Tuesday, November 01, 2016

Is Bombardier Another Example of a Company Unable to Find Success in Canada?

          By Brian Orlotti

Almost a year into the Federal governments mandate, the financial and corporate problems surrounding Montreal, PQ based Fortune 500 multinational Bombardier Inc. do not seem any nearer to a solution despite sales and the slow production ramp up of its CSeries commercial aircraft.

As outlined in the October 29th, 2016 Motley Fool post, "Bombardier Looks for CSeries Jet Orders: Can It Land Spirit Airlines?," the struggling aircraft manufacturer finally met its long-standing goal of lining up 300 firm orders for its brand-new CSeries jet earlier this year. The orders should fill its production capacity from now until 2020, when production ramp-up is expected to be complete. But the early sales have been heavily discounted and Bombardier has announced that it would record a special "onerous contract" charge of about $500Mln CDN to account for the discounts. The company now has to survive until 2020 when the discounted planes are completed and the company can begin to generate profit with new orders. Photo c/o Delta Airlines.

As outlined in the October 21st, 2016 Financial Post article, "Bombardier Inc announces second mass layoff this year — eliminating 7,500 jobs globally, 2,000 in Canada," the sputtering aerospace giant will eliminate 7,500 jobs (over 10 per cent of its global workforce), including 2,000 jobs in Canada. These layoffs are in addition to the 7,000 job cut announced last February.

Two-thirds of this workforce reduction will come from Bombardier’s rail systems division, while the rest will come from its aerospace branch. The company claims that the layoffs will be partially offset by its “strategic hiring” of 3,700 new employees to support the ramp-up of the CSeries jets and the new Global 7000 business jet, scheduled to enter service in 2018.

The layoffs are projected to save Bombardier $300Mln USD (400Mln CDN) a year by the end of 2018 and are part of the company’s five-year plan to improve revenue, margins and free cash flow by 2020. In addition, the CS100 airliner began commercial flights with its first customer, Swiss International Air Lines AG this past summer, with the larger CS300 due to enter service before year’s end.

The company has also secured CSeries sales to two major customers: Air Canada and Delta Air Lines Inc (though at industry-rumoured massive discounts).

Bombardier isn't just designing and rolling out the CSeries. As seen in the graphic above, the Bombardier Global 7000 and 8000 series of long range, high performance business jets, are also on the drawing board. The aircraft, originally designed for roll-out in 2016-2017 but currently delayed until 2018 or later, will be sold much like the CSeries, with early orders heavily discounted to help ramp-up sales and production capacity. This likely means a second "onerous contract" charge to cover the losses expected early in the Global 7000/8000 production ramp-up sometime around 2018/19, which will only be offset by the sale of profitable aircraft after many years of production.  Image c/o Bombardier.

The company’s woes continue, however, including CSeries production delays due to issues at its engine supplier, a global slowdown in demand for business jets and ongoing (and well-publicized) production problems at its rail systems division. On top of all this, Bombardier continues to carry over $9Bln USD ($12Bln CDN) in debt.

Having already received $1Bln CDN in funding from the province of Quebec as well as $1.5Bln CDN from Quebec’s pension fund, Bombardier earlier this year requested an additional $1Bln CDN from the federal government. As outlined in the October 11th, 2016 Financial Post article, "Federal Liberals signal desire for ‘meaningful investment’ in Bombardier but avoid dollar amount," the Trudeau government has not provided this funding but continues paying lip service to the idea, with the caveat of preserving Canadian jobs as a prerequisite for any deal.

As the corporate bloodletting continues, Bombardier’s future seems anything but clear. Canada has a history of difficulties keeping large high tech companies in business and Canadian. Only time will tell if Bombardier ends up being an exception to the general pattern of the RIM's, Nortel's, Avro's and Spar Aerospace's which came before.

Bombardier shares currently stand at $1.78 CDN each.
Brian Orlotti.

Brian Orlotti is a regular contributor to the Commercial Space blog.

1 comment:

  1. perhaps it is time to couple government largess to new and accountable senior execs - maybe should insist on partnering with the best engineering institutions in the country as a start.


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