Ottawa Citizen

Trying to climb to cruising altitude

Bombardier up against rivals with deep pockets, establishe­d clients


Pierre Jeanniot bought more than a hundred planes in his six years at the helm of Air Canada, so he knows what questions airline executives have to answer before they spend billions on new aircraft. How big is the market the planes will serve? How many flights per day will we need to run? What other airlines are operating in that market? Given all this, what aircraft would best fit the route? It sounds complicate­d, but it ultimately comes down to one simple factor: economics.

“It’s a pretty extensive analysis, but it’s basically an economic decision of how effective and how competitiv­e a certain airplane would be in a certain market,” Jeanniot said in an interview Friday.

This is exactly what Bombardier Inc. had in mind when it first announced the developmen­t of the CSeries commercial jet more than a decade ago. The Montreal-based company thought the 100- to 149seat market was under-served and felt it could become a major player with a lightweigh­t, fuel-efficient aircraft.

But then the CSeries was delayed. And delayed again, while costs ballooned to $5.4 billion US from the original forecast of $3.4 billion. And in the meantime, Bombardier’s competitor­s saw the logic in its push for greater fuel efficiency and began developing their own aircraft with composite materials and efficient engines.

Today, Bombardier finds itself at a disadvanta­ge compared to its chief rivals — Boeing Co., Airbus Group and Embraer SA — because of two major obstacles.

The first, and biggest, is its balance sheet. On Thursday, Bombardier suspended its dividend and announced that it will raise up to $2.1 billion in debt and equity. The moves are an attempt to address concerns about the company’s liquidity, as it burns through cash to develop the CSeries and a new generation of Global business jets. (A third project, the Learjet 85, was suspended in January.)

“I think one of the questions in the mind of some of the buyers is, are they going to make it?” said Jeanniot, who was CEO of Air Canada from 1984-1990 and head of the Internatio­nal Air Transport Associatio­n from 1993-2002.

“They don’t want to be left with an orphan, somebody that produces a few airplanes and then abandons the project.”

The rising cost of the CSeries program and Bombardier’s decision to suspend its dividend will make airlines even more wary, according to Jeanniot.

“I think people are beginning to wonder whether they will have the financial strength to pull the whole thing through,” he said. “Removing dividends is a major signal that you’re in trouble.”

For its part, Bombardier said Thursday it was positionin­g itself “with a flexible and strong financial profile.”

Meanwhile, Bombardier’s competitor­s have been able to use their strong balance sheets to offer aggressive pricing on their aircraft.

“One of the problems that Bombardier has had is it hasn’t had a strong balance sheet to do creative financing deals,” Scott Hamilton, managing director of aviation consultanc­y Leeham Co., said.

“Clearly Airbus and Boeing have strong balance sheets — they could buy and sell Bombardier with pocket change.”

At the end of 2014, Boeing had $13.1 billion in cash while Airbus, which will report full-year results later this month, had approximat­ely $10.3 billion at the end of 2013. By comparison, Bombardier’s market cap on Friday was $4.5 billion.

The second disadvanta­ge is that Bombardier is using the CSeries to enter a new market where it doesn’t have an existing customer base.

“Incumbency is extremely important,” said Hamilton. “Bombardier does not have an installed customer base, they have to create a customer base, and that’s been a real uphill challenge.”

To date, Bombardier has secured 243 firm orders for the CSeries. Its goal is to reach 300 by the time the first planes are delivered to customers later this year.

Meanwhile, in its determinat­ion to get the CSeries to market, analysts argue that the company neglected its other products, allowing competitor­s to edge their way into markets it used to dominate.

For example, Hamilton argues that Bombardier’s CRJ regional jet has been overtaken by Embraer’s E-Jets, while the Q400 turboprop is “struggling” to compete with the ATR 72.

Business aircraft, which have long been Bombardier’s bread and butter, have also suffered, most notably with the suspension of the Learjet program last month.

The company is in the midst of developing the Global 7000/8000, a luxurious, long-range business jet. But, like the CSeries, it too has been delayed and management is now being vague about when it will be completed.

“If there was a better world, the Global 7000/8000 would be available now,” Rolland Vincent, president of aviation consultanc­y Rolland Vincent Associates, said in an interview.

“It’s a very competitiv­e space. The sooner you have a product in this market, the better, and unfortunat­ely their two competitor­s both have products that are going be available earlier,” he added, referring to Gulfstream Aerospace and Dassault Falcon Jet.

The best hope now for the company is the change in leadership that was announced Thursday. Former United Technologi­es executive Alain Bellemare was named CEO, replacing Pierre Beaudoin who will move into the executive chairman role formerly held by his father Laurent.

“The revolving door of executives and sales at the aerospace division has created a real crisis of confidence in the commercial airline marketplac­e,” said Hamilton.

 ??  BOMBARDIER ?? Delays and cost overruns have put Bombardier’s CSeries at a disadvanta­ge compared to its chief rivals, who have developed their own similar aircraft with composite materials and fuel-efficient engines.
 BOMBARDIER Delays and cost overruns have put Bombardier’s CSeries at a disadvanta­ge compared to its chief rivals, who have developed their own similar aircraft with composite materials and fuel-efficient engines.

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