and in short, lots of flights delayed and cancelled during the high season,
Capt. Ian Brunto resigned in September, 2013 leaving an airline in distress, salaries were delayed
and after a year, technical manuals to the DHC-8’s were not up to date on some DHC-8 aircraft had
not been sold as planned causing a cash flow crisis al LIAT, though again 1 year later ? where is
management in this ? The problem has always been at the top at LIAT, revolving door for CEO, a
Chairman (Dr. Jean Holder) that has for 10 years watched LIAT decline but has taken few major
steps to stop the decline, and a Board that has too many politicians and few businessmen, so
paralysis and denial of the facts from top levels has kept things the same, and its now a matter of
WHEN not IF LIAT will fail.

Yet, we all know that doing the same over and over and expecting a different result is a recipe for
failure, that many airlines all over the world, small and big have experienced and wished they had
changed something before the end came, today LIAT is on course for the end. So now, we have a
new CEO at LIAT, Mr. David Evans, a seasoned British Airways executive, with regional airline
experience but never a CEO but Commercial Director at 2 small airlines in the Middle East. As good
as he may be, he is powerless to change anything without the support of the Chairman and the
Board, and in the lower ranks, it is highly very unlikely he will find good help, I have been told too
many people are in high positions at LIAT that should not be. With so few airlines around, few have
experience in managing a properly running airline, and many do not have the skills and knowledge
needed of their position, its why an outside firm has been hired to tell them which routes are and are
not profitable and the marketing, PR and communications have been singled out by several
seasoned executives in the Caribbean as being very poor.

The airline has been in trouble for the past 25+ years, and he will find few people in the airline that
have experience working anywhere else, so new ideas will be hard to find, but he will find a
corporate culture resistant to change as former CEO’s have found. They had to get an out side firm
to tell them which routes were making money and which were not ? with 850 employees you do not
have anyone keeping a daily track of each flights financial performance ? or you cannot get all the
maintenance manuals in order for the DHC-8’s so they could be sold at the right price ? when the
decision was made in early 2013 to sell them ? Where is there any management accountability ? you
don’t have it at the top, and it spills down to not having it at the lower levels, no corporate culture of
accountability, just excuses for too many years. Time to remove the Chairman and the Board, so the
new CEO has a fighting chance to revive LIAT before it flat lines.

We have yet to hear anything coherent from Chairman Jean Holder, he is now threatening to reduce
the network, but orders a new fleet of larger aircraft, and says that shrinking the airline will loose its
competitive advantage and that competition is threat to its survival. Sadly, there is NO competitive
advantage at LIAT, it has a monopoly on Eastern Caribbean routes, people fly it because they have
no choice, but they are starting to have choices in St. Kitts with Seaborne and in Dominica with
Winair and soon St. Lucia, and the people are choosing the new guys. WHAT is he and the Board
waiting for ? you have a new CEO now so get on with the turnaround and start making the changes
needed for survival.

It is not rocket science gentlemen, just common sense, the ATR’s are a done deal, stupid acquisition
at this time, but cannot change it now so you move forward with the expensive ATR’s and the
financial burden the balance sheet has taken in 2013 and the hits the income statement took in
2013 and will take in 2014+. The citizens of the Eastern Caribbean need to voice themselves nice
and loud, hundreds of millions of $US have gone to LIAT and what do they get in return ? high fares
and taxes and poor service. time to make politicians accountable, best at the ballot box in the next
round of elections, as only the politicians can now really help LIAT by appointing a Board that can
guide LIAT out of its years of mismanagement.
Ah the good old days at LIAT ! when life was simple and easy with no worries, a HS748 with old
livery

With Caribbean Airlines in Trinidad and Tobago just itching to take over the market from LIAT and
Winair in St. Maarten now flying ATR-42’s into Dominica and soon St. Lucia, the vultures are circling
LIAT’s Eastern Caribbean Market, time is ticking for LIAT, and I have been asked many times what
can restore LIAT ?

