Air Canada sales boost backlogs, but few spirits

 - December 18, 2007, 12:02 PM

At face value, the big orders from Air Canada in late September for Bombardier and Embraer jets augur well for the Western hemisphere’s last two regional jet builders. The orders added significantly to the companies’ delivery backlogs. Embraer received a firm order for 45 of its 98-seat 190s and Bombardier logged a contract for 15 CRJ200s and 15 CRJ700 Series 705s. Just days later, Air Canada emerged from a year-and-a-half-long stint in bankruptcy protection, allowing it finally to implement a fleet restructuring plan that rests on a wholesale commitment to smaller jets, flying point-to-point to more medium-sized destinations with CRJs and replacing narrowbody service with Embraer 190s for mainline duty throughout the continent.

Sound familiar? Just about every airline in the U.S. has trumpeted the same kind of strategies. US Airways’ flight plan looks particularly similar, with its focus on large Embraer RJs for mainline service and smaller Bombardier jets to fly with its regional subsidiaries. The fact remains, however, the legacy carriers still can’t seem to make money, regardless of their commitment to airplanes anointed by so many as the saviors of the airline industry.

Of course, regional jets can’t solve all the problems by themselves. Labor, fuel and security costs and downward pricing pressure have contributed to the predicament as much as fleet composition and network structures. So it came as no surprise when US Airways fell back into bankruptcy in mid-September when it realized it wouldn’t be able to comply with a September 30 deadline to meet financial covenants associated with a $900 million ATSB loan guarantee. United, meanwhile, remains in Chapter 11, while Delta Air Lines–one of the first to embrace so-called mainline replacement with subsidiaries Comair and Atlantic Southeast Airlines–now stands on the precipice.

As for Air Canada, convincing investors that its RJ plans could work started with coming to terms with labor unions over flying rights for the various categories of regional jets in the fleet. With the ratification of a pair of new five-year labor contracts earlier in the year, the pilots of Air Canada and Air Canada Jazz fly under a new scope clause that grants the airline’s mainline pilots full rights to Embraer 170/190-family jets, while regional crews fly all present and future Bombardier CRJs. The deal allows Air Canada to transfer its twenty-five 50-seat CRJ100s to Air Canada Jazz. Represented by the Air Canada Pilots Association (ACPA), the mainline pilots also accepted concessions worth $38.5 million a year with last month’s contract ratification.

The Jazz pilot settlement included productivity concessions such as higher duty time limits (from 85 to 90 hours per month), one week less vacation time per year and an agreement to forfeit a 2.5-percent salary increase.

The all-too-familiar controversy over which pilot group would fly the new jets reached a climax last year, when Air Canada signed a deal with the ACPA that restricted Jazz from buying any more regional jets certified to carry more than 49 passengers. At about the same time, however, Air Canada promised Jazz pilots anything up to 75 seats and the right to bid against the mainline pilots for airplanes holding up to 110. Of course, the contradiction would prove explosive.

Financing Options

Now flying ten 50-seat CRJs, Air Canada continues to work on financing a new deal with Bombardier for 15 CRJ200s and 30 CRJ705s configured for 65 economy and nine business-class seats. Jazz wants to start taking deliveries during the second quarter of next year. By then it expects to have retired all its 10 BAE 146s and to have taken possession of the 25 CRJs from the mainline.

Air Canada, meanwhile, hopes to start taking the first of 45 Embraer 190s during next year’s fourth quarter. The airline plans a two-class configuration, the first-class section carrying a three-abreast seating arrangement and the economy class in the standard four-abreast layout with a 33-inch pitch.

The airline claims to have arranged financing for 45 airplanes, some by GE Capital Aviation Services and the rest temporarily by Bombardier. These days Bombardier typically relies on the Canadian government to relieve it of its financing exposure, as in the case of the $250 million loan guarantee issued in August for 10 CRJs previously delivered to Comair. However, because those programs exist specifically to help export markets, it remains unclear what sort of support the Canadian government could legally offer Air Canada.

That regional jet demand now tends to come from the airlines in the most trouble makes financing an even bigger issue and leaves the manufacturers in a quandary. Along with Air Canada, US Airways, Alitalia and Swiss–some of the weakest airlines in the world–now account for some 45 percent of the backlog for the Embraer 170/190 family.

In Bombardier’s case, Air Canada, US Airways and Delta Air Lines account for roughly the same portion of the CRJ backlog. Moreover, the figures do not take into account the many independent regionals flying ERJ and CRJ-series jets in code-share arrangements with those major airlines. If, in fact, any of them fail, their regional partners will need to scramble to deploy the airplanes with other airlines or default on their loans.

So it seems numbers can lie after all–or at least mislead. Despite impressive sales totals and relatively ample backlogs, if the airline industry’s houses of cards collapse, Bombardier and Embraer will probably find themselves planning still more production cuts and valuation damage control. Everyone involved can do little more now than watch and wait.