Delta CSeries Order: No, Bombardier is Not Losing $4M by Airplane - All is Normal
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June 4, 2016 - By André Allard
This is an automated translation from french to english quickly revised. The link to the original french version is at the bottom. Thanks to André for his permission to share this with you on FliegerFaust.com
Obviously, the inclusion of a provision of 500 M$ for onerous contract in the balance sheet of Bombardier for Delta Airlines and Air Canada controls seems generating much confusion. Additional explanations are needed.
It would be an error to take the provision of 500 M$ for both airlines orders and dividing by the number of planes sold, or 125, which would result in a loss average 4 m $ by plane. In fact, the
500 M$ provision for future loss concerns the airplanes that will be produced during the famous learning curve I talked on May 19, which here is an excerpt:
The introduction of any industrial goods whatsoever includes what is called a learning curve. This phenomenon is linked to the fact that more often a human reproduced the same task of manufacturing, the more he becomes effective. Which means that the number of hours required for the production of a unit will be descending and that productivity and profitability will increase with the number of units produced. The learning curve is not unique to the aviation industry and exists in all areas of manufacturing. According to studies compiled over the years, we can say that in general aviation, the learning curve production costs decrease by 15% every time the number of units produced is doubled. The learning curve in aeronautics implies the first 200 to 300 produced units will cost more to produce than what they bring. This comes in addition to successfully commercialize a new airplane; an Above-average discount to attract the first major customers is normal. There again, this phenomenon is not unique to the C Series and is rather standard. It is the refusal of the previous administration to provide such discounts that caused the hollow in sales of the C Series at the beginning.
With regard to the learning curve of the C Series, the vice-president of the C Series, Rob Dewar, said in an interview with Aviation Week magazine that this curve was steeper (faster) than expected. This means that Bombardier employees learn more quickly and that production costs decrease more quickly. From Mr. Dewar information and other data collected on the Internet, I have reproduced a chart representing the learning curve of the C Series. I used a cost of departure of 70 M$ and a decrease of 20% each time that the production doubles in order to better represent the most recent information.
To see the image you have to be directly on this page: http://www.fliegerfaust.com/no-bombardier-is-not-l...
Expected CSeries Production Cost Per Unit
With this available data, you arrive with a production cost of 28.7 M$ per unit at the beginning of 2020. As it is averaged with the CS100 and the CS300, suggests that the cost of production from the CS100 is then slightly less than 28 M$ per unit. This is in line with the information circulating about the price paid by Delta for the CS100 purchased. This is also in line with the statement of the president and CEO of Bombardier, Alain Bellemare, who says that the C Series will begin to generate surpluses in 2020. With this curve, Bombardier would need to produce 230 to 250 C Series to bring the cost of production under the sales price, which is in good average and certainly better than the Boeing B787 for example, which it will require a minimum of 1000 produced equipment to reach this threshold.
Estimated losses related to the introduction of the C Series should vary from $2 to $3 billion and, should I need to say, is as expected and planned. No news here.
The method of accounting used by Bombardier, which is different from that used by Airbus and Boeing, makes sure the company must record losses at the time where they are incurred. Now as long as Bombardier had not sold the aircraft, they could not make allowance, since they did not know at what price the aircraft would be sold or how much it should produce during the learning curve. In fact, Bombardier had to wait to have completed the program of certification before being certain to launch production of the C Series and to have a good estimate of the number of airplanes that will be produced in 2016, 2017, 2018, 2019 and 2020.
Finally, no matter the amount the discounts represent, the first units built during the establishment of a new aircraft always are at a loss, regardless of the size and the name of the manufacturer.
French original version: https://aeroemploi.ca/nouvelles/n/467-commande-de-...