Bombardier shares surge on largest-ever US$9.6 billion business jet order

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NetJets Challenger Bombardier aircrafts are shown in this photo released on Monday June 11, 2012. Bombardier shares soared in heavy trading Tuesday following a major deal with one of Warren Buffett's companies, which is poised to buy up to $9.6 billion worth of business jets and services. THE CANADIAN PRESS/HO, Bombardier - Paul Bowen

MONTREAL - Bombardier Inc. shares soared in heavy trading Tuesday following a major deal with one of Warren Buffett's companies, which is poised to buy up to $9.6 billion worth of business jets and services.

Private jet company NetJets Inc. signed a deal Monday to buy up to 275 Bombardier Challenger business jets that could be worth up to US$7.3 billion. There are 100 firm orders and options on 175 more.

Bombardier said it has also signed a 15-year service and maintenance agreement for the aircraft valued at as much as an additional US$2.3 billion if all options are exercised.

Bombardier (TSX:BBD.B) shares gained more than six per cent, or 22 cents, to close at C$3.87 on heavy volume of more than 21.2 million shares on the Toronto Stock Exchange.

"This purchase demonstrates our long-term planning and represents our ongoing commitment to providing unparalleled safety and service in aircraft uniquely customized for our owners," NetJets chairman and CEO Jordan Hansell said in a statement.

"We are confident that NetJets' market leadership and strong foundation position us to make long-term investments in our business to differentiate our fleet in ways that no one else in the industry can."

NetJets is a unit of Berkshire Hathaway Inc., the main company of renowned billionaire investor Warren Buffett.

The deal includes 75 firm orders and 125 options for the Challenger 300 Series aircraft as well as 25 firm orders and 50 options for the larger Challenger 605 Series aircraft. The firm orders are worth $2.6 billion based on 2012 list prices.

The order follows a deal earlier this year that saw NetJets order up to 120 of Bombardier's Global business jets in a deal worth as much as US$6.7 billion.

"We are very proud that, once again, NetJets has selected Bombardier aircraft to grow and support the expansion of its fleet worldwide," said Steve Ridolfi, president of Bombardier Business Aircraft.

"These aircraft are renowned for their reliability, performance and wide cabin comfort. We are convinced that the Challenger jets will complement NetJets' existing fleet perfectly."

In addition to the Bombardier order, NetJets said Monday that it has placed an order for 150 Cessna Citation Latitudes, including 25 firm orders and options for 125 more, with deliveries beginning in 2016.

Besides now being a supplier to NetJets, Bombardier also competes with the company, which allows customers to buy a portion of a business jet, with its own fractional jet ownership business called Flexjet.

Flexjet offers customers whole and fractional ownership and management of business jets and access to two fleets, including its Learjet and Challenger aircraft as well as a network of charter operators.

Analysts said the order is positive for Bombardier, whose shares have been under pressure over the past year, falling from a peak of $7.16.

"The market has been aware that Bombardier was a contender for the NetJets mid-size jet order, but the magnitude of the order is likely much larger than market expectations," said Cameron Doerksen of National Bank Financial.

He said the order supports higher business jet production rates in 2014 and beyond.

Deliveries are already expected to increase this year and in 2013.

The first Challenger 300 will be delivered in 2014 while the first larger Challenger 605 will be delivered in 2015.

Doerksen said Bombardier undoubtedly offered volume discounts but standardized systems and interiors will lead to lower production costs and consequently margins that are in line with smaller orders.

Chris Murray of PI Financial Corp. said the fractional ownership segment and the NetJets order are strong indicators of the positive long-term demand outlook for business aircraft and Bombardier's positioning as industry leader.

"The long-term services and support agreement is a significant win both strategically and financially. Typically service activities offer higher margins than manufacturing and has been an area the company has been actively seeking to expand," he wrote in a research note.