Speaking notes for Pierre Beaudoin President and Chief Executive Officer Bombardier Inc. The Wings Club February Luncheon The Yale Club New York February 16, 2012 Check against delivery
Change is in the air Good afternoon ladies and gentlemen. It truly is an honour to be here today addressing the distinguished members and guests of the Wings Club. As you know, this prestigious club has played an important role in aviation over the past 70 years. Like the Wings Club, Bombardier was founded in 1942. But a seventieth anniversary isn t the only thing we have in common. We also share your passion for fostering progress in our industry. I am here today to make the case for change. The essence of progress in any society lies in new ideas and bold moves that push the envelope. It is rooted in the spirit of change. Without that spirit, we would not have the light bulb, the television, the internet or the airplane. Each of these innovations faced scepticism at the outset. Doubting Thomases are part and parcel of the change process. And, in some ways, they play a useful check in driving change agents toward material, constructive change. Constructive change is the mindset that Bombardier grew up on. So did the aviation industry. It is crucial that we keep this mindset alive. Today s airline operators are demanding new products to meet the requirements of their rapidly changing reality. Our industry must keep pace with these needs. True agents of change don t wait for all the stars to align before they make a gamechanging move. What they look for and visionary ones are very good at it is a clear and compelling need. An unserved market niche. An opportunity to make things better. Some seventy years ago, my grandfather J.-Armand Bombardier invented a tracked vehicle to transport schoolchildren, doctors and even the local priest across the snowbound roads of rural Quebec. This innovation was followed by the recreational snowmobile, the Ski-Doo *, in 1959, which later gave rise to the Sea-Doo * watercraft. Both of these latter inventions launched brand-new recreational sports. This drive for progress and the evolution of mobility has always been an intrinsic part of our DNA. In our Aerospace group, it has enabled us to accomplish a great deal in 25 short years. We have created, led and revitalized categories. This includes giving birth to the regional jet market with our family of CRJ aircraft. 2
And despite the widely held belief that the new jet culture would kill the turboprop, we also spearheaded the revival of the turboprop category with our Q400 aircraft. At the heart of change lies a willingness to make bold moves, an unwavering focus to find the niche with unserved requirements, a commitment to listen to a customer s expressed and unexpressed needs, to ultimately create better ways to move the world. More than an aircraft manufacturer For us, the end goal is to create better ways to move the world in not one, but two industries. Most of you know us as a leading civil aircraft manufacturer. In fact, one of our aircraft takes off or lands somewhere around the world every three seconds. What you may not know, though, is that we are also the global leader in rail technology. We have over 100,000 rail cars and locomotives in service worldwide. If you have ridden a tram in Brussels, the metro in Berlin or Delhi, the AirTrain at New York s JFK International Airport or a high speed train in China, it was likely a Bombardier product. With our wide product offering, we have been at the forefront of change. What needs to change in the aviation industry? Of course, change is not without its negative effects. As airlines are forced to chase lower seat costs to remain competitive, they are consolidating passengers onto larger aircraft. Routes that once had four flights a day now have two. As a result, cities like Allentown, Pennsylvania; Providence, Rhode Island and Toledo, Ohio; are experiencing a decline in choice, frequency and service. To provide these smaller but important urban centres with better connectivity, operators need more efficient single-aisle aircraft. That s the only way these routes will remain economically viable. Our industry also needs to think outside the box when it comes to exploring different business models to address the mobility needs of Asia s rapidly growing middle class. I suspect that frequency will also be a key issue in this fast-moving market and not just in Asia s large cities. With their low-yield flights, these emerging economies cannot afford the inefficiency of operating older aircraft at sub-optimal seat costs. Also, as the world s emerging economies grow, so will the demand for air travel and consequently aircraft. But if we continue to operate sub-optimal fleets and to rely on outof-date airspace management systems and airport infrastructure, the impact of our environmental footprint will put a serious damper on this growth. 3
