Per The Economist: Bombardier Plane truths
A wounded Canadian planemaker may get another bail-out
Feb 20th 2016 | From the print edition
IN SPITE of booming demand for jetliners across the world, North American planemakers have had a miserable few months. So far this year Boeing, America’s biggest aerospace group, has suffered the two biggest daily falls in its share price yet seen, caused by downgrades to its production forecasts and news that regulators were investigating its accounting methods.
But its woes look as nothing compared with those of Bombardier, a Canadian maker of planes and trains. On February 17th it announced net losses of $5.3 billion in 2015, mainly due to write-downs, and a $10 billion shrinking of its order book since 2014. Many are asking if the company will run out of cash.
The trainmaking division is doing fine. But Bombardier’s aerospace division, which made only $138m in profit in 2015 before $5.4 billion of write-downs, is giving its executives nightmares. Those parts that used to generate good profits are stalling. The market for business jets, particularly large ones, is suffering from slower growth in emerging economies, says Stephen Trent of Citigroup, a bank. Bombardier has also been losing ground against more specialised competitors such as Textron and Embraer in the market for small and medium-sized business jets.
The company’s biggest problem, though, is the CSeries, its project to develop a 100- to 150-seater plane to break the duopoly of Airbus and Boeing in this area (see table). Three years late and costing $5.4 billion to develop instead of the $3.5 billion originally forecast, the project has been soaking up cash. Although the plane’s entry into service is planned for later this year, it still has not been awarded safety certification by authorities in America and Europe. Ruthless pricing by Airbus of its A320neo and Boeing of its 737 MAX, as well as fears over Bombardier’s financial viability, have made the company’s cashflow situation worse by discouraging new orders. Until Air Canada announced the purchase of up to 75 of the plane’s larger CS300 variant, on February 17th, there had been no orders since 2014.
It will be a long haul before Bombardier recoups its costs on the project, says Bjorn Fehrm at Leeham Company, an aviation consultant. The first 15 planes produced this year will cost Bombardier $60m each to make, he says, but will sell for just $30m or so. The programme will not become cashflow positive until around 200 planes have been delivered. The CSeries’ fuel efficiency may bring it more orders if the oil price goes back up. But so far, including Air Canada’s order if it is confirmed in full, it has sold only 318.
To keep it going in the meantime, Bombardier needs cash. Last year it offered Airbus a majority stake in the CSeries project, but was rebuffed. Instead, the company’s home province, Quebec, offered C$1.3 billion ($1 billion) for 49.5% of the CSeries venture and a further C$1.5 billion from its pension fund for a stake in the rail division.
This is unlikely to be enough. So the question is, where will the next cash injection come from? Airbus is unlikely to change its mind, and Boeing is busy sorting out its own problems. An investment from COMAC, a Chinese state-owned planemaker which is also trying to bust in on the Airbus-Boeing duopoly, and with which Bombardier signed a co-operation agreement in 2011, seems too politically toxic to be feasible. The Canadian electorate would not want to see a national champion fall into Chinese hands.
So a further bail-out from either the Canadian federal or Quebec provincial government, in return for a stake in the CSeries, is most likely. This week Bombardier announced 7,000 job losses; the fear of even bigger cuts may force politicians’ hands. If so, taxpayers will not see a return on their investment for years, if ever.