From a Lehman Brothers report:
We have reason to believe that US Air will postpone the delivery of 19 CRJ 200s from 2004 to the 2005-2006 time period.
The delay could be material to Bombardier's earnings and credit outlook. Our backlog analysis (see July 20th report) indicates that these 19 planes account for 14% of Bombardier's remaining fiscal-year 2005 production schedule. Unless the company can place these planes with other customers, Bombardier will have to either cut its production or inventory planes. In addition, given US Air's uncertain financial status, the possibility exists that a portion of these planes may never be delivered.
The reason for the delay may be as important as the news itself. If the delay reflects a waning commitment by GE to finance US Air, concerns about the status of the remaining US Air orders will likely increase. By contrast, if GE extends its current commitment beyond September 30 but at a slower delivery pace, this would be an offsetting piece of information. We hope to get more information on the status of GE's financing commitment on US Air's 2Q04 conference call later this morning.
We also expect a statement from Bombardier on the topic. Depending on the details of both US Air and Bombardier's comments, we cannot rule out the possibility of a rating action. The key will be the extent of any earnings impact for Bombardier's 2004 outlook. Moody's notes that "a downgrade could result if further disruptions are experienced in the execution of the company's turnaround plans, such as.... a cancellation or deferral of aircraft deliveries that are greater than can be accommodated by the recent production schedule reduction." S&P is somewhat more lenient and states that "Material order cancellations or deferrals...would not necessarily lead to a downgrade." However, the agency adds that a catalyst for a downgrade includes "an assessment that free cash flows will be negative for the current year."
The potential US Air news is another example of the headline and event risk surrounding the Bombardier credit story. While current trading levels incorporate much of the company's credit downside, we believe the Bombardier investment decision is as much a matter of "when to invest" as it is "at what level to invest." To this point, the outlook for regional jets is a critical unknown, and we believe only time will tell how the order book develops. In the nearer term, we believe the back-and-forth of headlines will continue to fuel spread volatility, and for now, we suggest a wait and see approach. We reiterate our marketweight.
Kris Grimm (212) 526-4430
Marc Aylett (212) 526-7119
We have reason to believe that US Air will postpone the delivery of 19 CRJ 200s from 2004 to the 2005-2006 time period.
The delay could be material to Bombardier's earnings and credit outlook. Our backlog analysis (see July 20th report) indicates that these 19 planes account for 14% of Bombardier's remaining fiscal-year 2005 production schedule. Unless the company can place these planes with other customers, Bombardier will have to either cut its production or inventory planes. In addition, given US Air's uncertain financial status, the possibility exists that a portion of these planes may never be delivered.
The reason for the delay may be as important as the news itself. If the delay reflects a waning commitment by GE to finance US Air, concerns about the status of the remaining US Air orders will likely increase. By contrast, if GE extends its current commitment beyond September 30 but at a slower delivery pace, this would be an offsetting piece of information. We hope to get more information on the status of GE's financing commitment on US Air's 2Q04 conference call later this morning.
We also expect a statement from Bombardier on the topic. Depending on the details of both US Air and Bombardier's comments, we cannot rule out the possibility of a rating action. The key will be the extent of any earnings impact for Bombardier's 2004 outlook. Moody's notes that "a downgrade could result if further disruptions are experienced in the execution of the company's turnaround plans, such as.... a cancellation or deferral of aircraft deliveries that are greater than can be accommodated by the recent production schedule reduction." S&P is somewhat more lenient and states that "Material order cancellations or deferrals...would not necessarily lead to a downgrade." However, the agency adds that a catalyst for a downgrade includes "an assessment that free cash flows will be negative for the current year."
The potential US Air news is another example of the headline and event risk surrounding the Bombardier credit story. While current trading levels incorporate much of the company's credit downside, we believe the Bombardier investment decision is as much a matter of "when to invest" as it is "at what level to invest." To this point, the outlook for regional jets is a critical unknown, and we believe only time will tell how the order book develops. In the nearer term, we believe the back-and-forth of headlines will continue to fuel spread volatility, and for now, we suggest a wait and see approach. We reiterate our marketweight.
Kris Grimm (212) 526-4430
Marc Aylett (212) 526-7119
