Break up Bombardier to keep it from going off the rails
Multitude of distractions keeps the transportation company from sustainable success Bombardier is forfeiting desperately needed revenues by alienating existing customers, David Olive writes.
Seldom in its oft-troubled history has Bombardier Inc. seemingly enjoyed such bright future prospects as today.
The order book for the aircraft and rail-equipment maker has been swelling with new contracts. Bombardier last year shed its C-Series albatross, now controlled by Airbus SE. Credit-rating agency DBRS Ltd. last month upgraded its financial expectations for Bombardier from “stable” to “positive.”
And even before Wall Street securities firm Goldman Sachs Group Inc. put a “buy” recommendation on Bombardier shares in June, the firm’s stock was already on a tear. It has jumped in value by 84 per cent so far this year, and has quintupled in the past two-and-a-half years.
That kind of investor exuberance always merits skepticism. That’s especially the case with Bombardier, whose financial performance remains abysmal.
There’s reason to doubt if the overstretched Bombardier can ever gain mastery of its many products and markets.
Indeed, there’s a compelling argument to be made that Bombardier’s businesses can only achieve sustainable success by being liberated from their overburdened parent by a breakup of Bombardier Inc.
While it’s encouraging that positive reports have lately outpaced layoff notices at Bombardier, the firm remains deeply troubled.
A leading proof of that is Bombardier’s continued inability to fulfil its contracts. For key clients such as the public-transit systems of Toronto and New York, doing business with Bombardier has meant repeated delays and the delivery of faulty equipment.
Bombardier is the quintessential high-fixed-cost enterprise, whose network of factories and R&D centres in 28 countries consumes vast amounts of cash whether the order book is fat or thin.
Yet Bombardier forfeits desperately needed revenues by alienating existing customers, a sin that also narrows its chances of winning new clients.
Last year, Bombardier was frozen out of the bidding on a $3.2-billion New York subway contract.
In February, Bombardier was shut out of a rail contract worth more than $1 billion in its Montreal hometown. And in June, Bombardier lost to Siemens AG for a $2.6-billion expansion of London’s Piccadilly Line.
Earlier this year, Bombardier was rebuked by, of all parties, the Caisse de dépôt et placement du Québec, the giant pension fund that owns 28.5 per cent of Bombardier’s transportation division.
“The core of (Bombardier’s) challenge is execution,” Caisse CEO Michael Sabia told reporters. “Here I’m thinking about issues that have been encountered in Toronto. That can’t happen.”
Bombardier’s financial struggles have long been attributed to its problem-plagued C-Series project, an $8-billionplus quest to develop a nextgeneration commuter aircraft.
But the C-Series saga obscures the prosaic yet far worse problem of Bombardier’s chronic failure to satisfy customers.
That’s where to look for the explanation of why Bombardier’s revenues have fallen in each of the past four years. Bombardier has surrendered close to one-fifth of its revenue base since 2014.
Naturally, that steep drop in revenues has caused tremendous losses, given Bombardier’s high overhead.
Bombardier has lost money in each of the past four years, for a staggering total of $10.7 billion since 2014.
And despite decades of taxpayer handouts, Bombardier’s balance sheet is still an eyesore.
In balance-sheet terms, Bombardier is worth a great deal less than nothing. Bombardier’s value, in net tangible assets, is negative $15.4 billion. That suggests the firm’s current stock-market value, of $12.3 billion, is an example of magical thinking.
A company whose products carry tens of thousands of commuters each day in Shanghai, Berlin, Delhi, Sao Paulo, Kuala Lumpur, Rome and Singapore has reason to be proud. But pride has inculcated a ruinous complacency in the culture at the world’s biggest Québecois enterprise, whose managers know their firm, for political reasons, will never be allowed to fail.
But there’s a limit to goodwill. The engineering challenges and sprawling global footprint of Magna International Inc., the world’s second-largest auto-parts maker, are just as formidable as those of Bombardier.
Yet Magna, twice as big as Bombardier in revenues, consistently satisfies its demanding customers, and is one the most reliably profitable firms on Earth.
A multitude of distractions at Bombardier keeps management from achieving continuing success in its overabundance of businesses, where many of its rivals are deeperpocketed than Bombardier.
Brazil’s Embraer SA, Bombardier’s closest rival in commercial aircraft, has just formed a $4.5-billion (U.S.) joint venture with mighty Boeing Co.
Bombardier’s chief rival in turboprop commercial aircraft, ATR, is a joint venture led by Airbus. And Gulfstream, with which Bombardier competes in business jets, is owned by General Dynamics Corp., like Boeing and Airbus, a beneficiary of military contracts.
Bombardier is an ideal breakup candidate. In fact, it’s difficult to see any other way forward.
As a discrete business, Bombardier’s $11.2-billion (Canadian) (sales) rail-equipment division is viable, with a 12.6per-cent jump in revenues last year, and a $939-million pretax profit that is an impressive 8.4-per-cent return on revenue.
As a stand-alone enterprise, Bombardier’s business aircraft division boasts a sizable $6.5 billion in 2017 revenues, a $548-million (U.S.) profit equal to 8.5 per cent of revenue, and two of the best brands in the industry, Challenger and Global. (Putting the division’s weak Learjet brand on the auction block would help focus the business.)
Bombardier’s prospects are cloudiest in commercial aircraft.
Revenue growth in that division is reliant on Bombardier’s ability to execute on its plan to become a major aftermarket services provider, repairing and overhauling its own aircraft and those built by competitors.
Otherwise, growth in regional aircraft sales is forecast to be tepid. And Bombardier fans are wrong to expect a big revenue boost from the company’s former flagship C-Series. Bombardier’s surrender of control of the C-Series program to Airbus left Bombardier with a mere 34-per-cent stake in that business.
And Airbus has an option to take full ownership of the C-Series in seven-and-a-half years, just as the C-Series hits its stride as a profitable brand.
But Bombardier’s de facto giveaway of the costly C-Series program to Airbus, a deal that went into effect this week, was an important first step in shifting risk at Bombardier from taxpayers to the private sector.
It emulates Bombardier’s 2003 spinoff of its founding recreational products business, which yielded a highly successful BRP Inc. The name of Quebec snowmobile inventor Joseph-Armand Bombardier now appears on transportation equipment worldwide.
How much better, though, if the legacy of Bombardier’s founder had not evolved into a perpetually dysfunctional transportation conglomerate.
The way to best serve that legacy, and finally end Bombardier’s status as a charity case, would be to set the firm’s remaining businesses free of a chronically troubled parent that serves mostly to prevent their achieving sustainable success.