Delta spending delays dash Bombardier hopes
From Wednesday's Globe and Mail
Published Tuesday, Sep. 13, 2011 7:40PM EDT
Last updated Tuesday, Sep. 13, 2011 7:52PM EDT

Delta Air Lines Inc. (DAL-N7.990.618.27%) is delaying an order for new narrow-bodied aircraft for several years, dashing hopes that Bombardier Inc. (BBD.B-T4.260.030.71%) is about to land the biggest order yet for its new C Series airplane.

The Atlanta-based airline announced three weeks ago that it will buy 100 Boeing Co. 737 planes and was believed to be set to follow that up with the purchase of 100 smaller narrow-bodied planes later this year or next year.

“We are done talking about aircraft for the near to medium term,” Ed Bastian, Delta’s president, said on Tuesday. “There’s no second step of aircraft [purchases], whether it be with Bombardier or Embraer or Boeing or Airbus.”

Montreal-based Bombardier and Embraer SA of Brazil were believed to be the two contenders for an order for planes that would seat between 100 and 150 passengers in a deal that would almost double the number of orders for the C Series.

Airlines have ordered 133 C Series planes, which represent Bombardier’s $3.4-billion bet that it can compete in the biggest segment of the commercial airplane market and challenge the duopoly Boeing and Airbus SAS have enjoyed for decades.

The delay of several years in replacing some DC-9 airplanes that have been in service for 33 years is another sign of growing concern among U.S. companies about the health of the U.S. and global economies.

“This was about Delta, not about the airplanes,” said industry analyst Scott Hamilton, a principal at consulting firm Leeham Co. LLC. Bombardier went more than a year without landing orders for the C Series before several airlines signed on around the Paris Air Show in June.

“The declining U.S. economy in particular, the softening global economy and the narrowing of profits in 2011 versus 2010 caused Delta to pull back from the 100-150 seat airplane order for now,” Mr. Hamiton said. Delta did not want to place an order now that would have included down payments, progress payments as the planes were being built and additional debt on its balance sheet, he said.

The order for Boeing planes is worth about $8.5-billion (U.S.), while an order for 100 C Series planes would have been worth about $6-billion at list prices.

Delta needs to reduce the $13.8-billion on its balance sheet and the risk that brings to the company, Mr. Bastian told a Deutsche Bank AG transportation conference in New York on Tuesday.

The plan, he said, is to maintain annual capital expenditures in the $1.2-billion to $1.4-billion range to 2014. Delta’s capital expenditure hit $2.2-billion in 2008, but fell to $1.3-billion in 2009 and is expected to be $1.2-billion this year.

In addition to delaying airplane purchases, Delta will trim fourth-quarter flights by between 4 and 5 per cent, Mr. Bastian said, and by 2 to 3 per cent next year.

The number of transatlantic flights will be cut by at least 10 per cent in the fourth quarter, he noted.

Dallas-based American Airlines, a unit of AMR Corp., said it will cut capacity in the fourth quarter while United Continental Holdings Inc. said it will hold its 2012 flight levels steady at 2011 levels.

The first flight of Bombardier’s C Series is scheduled next year and the first planes are scheduled to be delivered to customers in 2013.

The biggest single order is from Republic Airways Holdings Inc., which operates Frontier Airlines and other regional U.S. carriers. Republic has 40 of the planes on order and options for another 40, but also said during the Paris Air Show that it will order A319 planes from Airbus.

The A319 with more fuel-efficient engines competes directly with the C Series.