The first step is to start at the top, something applicable to many airline owners and executives
today:

1. Tell the truth

2. Welcome the truth

3. Tackle the problems, do not ignore the problems, denial gets you nowhere

4. Agree to disagree, but still commit to problem solving

5. Reward the messengers of bad news, don’t punish or ignore them

6. Build integrity
Corporate and financial restructuring can create value, you need to fix the business which is the
operating cash flows and then fix the financing, the debt/equity relationship. There are several ways
to go about changing LIAT:

1. Incremental change, is good when governments have no guts to make radical changes and the
company lacks relevant expertise and resources, while this is LIAT to the tee, the situation requires
something more radical than small incremental changes, LIAT has been doing that for 25+ years
and where has it gotten with it ? nowhere.

2. Re-engineering, when high cost savings are needed but stakeholders have no guts you van try
improvements without big changes to labor contracts and negotiations. You look for elements
within the operation that can be redesigned, like online check ins, faster aircraft turnarounds to
more automation. This requires lots of technical skills, leadership, and ability to implement change,
not something LIAT is able to do at this time.

3. Hardball negotiations, need for change but still shying away from a total transformation, you use
skilled negotiating tactics to improve labor contracts, airport fees, leasing costs, financing terms
and conditions and across the board supplier discounts. Needs experienced negotiators, and in
LIAT’s case much of the fight will be with shareholder governments for change, which at this time is
a no go deal, the Board probably hired a CEO that has no fight in him, unlike former CEO Mark Darby
who had fight in him, but was sacked early.

4. Transformation, when you have a strong case for cost savings, strengthening the competitive
position of the airline, and identified new sources of optimizing existing assets, you are ready for a
new cost reduction model, BUT you need the shareholders behind you 100%. Change is always
difficult, especially in uncertain times when the airline’s future rests on the outcome of a successful
change. Here leadership is key, something that has been totally lacking in LIAT’s Chairman and
Board for years (you can read that in Mark Darby’s account of his days at LIAT, on the web). This is
what LIAT needs, strategic and financial restructuring as soon as possible, if it is to survive to see
2016.

I have undertaken several airline restructurings, and want to save that topic for another article but in
LIAT’s case, I will summarize what I would need to do if I was CEO :

1. Strategic repositioning, a strategy based on anew business model, with a clear vision, mission
and customer value proposition, using value chain design, balance scorecard and strategy maps,
need to have leadership driving this, and everyone at LIAT to understand the new strategy and
everyone on board and aligned with it. With American Airline’s Eagle operation shut down in San
Juan, Puerto Rico there are many opportunities in that market.

2. Reorganisation, this is the structure part, staffing is to be reduced, skills improved with new
training more flexible work rules, change management implemented, out with the nay sayers and
keep those that are on board willing to change and worked for a better LIAT.

3. Value chain improvements, revenue enhancements through more code shares, new destinations
to hubs. Cost reduction in staff, but also dropping direct services to markets that do not produce
profit, code share with 18-30 seat operators on those thinner routes. Reduce assets, maybe 12
ATR’s are too much, since they are new, there is no reason why the ATR’s cannot fly 8+ hours daily.
With revenue enhancement, cost reductions we get improved profitability, positive cash flow, then
better ROIC (return on invested capital), somewhere around 12%, should be the target, so that the
airline can sustain its growth without more Government aid.

LIAT has a future, it is sadly in the hands of the Chairman and the Board, the CEO is in the middle but
he needs to be tough and push for change, otherwise sit back and enjoy the nice weather and wait
for the end to come, and it will come, sadly. I first worked with LIAT in the late 1980’s, love the airline,
love the people of the Eastern Caribbean, just want to see a viable LIAT to be the best it can be, a
regional from Santo Domingo to Kingston to Panama, Colombia, Guyana to St. Maarten and
everything in between.

Best wishes Mr. David Evans (CEO), wish you the very best in the next 3 years, you will either be the
hero for saving LIAT or the heel that buried it ! I and most of the good people of the Eastern
Caribbean hope you will be the hero and make LIAT the airline it deserves to be and can be.

Till next time, thank you to those that read this all the way through !
May 3, 2014

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