Canadian aircraft maker Bombardier (BDRAF, Financial) seems to be headed for a tough time as oil prices continue to drop. As of this writing the Brent Crude Oil price per barrel is $69.07 according to Bloomberg and analysts expect the figure to drop even further. On the back of the price drop, Khader Mattar, Bombardier’s VP of Sales for Middle East, Africa and Turkey, expressed his concerns during his interview with The National – “If the prices of oil continue to drop, as we have seen it in the past four to five weeks, then I suspect that there will be some decrease of sales in the region.” Here’s what’s going on and how all that is affecting Bombardier.
The alarming drop in oil prices
The drop in oil prices, particularly in the past four months, have been alarming for many. From its 52-week high of $112.59 a barrel, the Brent Crude Oil has dropped to $69.07, translating into a 38.7% drop. What’s further alarming is the fact that analysts expect the figure to drop to as low as $60 a barrel. A Business Insider report quoted Tony Nunan, a risk manager at Mitsubishi Corp in Tokyo, saying "We're heading for $60 for Brent. (There is) nothing to stop it."
Movement of Brent Crude Oil Prices over the past one year. Source: NASDAQ
How this affects Bombardier
The current concerns may have been raise by the jet maker’s Middle East division, but analysts and industry experts believe the drop is oil prices is going to have a global impact on all aircraft makers if the drop stretches over a period of time and moves beyond a certain price point – Bombardier is no exception. Analysts following the sector had mentioned that if oil prices move lower than $70 a barrel (something that has already happened) the order books of the jet makers might get affected. However, Boeing (BA, Financial) chief Jim McNerney believes the price will have to drop much lower than $70 before it can do any harm.
The phenomenon affects the Canadian company majorly in two ways – affecting its business in the Middle East, and affecting the global demand for its fuel efficient CSeries jets. As pointed out by Khader Mattar, the demand in the Middle East might get compromised. The Gulf carriers are among the fastest growing airlines in the world and are expected to account for a substantial chunk of the deliveries in the coming 20 years. The requirement of the Gulf carriers are a little different compared to US and UK carriers. The weather conditions in the Middle East are much different and jets require a wider wingspan or a more powerful engine to get air borne. As a result, the fuel consumption increases.
Keeping in mind the requirement of fuel efficient planes in the Middle East and other parts of the world as well, Bombardier is working on its CSeries jets that it expects to deliver unparalleled fuel economy. But if oil prices continue to slide, the very point for which the fuel efficient jets were announced becomes invalid. It’s not just Bombardier – Boeing and Airbus (EADSY, Financial) are also working on fuel efficient commercial jets.
The drop not only might affect the demand for commercial jets, but might also take a toll on the demand for Bombardier’s business jets. According to the company, “the energy sector is the biggest client for its business jets.” Bombardier has a 25% market share in the geography with 100 business jets flying, the majority of which are in Saudi Arabia, followed by Turkey and UAE. By 2033, Bombardier expects the number of business jets in the region to expand to 1,400 aircraft.