Doing our part at Bombardier At Bombardier, we are committed to doing our part to help the aviation industry address its economic, connectivity and environmental challenges to driving the evolution of mobility in aerospace. When we launched the CRJ regional jet in 1989, we created a whole new market worldwide. The CRJ, an aircraft tailored to the size of the market, went on to become the best-selling regional aircraft program in history. Since then, we have become one of the industry s most prolific generators of new aircraft technologies and products, launching a total of 28 successful new aircraft programs. This includes the Global Express, now called the Global 6000, which gave birth to an entirely new breed of business aircraft. Today we have an additional six new aircraft programs that are scheduled to enter into service between now and 2017: the Global Vision flight deck, entering into service in early 2012, the Learjet 85 business jet, the Global 7000 and Global 8000 business aircraft, and the two members of our CSeries commercial aircraft family, the CS100 and CS300. The CSeries: 100% new, no compromises As you know, the CSeries is the world s only all-new aircraft in the 100- to 149-seat segment. It is another example of us listening to operators and responding with an aircraft that s optimized to meet their evolving needs. Our logic for the CSeries is simple. The last time we saw a 100% new aircraft family optimized for this segment was the DC9 in the 1960s. There have been derivatives of bigger aircraft since then but even the last of those, the Boeing 737NG, dates back 15 years. During this time, operators needs in this segment changed rapidly. The industry, however, was focusing somewhere else. The two major players were busy developing large, long-haul aircraft to capture the bigger piece of the revenue pie. Of course, these two manufacturers want the airlines to grow all their airplane sizes. They argue that demand is elastic in all markets and that airlines should in other words trade variable costs against fixed costs. The CSeries program stimulated established players, who then woke up and scrambled to offer a solution of their own, lowering seat costs. Competition is a good thing for any industry! 4
However in the 100- to 149-seat category, we remain the only OEM providing carriers with what they want an optimized aircraft that will deliver a step change in operating economics. The CSeries is the greenest and most cost-effective mainliner in its niche. Compared to existing aircraft in this segment, it will deliver a 20% fuel burn advantage (1) and a 15% cash operating cost advantage (1). Its clean-sheet design will drive down CO 2 emissions by 20% (1), make the CSeries four times quieter (1) as well as give the aircraft exceptional wide-body comfort. And when compared to the re-engined derivatives, the CSeries still provides airlines with a 12% fuel burn advantage (1). What s the market opportunity in this segment? We re forecasting a 35% increase in the 100- to 149-seat fleet over the next 20 years. That s 7,000 aircraft deliveries or more than $420 billion in sales. Half of this market will be generated by the replacement of aging aircraft while fleet growth will come from new business models and increasing demand in emerging markets. While this represents only 10 to 15% of the commercial aircraft market by revenue, it provides Bombardier with a huge opportunity. It is understandable why the two established players would have neglected this niche given its size, but this segment fits perfectly in our evolution of mobility strategy and our focus on developing transportation solutions. If frequency is important to an airline s success and the market tells us that it is important then this niche needs a competitive seat cost in a smaller aircraft. That s where the CSeries comes in. Unmatched versatility Part of what makes the CSeries a game-changer is its unmatched versatility. It is capable of covering the two extremes of aircraft performance it can access small airports while also offering the range and comfort necessary to fly long missions of six hours or almost 3,000 nautical miles. It will create a new paradigm much like low-cost carriers did when they changed the airline market in the last quarter of the 20th century. And like we did in regional aviation with the CRJ. Because it is designed for optimal operational flexibility, the CSeries will allow carriers to explore new types of routes and business models. This versatility is highlighted by the type of customers that are ordering the CS100 and CS300 aircraft. To date, we have signed up major network carriers like Lufthansa and Korean Airlines that see the CSeries as part of their sustainable fleet development strategy. Premium airlines like Sweden s Malmö Aviation that want to be able to access city centre airports 5
with their short runways and strict noise restrictions. A leasing company, Lease Corporation International, that needs an asset with a whole lot of flexibility. And most recently, a full service provider, PrivatAir, that will operate an all-business class CSeries for its major network airline partners. This customer diversity speaks volumes about the flexibility of the CSeries to meet airline transport requirements worldwide. And I am convinced there are even more business models out there for the CSeries that we have yet to imagine. A word about the naysayers As our industry evolves, it is clear to me that the comfortable days of duopolies in commercial and regional aircraft are over. Today it is a multi-player game in all segments and that means increased innovation and passenger choice. The commercial aircraft duopoly is definitely feeling threatened, and in their case, the best defence appears to be a good offence when it comes to the CSeries. Scepticism about the feasibility of the CRJ was pretty much industry wide at the time. In the end, the CRJ became the hottest commercial property in the skies and we succeeded beyond