Bombardier sale deepens roots in Russia
Three deals to sell Q400 props could be worth $3.4B
Bombardier Inc. announced three conditional deals to sell Q400 turboprops in Russia Wednesday. But the tentative agreements, including one to build a plant there, are preliminary and their implementation speculative.
The deals, including a letter of intent and a memorandum of understanding, are scheduled to be finalized in 2014, Philippe Poutissou, vice-president of marketing for Bombardier Commercial Aircraft, said in an interview. But there is no target date for their implementation.
As The Gazette reported in June, Bombardier has signed an “industrialization” memorandum of understanding with state-owned Rostekhnologii (Rostec) to explore building a final assembly plant in Russia in a joint venture. Only if that condition is fulfilled, Rostec has agreed in return to place, through its Avia Capital Services subsidiary, 50 of the Q400 70-seat turboprops built there with carriers in Russia and Commonwealth of Independent States nations — former Soviet satellite states. The third preliminary agreement is a letter of intent from Ilyushin Finance Co. to buy up to 50 Russian-made Q400s — also conditional on Bombardier building a plant there.
At full price, far above the price carriers pay in reality, the deals for the 100 Q400s would be $3.4 billion U.S. Dis- counts in the industry are typically between 30 per cent and 40 per cent, but can reach higher than that.
Where the final assembly plant would be is still undetermined, as are its costs, who would build it, its production targets, its startup date, who, if anyone, would control the joint venture and the number of people it would employ, Poutissou said.
But production in Russia would be in addition to the current manufacturing plant in Downsview, Ont., where the Q400 is currently assembled and would not threaten the 4,000 jobs there, he said. In fact, it could mean additional work for the Canadian facility, he noted.
“Downsview maintains responsibility for the overall program management — design, customer services and support. So when we look at the program as a whole, these orders are incremental— they are aircraft that would not have been ordered had we not engaged in a discussion about a final assembly (plant).”
The Russian-made planes would be built and maintained to the same standards as the Canadian ones, Poutissou said.
The market for regional aircraft is projected to be 400 airplanes in the next 20 years, Poutissou said.
Analysts welcomed the tentative orders for 100 Q400s, the Bombardier commercial aircraft with the smallest backlog — about 13 months, or 36 planes, half of them destined for WestJet Airlines Ltd. — and languishing sales.
In 2012, the division sold only 50 Q400s, and a mere 12 in the first half of this year.
Benoit Poirier, an analyst with Montreal’s Desjardins Securities, said in a note to clients that the deal “would secure the Q400 backlog for approximately four years (based on our delivery forecast of 23 units in 2014). We note that the Q-Series family was the only Bombardier segment that previously had a backlog below its target range of 18 to 21 months. … These announcements confirm and reinforce Bombardier’s strong positioning in Russia. … (Bombardier) forecasts 144 per cent growth in demand for the 60- to 99-seat turboprop segment over the next five years in Russia and the neighbouring region.”
Cameron Doerksen of Montreal brokerage National Bank Financial wrote in a note that “without new orders in the near-term, Bombardier is at risk of having to significantly curtail production of the plane.”
“If the preliminary deals are executed, it would go a long way toward revitalizing the Q400, sales of which have been very slow of late.”
The agreements have been in the works for a long time and negotiations were at times acrimonious. At the Paris air show in June, Rostec said Bombardier had withdrawn from the talks, and president Sergei Chemezov told reporters that his firm was now in talks with Bombardier’s only rival in the turboprop business, France’s ATR.
The dispute centred on whether or not the Russians had agreed to buy up to 150 Q400s, leaked reports noted.
Chemezov, formerly a KGB officer and a close colleague of Russian President Vladimir Putin when both were spies in Dresden, then in East Germany, now heads statecontrolled Russian Technologies State Corp. and sits on the board of fighter-jet manufacturer Sukhoi.
In interviews and conversations, Bombardier officials make a point of mentioning the importance of Russia as a market, including the 120 Bombardier aircraft flying in that country. But that number is comparatively minor when stacked up against Bombardier planes flown by individual airlines — including 466 regional jets by Delta Air Lines alone.
Bombardier also signed a letter of intent to start “exploratory discussions” with aircraft manufacturer IRKUT Corp. on possible customer support collaboration with the Russian MS-21 aircraft, a 150- to 215-seat aircraft now due out in 2017.