Fitch: Bombardier's Key Delta Order Reduces CSeries Program Risk

NEW YORK & CHICAGO--(BUSINESS WIRE)-- Bombardier's (BBD) firm order from Delta Airlines for 75 CS100 aircraft improves the prospects for the long-term success of the CSeries program, Fitch Ratings says. This new order, with Air Canada's February letter of intent to purchase 45 CS300 aircraft, strengthens the CSeries program's credibility and demonstrates important progress in building a viable program fleet and establishing a competitive niche within the broader commercial aircraft market.

Pricing related to the Delta order and Air Canada letter of intent is a concern, as evidenced by BBD's plans to record a charge of approximately $500 million in the second quarter to reflect the impact of these two agreements. However, Fitch believes the strategic importance of the orders outweighs concerns about their impact on BBD's profitability from deliveries during the first few years of the program. Still, substantial future orders at attractive margins will be needed to make the CSeries profitable over the life of the program, which is key to improving the company's cash flow.

BBD still faces challenges associated with the CSeries program, including execution on the production ramp-up and the potential for order cancellations. Republic Airways had 40 CSeries orders when it filed for bankruptcy in February 2016. Fitch believes the status of the Republic order is uncertain, at best, as Republic plans to operate a fleet of Embraer aircraft following bankruptcy.

The CSeries is just one aspect of BBD's overall credit profile. Other rating concerns include high leverage, weak demand in BBD's regional aircraft and business jet markets (although business jet orders in Q1 2016 improved from the year-earlier quarter), and a competitive environment and execution challenges in the rail transportation business.

Fitch also expects free cash flow (FCF) could continue to be significantly negative through at least 2018. FCF was approximately negative $750 million in the first quarter of 2016 due to ongoing aircraft development spending and costs to ramp up production of the CSeries. BBD typically generates negative FCF early in the year, but there is a risk that improvement through the remainder of 2016 could be less than expected, which would exacerbate risks to BBD's liquidity.

Prospects for BBD's liquidity improved materially in late 2015 when the company reached preliminary agreements to sell a 49.5% minority interest in the CSeries program to the Quebec government for $1 billion and a 30% minority interest in BBD's transportation business to Caisse de depot et placement du Quebec (CDPQ) for $1.5 billion, which closed in Q1 2016.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160429005577/en/

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Source: Fitch Ratings

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