COMMENT Bombardier can’t seem to lose
Government aid allows firm to sell jets at a loss
‘We lose money on every sale, but we make it up in volume.” It’s an old joke, except at Bombardier where it’s a business model.
The aircraft manufacturer timed its latest quarterly loss report — $138 million in the first three months of this year, on revenues of $3.9 billion — to coincide with the announcement of the sale of 75 of its CSeries passenger jets to Delta Air Lines. The deal was hailed as a “turning point,” a “watershed,” and, inevitably, a “gamechanger,” and why not: it’s nearly a third as many as the company has been able to sell since the CSeries was launched, more than a decade ago.
Quite what has changed, however, remains a matter of conjecture. If the company has lately had greater success selling the plane than before, it may have less to do with the quality of the plane than the price. Though widely reported to be worth $5.6 billion, or roughly $72 million apiece, the Delta deal is in fact worth a fraction of that sum, which is based on the plane’s list price.
Reuters reports the actual price may have been discounted by as much as 75 per cent, considerably more than the norm even within an industry notorious for sandbagging price estimates, leaving Bombardier with somewhere south of $2 billion. Calculating production costs is tricky, especially given the plane’s astronomical development costs — more than $6 billion at last count — but assuming a markup of anything less than 180 per cent in the list price, it seems likely the company is selling the plane for less — much less — than cost.
The same would seem to have been the case with the Air Canada deal, this one for 45 planes, announced in February. Not only is the sale believed to have been on similarly discounted terms — reflecting the two deals’ impact, Bombardier plans on booking a $500-million “onerous contract” charge in its second quarter — but the deal was plainly sweetened by the company’s anxious helicopter parents in Ottawa and Quebec City: the one with legislation giving it greater flexibility with regard to maintenance staffing, the other by dropping a lawsuit.
But wait. How is Bombardier, with $9 billion in debt, mounting losses, and a stock price that has fallen 5.2 per cent per year over a decade, able to afford such “aggressive pricing,” a.k.a. selling planes for less than they cost to make? Answer: government, again. To add to the US$650 million in startup financing from the governments of Canada and Britain, the project was given a further $1.3-billion injection by the government of Quebec last fall — and another $1.5 billion via the province’s always accommodating pension fund, the Caisse de depot, in exchange for a third of the company’s train business.
Still, with Delta coming on board, and other airlines rumoured to follow, this changes everything, right? After a difficult fledging, the CSeries has found its wings, and now can fly unaided, yes? Well, no. News of the sale was quickly followed by a renewed push for an additional $1.3 billion in federal aid — on top of Quebec’s billion-plus, on top of the Caisse purchase, on top of the startup funding, and on top of the more than $2.4 billion in federal loans, grants and other assistance Bombardier has benefited from over the past 50 years.
Don’t call it a bailout, the company’s CEO, Alain Bellemare, says: it’s “a strategic investment.” On the other hand, the premier of Quebec, Philippe Couillard, says governments should be putting money into Bombardier, not in the manner of investors or bankers, but “economic agents.” Government assistance may have made the Delta deal possible, but the deal would seem to make more such aid inevitable.
For its part, the federal government is maintaining the pretence of being undecided whether to hand over the lolly. The matter is said to be the subject of “negotiations” between the government and Bombardier. But since the vice-president overseeing the CSeries program is on record that the company doesn’t actually need the money (federal funding, Rob Dewar told the Financial Post last month, “would be helpful but is very clearly not required”) the negotiations seem to come down to whether Bombardier can be persuaded to take the proffered federal aid.
Certainly the company is not about to make any changes to its notorious dualclass share structure, under which Quebec’s Bombardier-Beaudoin family, with a minority of the shares outstanding, is nevertheless entitled to a 54 per cent voting stake. Indeed, company chairman Pierre Beaudoin insists, it’s “vital”: why, without it, the company would not be the shining success it is today. That’s right: the primary beneficiaries of all of this assistance from the taxpayer are all to be found in one vastly wealthy family.
And lurking in the wings, the federal Export Development Canada, ready to provide additional financing as needed, as it has on many previous occasions. The assistance is nominally in the form of incentives for Bombardier’s international customers, but who’s kidding whom: without it, the company would have a harder time closing deals, requiring it to price even more aggressively. Good times and bad, whatever way the winds are blowing, they always seem to blow money in Bombardier’s direction.