the wildest dreams of all but a few. I have no doubt that the CSeries will follow the same successful path as the CRJ. Some may believe that re-engined aircraft with a 20-year-old design will be good enough. We see the future differently at Bombardier. We believe that good enough is not what operators expect or need in this segment, especially considering the airlines tight margins. CSeries: history repeats itself Here we are 20 years after the first CRJ 50-seater entered into service and we are hearing the same litany of it won t work remarks about the CSeries. Let s take a closer look at these comments. CSeries naysayers initially claimed that we had chosen the wrong technology. The next thing we knew, some competitors had signed on to use the same next-generation engine as the CSeries and technology was no longer the issue. Then there is the no-business-case argument. Like us, the industry is also forecasting 7,000 units for the 100- to 149-seat category over the next 20 years, so volume is clearly not the issue. And in a business where margins are so tight, can airlines really afford to pass up a 10 to 15% cost advantage (1)? 6
The next predictor of failure is the CSeries slow order uptake which supposedly heralds the collapse of our competitiveness. This one is a case of some people playing fast and loose with their sales figures. First of all, we re not competing against the A320 NEO or the Boeing 737-800 Max. When you compare apples to apples, we have outsold competitors in the below 150-seat category and our order trajectory is as good as we want and need it to be. To date, we have over 300 orders, options and purchase rights for the CSeries and have sold out our delivery slots for the first 2½ years. I am very comfortable with our pricing strategy and, as I mentioned, our customer diversity. Some sceptics are also saying that we won t be able to manage the CSeries global supply chain. The truth is that we are a global leader in two industries rail and aerospace where all we do, day in, day out, is manage complex projects involving suppliers from around the world. We were also the first aircraft OEM to create risksharing partnerships with suppliers for our Global Express business jet program almost two decades ago. It is now second nature for us to integrate suppliers and manufacturing facilities from around the world into our new aircraft programs. In the CSeries program, we share the same systems and governance with our suppliers. We are also physically in the same building, working together on testing and integrating at our Complete Integrated Aircraft Systems Test Area facility or CIASTA in Mirabel outside Montreal. As we evolve, we integrate lessons learned from our previous aircraft programs as well as from our rail transportation group where designing, building and certifying a train is also a feat of incredible complexity. Then there are those who assert that we won t be able to deliver the performance that we promised. Based on wind tunnel and engine testing, the CSeries performance looks very good and certainly meets our expectations. Historically, all of our aircraft at this stage of development ended up delivering on their promised performance. The last claim made by CSeries sceptics attempts to cast doubt on our ability to deliver on time. What can I tell you? I m not going to try to defend the track record of the two largest manufacturers. As of today, we continue to drive for first delivery at the end of 2013. Sub-assemblies are streaming in the door at CIASTA where we have gone from being a virtual aircraft to a real one. We are building our first test vehicle in Mirabel, and systems integration and commissioning are going even better than we had expected. 7
Conclusion As the CSeries program demonstrates, progress requires a vigorous faceoff between the spirit of change and the status quo. We will not achieve what we need to achieve in the aviation industry without a spirited debate that leads to the evolution of mobility. We embrace this debate as a crucial stepping stone to the desired outcome of constructive change. We are convinced and so are a growing number of operators that the CSeries is a viable instrument of this positive change. In the end, history is made by those who step into action and do something. At Bombardier, we are doing something something great. Ladies and gentlemen, change and progress are in the air and, at Bombardier, we are helping to drive it with our all-new CSeries commercial aircraft. Thank you. (1) The CSeries family of aircraft programs is currently in development, and as such is subject to changes in family strategy, branding, capacity, performance, design and/or systems. All specifications and data are approximate, may change without notice and are subject to certain operating rules, assumptions and other conditions. This document does not constitute an offer, commitment, representation, guarantee or warranty of any kind. The configuration and performance of the aircraft may differ from the images shown and descriptions provided and, together with any related commitment, representations, guarantee or warranty, shall be determined in a final purchase agreement. Bombardier, CRJ, CS100, CS300, CSeries, Global 6000, Global 7000, Global 8000, Global Express, Global Vision and Learjet 85 are trademarks of Bombardier Inc. or its subsidiaries. * Ski-Doo and * Sea-Doo are registered trademarks of Bombardier Recreational Products Inc. 8