Bombardier’s battle
Canadian manufacturer scrables for turnaround amid poor performance, talks C Series deals with Chinese carriers
Canadian plane and train manufacturer Bombardier Inc took big hits to prospects for growth in its core units this week, putting it under increased pressure to find new markets for its jets and a potential new train maker partner.
On Tuesday, the US Department of Commerce slapped preliminary 219.63 percent anti-subsidy duties that would effectively block Bombardier C Series single-aisle jet sales in the US.
The duties were imposed over a trade dispute between Bombardier and its US rival Boeing Co.
Boeing has complained that the 110-to-130 seat aircraft that Bombardier had made were dumped below cost in the US market last year while benefiting from unfair subsidies.
The commerce department’s penalty against Bombardier will only take effect if the US International Trade Commission rules in Boeing’s favor in a final decision expected in 2018.
“There’s a real question as to whether the Commission will determine a company to be threatened with injury when it doesn’t produce a directly competing project,” former ITC chairman Dan Pearson told Reuters by e-mail. “And the actual delivery of aircraft... is at least a couple years away.”
Meanwhile, Germany’s Siemens AG opted to merge its rail business with France’s Alstom SA instead of Bombardier’s Berlin-based rail unit, placing the manufacturer in an even more difficult financial situation.
Facing capital pressures
With C$9 billion ($7.22 billion) in debt and future orders of its C Series jet in the US possibly blocked, Bombardier may face pressure to raise money in order to compete with the newly created European rail giant, as some say.
“They [Bombardier] need fresh money,” said Maria Leenen, CEO of German rail consultancy SCI Verkehr. “They will have to defend their turf against the strong new player.”
The manufacturer’s rail unit Bombardier Transportation (BT) may need a partner at some point to compete against the French-German giant.
“Suddenly, the chess board has changed, but Bombardier is not small,” said a source familiar with the matter. In addition, BT can scoop up contracts in the near term while Siemens and Alstom focus on integrating their businesses.
Analysts and company insiders perceive the potential US duties on the manufacturer’s flagship jet program as a bigger risk than the failed European rail merger with Siemens.
Bombardier is in a stronger position than it was in 2015, when it considered bankruptcy after the C Series program fell behind schedule and sucked up capital.
However, cash infusions from the Quebec government in the C Series plane production, and by Quebec’s pension fund in the rail business, helped it buy time to launch a turnaround program.
Nevertheless, Bombardier is once again facing severe uncertainties, which will weigh on its share price. Its stock fell 14 percent Wednesday.
“The transformation plan requires the company to continue ramping up production and deliveries of the C Series,” said Raymond James’ transportation analyst, Steve Hansen.
“In the short term, that’s not an issue, but I’d say over the medium term, it is an issue, and they will want to be able to sell to some US airlines,” he continued.
China’s giant three to the rescue?
With its US market in doubt for now, Bombardier is pushing hard for its first C Series sale in China, the world’s fastest-growing aviation market, which may help keep its turnaround plan on track.
Marc Meloche, Bombardier Commercial Aircraft’s head of structured finance, said on Tuesday that the company aims to close deals with Chinese airlines in the coming months and is currently in talks with the country’s three biggest, Air China, China Eastern Airlines and China Southern Airlines.
Sources said Canadian Prime Minister Justin Trudeau will soon visit China, where part of the C Series fuselage is made, suggesting deals could be announced shortly. Officials familiar with the visit say it is likely to take place in December.
Meloche noted that China’s interest is high. “Bombardier is talking to all three big Chinese airlines, as well as many regional [players] and start-ups. All are very interested in the Bombardier C Series,” he said.
Though the C Series will likely face even more competition from some aircraft made by Brazil’s Embraer SA, as well as the smallest planes made by Boeing and Airbus, Meloche assured that several Chinese lessors, many of which were looking for sale-and-leaseback opportunities, had already issued term sheets in support of C Series deliveries.
New rules requiring Chinese airline start-ups to operate at least 25 smaller-city hopper jets before graduating to bigger aircraft have also fueled hopes of Chinese demand for C Series jets.
While current C Series models accommodate 110 to 130 seats, above China’s 100-seat limit for regional jets, Meloche said Bombardier can make adjustments to meet the requirements.
He also said Bombardier could expand its activities at China’s Shenyang Aircraft Corporation, which already makes part of the fuselage for its C Series and Q Series aircraft.
But unlike Boeing and Airbus, which are expanding production facilities in China, he said Bombardier had not yet discussed the possibility of establishing a separate aircraft plant in the country.