BUSINESS

Bombardier seeks to deepen Russian roots with US$3.39B Q400 deal; assembly plant

08/28/2013 12:24 EDT | Updated 10/28/2013 05:12 EDT
MONTREAL - Bombardier is attempting to deepen its roots in Russia, signing three preliminary agreements Wednesday, including one that contemplates a Q400 final assembly line for some 100 turboprops that could be worth US$3.4 billion at list prices.

The Montreal-based plane and train manufacturer said it will work with Rostekhnologii, a state corporation controlled by the Russian Federation, to assess the creation of a joint venture to manage the production of aircraft for Russian customers.

The final assembly line in Russia would complement its Toronto operations, where the final assembly of the 70- to 80-seat turboprop currently take place

The sales and manufacturing agreement is expected to be finalized in 2014.

Russian leasing company Ilyushin Finance Co. signed a letter of intent at the MAKS Air Show to acquire 50 Q400 NextGen aircraft. A market development agreement reached with Rostec and its aircraft leasing subsidiary, Avia Capital Services, could place at least another 50 planes in the region.

"Developing local roots in strategic markets is at the core of Bombardier's strategic framework and we have identified Russia as being key to our growth and sustainability," said Mike Arcamone, president of Bombardier Commercial Aircraft.

"The agreements signed today are the next step towards ensuring our long-term competitive position in the Russian Federation and will help secure (Rostekhnologii's) ongoing establishment of an aviation centre of excellence."

Ilyushin said its intent to purchase 50 Q400s and a recent firm order for 32 CSeries CS300 aircraft will help local operators to expand regional travel.

"The Q400 NextGen aircraft's excellent fuel efficiency and operational costs, interchangeability with jet service, comfort and outstanding environmental qualities, make it an ideal choice for diverse operations across Russia's vast landscape," said director general Alexander Rubtsov.

Bombardier also agreed to enter into exploratory discussions with leading Russian aircraft manufacturer Irkut Corp. to develop customer support infrastructure for its 150- to 212-seat MS-21 commercial aircraft that is scheduled to enter into service in 2017. The two firms would also explore other collaboration.

Analyst Walter Spracklin of RBC Capital Markets said the agreements are an attempt by Bombardier at "locking in" the Russian market for the Q400 against its main rival ATR.

Bombardier's product is more expensive at US$34 million compared with US$19 million for ATR, but the Q400 range is 900 kilometres longer at a "more practical" 2,500 kilometres. The Q400 has eight to 10 more seats, up to 35 per cent more cargo volume and can fly up to 90 knots faster than ATR's product.

"With the potential establishment of a joint venture and a final assembly line in the region, we see Bombardier establishing the Q400 as the market leader in the turboprop segment in Russia," he wrote in a report.

The agreements could "revitalize" the Q400, whose orders have been lagging, added Cameron Doerksen of National Bank Financial. Bombardier has received just 14 Q400 orders this fiscal year and has a backlog of 36 aircraft. ATR has received far more orders of late.

Bombardier has delivered 439 of the 475 Q400s that had been ordered as of June 30 by some 50 operators in more than 30 countries.

"Bombardier management has been touting the Russia market as a sales prospect for the Q400 and there have been recent Russian press reports on the possibility of a deal so this news is not a major surprise," Doerksen wrote.

There are currently more than 120 Bombardier commercial regional jets in service in Russia and the Commonwealth of Independent States, and Bombardier is forecasting a market demand of approximately 400 aircraft in the 20- to 99-seat market in the region over the next 20 years.

In June 2012, the Q400 received aircraft type approval to operate in Russia and the Commonwealth of Independent States. The Q400 NextGen turboprop airliner is the successor to Bombardier's Dash 8/Q-Series family of aircraft.

Alexey Fedorov, managing director of aviation projects at Rostekhnologii, said the deal will contribute to the fleet renewal of its airlines, improve flight safety and reduce fares on regional routes.

"We are entering an important stage of validation towards formalizing the creation of this joint venture that will lay the foundation for the future of Russian turboprop aviation," he said.

Assembling the Q400 aircraft in Russia won't affect production rates in Toronto, but it's premature to know the impact on Bombardier's global supply chain and potential first delivery of the aircraft, added spokeswoman Marianella de la Barrera.

"These agreements are all at a preliminary stage and the details of the industrial plan, the timing, the next series of discussions for what suppliers come on board all of that is in discussion and our view is that they could be concluded into definitive agreements in 2014," she said in an interview.

On the Toronto Stock Exchange, Bombardier's shares gained 10 cents, or 2.2 per cent, at C$4.67 in midday trading Wednesday.