Bombardier Used ‘Aggressive’ Pricing To Win Delta Order, Sources Say

Bombardier scored a major order for its new CSeries passenger jets from Delta Air Lines Inc on Thursday, boosting the Canadian manufacturer's stature in the airline industry even as it faces a long road back to profitability.

The order for 75 CS100 jets, worth an estimated $5.6 billion based on the list price, was the biggest yet and the first from a major U.S. airline for the CSeries program, which is years behind schedule and billions of dollars over budget.

Quebec-based Bombardier hopes the deal marks a turning point in its attempt to break into the fleets of top airlines and serve the niche market for 100-seat planes spurned by larger rivals Boeing and Airbus.

It is also locked in competition with Brazil's Embraer, its most direct rival for small jet sales.

Clinching the order does not appear to have come cheap for Bombardier, however, with its chief executive conceding the company had been "aggressive" on pricing in order to win.

Aerospace industry sources involved in negotiating similar deals estimated discounts as high as 75 percent may have been offered to reboot the CSeries program with a big order, matching some of the most aggressive pricing seen lately in the market.

Two sources pegged the discount closer to two-thirds off the nominal list price of $71.8 million.

Commercial jets typically sell for roughly half of their catalog prices before adjustments for inflation, according to those familiar with the business.

Bombardier said it would book a $500 million "onerous contract" charge in the second quarter related to the Delta order and a separate order from Air Canada in February.

The deal came as Bombardier pushes the Canadian government to inject $1 billion into the company, as Quebec's provincial government vowed to do last year. The talks with Ottawa have hit an impasse partly over federal demands for more oversight.

Bombardier supporters are hoping Delta's endorsement could help win backing from the government. But the order does not change Canada's position on the issue, a source familiar with the matter said on condition of anonymity.

Bombardier CEO Alain Bellemare said the company's dual class structure is a factor in the funding negotiations, but expressed confidence that an agreement could be reached.

"There's a lot of back and forth obviously. We've not yet converged on a win-win solution, and ... we're going to keep talking to them until we find one," he told a news conference.

Quebec Premier Philippe Couillard urged Ottawa on Thursday to help Bombardier, arguing that governments should not behave like bankers or investors but as "economic agents."

The two governments and the company have said the cash infusions would not violate World Trade Organization rules, but Brazil and the United States are expected to scrutinize any aid.

Bombardier shares closed up 1.5 percent at C$2.04 after jumping 13 percent at the open.

'MASSIVE VALIDATION'

The widely anticipated deal with Delta included an option to buy an additional 50 CS100 aircraft, Bombardier said. Atlanta-based Delta also has an option to convert a number of its orders into the larger CS300 variant at a later date.

The size of Bombardier's order book for the jet program will dramatically increase with the deal, which also makes Delta the single largest CSeries customer.

For its part, Delta will be able to phase out the 50-seat jets that it contracts regional airlines to fly under its Delta Connection brand. The larger CS100 planes burn less fuel per passenger and have room for two cabin classes rather than one, giving the global carrier an opportunity to add revenue.

Ed Bastian, Delta's incoming CEO, said the order meant that Bombardier was now a competitor to Boeing and Airbus in the mainline aircraft market. "And we're thrilled to have that choice in the marketplace," he told the reporters in Montreal.

Still, analysts say Bombardier and Brazil's Embraer remain dwarfed by the two transatlantic plane giants.

Coupled with Air Canada's commitment from early this year, the deal puts Bombardier's CSeries above a target for 300 orders or commitments before the jet enters service this summer.

"It's a massive validation of the aircraft because of how financially savvy Delta is," said Kevin Michaels, vice president at consulting firm ICF International. "If Delta is ordering the CSeries, then boards at other airlines are going to be asking their managements about considering it."

The deal carries CSeries' firm order book beyond 2020, when the program is expected to break even on a free cash flow basis. Analysts had feared the CSeries order book could dry up just as the program turned profitable.

Separately, Bombardier had an unexpectedly larger adjusted first-quarter loss of 3 cents a share, above the average analyst estimate for a loss of 1 cent per share, according to Thomson Reuters I/B/E/S. Revenue fell nearly 11 percent to $3.91 billion.

Bellemare said the second quarter is looking a bit better, but more work needs to be done to improve the company's cost structure. He said Bombardier is on track to meet 2016 guidance.