By Solarina Ho TORONTO, Jan 16 (Reuters) - Bombardier Inc warned on Thursday it will delay putting its new CSeries jet into commercial service until the second half of 2015, a potentially costly setback in its plans to challenge Airbus Group NV and Boeing Co.
Bombardier said the delay is necessary so that it can undertake a longer-than-expected test phase to ensure overall systems and software on the narrow body aircraft are mature.
The news sent the shares of the Montreal-based planemaker down more than 8 percent at one point to their lowest level since early May.
The delay is the latest setback for the world's fourth largest planemaker's ambitious plan to dominate the growing 100- to 149-seat market. In that category, it is pitting the CSeries against the smaller aircraft made by industry giants Boeing and Airbus.
The highly anticipated, completely new CSeries is built using lightweight composite materials and other technologies designed to make the jet burn much less fuel, be significantly quieter, and have sharply lower operating costs for airlines.
The plane's development costs now stand at around $3.9 billion, but analysts warned the delay could drive that figure up significantly.
"Management hasn't hit any of their major important milestones, so they have a credibility issue right now," said Scott Rattee of Stonecap Securities. "You'd hate to think we're going to get into November 2015 and then have another delay." Bombardier declined to comment on the financial impact but said it was still "aiming for" C$3.9 billion. The company might offer more details when it reports fourth-quarter and full-year results on Feb. 13.
EARLIER DELAYS In an earlier setback, the CSeries' inaugural flight was delayed three times, or by about nine months, before taking place four months ago.
Bombardier had scheduled the jet to go into service one year from the first flight. Analysts, however, had become increasingly skeptical of that timetable, predicting the plane would not enter service until sometime in early 2015.
The delay announced Thursday is longer than even some of the more bearish expectations.
"We're taking this very seriously," said Bombardier Aerospace spokesman Marc Duchesne. "At the end of the day, (customers are) telling us, hey, as long as you deliver an aircraft that's meeting its promises ... we're fine." It's not unusual for jetliner programs to fall behind schedule. Production problems pushed first deliveries of Boeing's high-tech 787 Dreamliner and Airbus's A380 superjumbo, the world's largest jetliner, years behind schedule.
Bombardier had promised the CSeries was going to be different, but the latest setback, combined with the earlier ones, puts its delays within the ballpark of its competitors.
At least one early CSeries customer said it was talking to Bombardier about the consequences of the delay.
"Of course, we are not amused," said Nils Haupt, a spokesman for DT Lufthansa, the parent company of launch customer Swiss International Air Lines.
Haupt said compensation is usually part of the contract between airlines and manufacturers in the event of such delays, but he did not elaborate on the contract with Bombardier. He said the airline has contingency plans.
"We have always seen in the last years, delays in delivery. Of course, we wouldn't hope for that ... It's happened, we have to deal with it," he said. "It is not the end of the world." Engine supplier Pratt & Whitney said in an email it remained confident the CSeries will be a success.
MORE COSTS, MORE TESTS, MORE ORDERS Several analysts said the latest delay will definitely push program costs north of $4 billion, but estimates varied from a few hundred million dollars to more than $1 billion, depending, in part, on when in 2015 the plane will enter service.
"The latest delay could add over $1 billion to the cost the entire program - which will significantly hurt (Bombardier's) ability to expand Aerospace margins," Peter Arment, an analyst at Sterne Agee, said in a client note. Arment based that view on his estimate that Bombardier's current cash burn rate on the CSeries is more than $200 million per quarter.
The company's board reviewed the program's timetable on Wednesday, Duchesne said, and decided that postponing deliveries until at least July 2015 was prudent to ensure all was in order with the plane's systems.
RBC Capital Markets analyst Walter Spracklin said the avionics and fly-by-wire systems are a key areas of concern.
The first CSeries plane to be tested flew on Thursday from its manufacturing site in Mirabel, Quebec, to Wichita, Kansas, where the test team is headquartered. Duchesne said the move was made to ramp up flight test hours. Bad weather in Mirabel had hampered some of the testing.
A second test plane flew for the first time earlier this month and the third is expected to fly within weeks.
At least one analyst said getting orders for the CSeries is far more crucial to Bombardier than production delays. On Thursday, the company announced a deal worth up to $2 billion with Saudi Gulf Airlines to buy 16 CSeries jets with options for 10 more.
"We believe a more realistic timeline for EIS (entry into service) is positive from the company's sales-effort standpoint as it would provide increased visibility for customers considering placing orders," BMO Capital Market's Fadi Chamoun wrote to clients.
The CSeries, which is aiming to win 300 firm orders by the time it enters into service, now has 198 firm orders.
The delay, however, will be an opportunity for Boeing and Airbus to try to dissuade airlines from going with a new plane, some analysts said.
The CSeries' projected improvements have prompted Airbus and Boeing to launch new versions of their older single-aisle models, with new, fuel-efficient engines.
Bombardier shares dropped 7.7 percent to close at C$4.17 on the Toronto Stock Exchange on Thursday.