BOMBARDIER’S DOWNWARD SPIRAL
Disappointing fourth-quarter results signal the dismantling of the company as we know it. An analysis by Frédéric Tomesco
MONTREAL Newly installed Bombardier Inc. boss Alain Bellemare struck a confident tone when he addressed Wall Street analysts in person for the first time two days before the 2015 U.S. Thanksgiving.
“The potential for Bombardier is great,” Bellemare said at his maiden investor day, speaking from a podium overlooking a crowded Manhattan hotel ballroom.
“We have developed a five-year turnaround plan to drive superior performance across all of our businesses. This team is committed to transforming Bombardier and driving superior performance.”
Investors are still waiting for Bellemare to deliver on that last promise. Bombardier shares have lost about half of their value since February 2015, and the Montreal-based manufacturer — saddled with more than US$9 billion of debt — has repeatedly missed cash flow targets over the last two years. And while many of the issues predate Bellemare’s arrival as CEO, his inability to avoid execution stumbles has left the company in a vulnerable position.
Thursday’ s disappointing fourth-quarter results — on the fifth anniversary of Bellemare’s hiring — signal the dismantling of Bombardier as we know it. The company warned investors last month the results would be worse than expected, saying it’s reviewing “strategic options” that could include asset sales. Bombardier burned through about US$1.2 billion of cash last year, more than double its previous estimate.
“2020 was supposed to be the capstone year of their turnaround,” said Chris Murray, an analyst at AltaCorp Capital in Toronto. “They’ve had some significant execution issues, which are terribly disappointing, and management’s credibility has taken a hit. Now they’ve got to make some fundamental decisions about the future.”
Bombardier “seemed to be on track for a while, but this last announcement created a lot of negativity,” said Dan Fong, an analyst at Veritas Investment Research in Toronto.
What went wrong — and why?
They’ve had some significant execution issues, which are terribly disappointing, and management’s credibility has taken a hit.
CHOPPING, NOT GROWING
Bombardier today is a far cry from the company Bellemare envisaged back in 2015, when he predicted 2020 revenue would exceed US$25 billion and free cash flow would be positive, allowing him to pay down some debt. Analysts such as National Bank Financial’s Cam Doerksen estimate 2020 revenue will barely top $16 billion — and that’s without factoring in additional asset sales.
To bolster cash reserves, Bellemare has pared Bombardier down to the bone. Just in the last two years, he handed control of the CSeries jet to Airbus, sold Toronto’s Downsview facility for $635 million, raised about US$250 million by selling the turboprop business and agreed to sell the CRJ regional-jet program to Mitsubishi Heavy Industries for about US$550 million. In November, he struck a deal to sell the aerostructures business to Spirit AeroSystems for about US$500 million.
On Thursday, the company announced it was selling off its minority stake in the Airbus A220 — the cutting-edge aircraft that began life almost two decades ago as the Bombardier CSeries and nearly bankrupted the company as development costs ballooned past $6 billion from the original $2.1-billion estimate.
In a statement, Bombardier said it is also pursuing other “strategic options to accelerate deleveraging.”
THE CSERIES GAMBLE
An exit from the A220 turns the page on a critical chapter in company history — and a multi-billion-dollar gamble that went awry.
Former CEO Laurent Beaudoin bet on the CSeries to vault the family-controlled company beyond regional jets — the 50- to 100-seat planes that had fuelled Bombardier’s growth in the 1990s — and into the narrow-body aircraft market controlled by Airbus and U.S. rival Boeing.
Made from a brand-new design and equipped with quiet, fuel-efficient engines, the CSeries initially struggled to pick up orders under Bombardier’s guidance. It entered service in July 2016, about 18 months late.
To make matters worse, analysts say, Bombardier first shied away from offering the discounts that are customary in the industry.
That, the analysts said, opened the door for Airbus and Boeing to win key orders in Europe and the U.S. with sweetheart deals, depriving Bombardier of much-needed sales momentum.
“Going it alone on the CSeries, without an established partner to share the manufacturing risks, was a big mistake,” said former Caisse de dépôt et placement du Québec senior executive Michel Nadeau, who has followed Bombardier’s evolution for decades. “You don’t take on a duopoly like that, especially if the incumbents have much deeper pockets than you.”
Successive production rampups have also been slower than planned, hurting revenue. Airbus delivered 48 A200 jets last year, well short of the 75 to 85 that Bombardier was originally targeting for 2019.
BAILOUT STRATEGY
As a minority investor in the A220 venture, Quebec has been watching developments closely.
Bombardier “is a file that is right at the centre of my preoccupations,” Economy Minister Pierre Fitzgibbon said last week as he highlighted the need to preserve aerospace jobs. “It’s probably the most important economic file.”
More than 12,500 people work for the company in Quebec, part of a Canadian workforce of about 17,600. Bombardier is the central player in Quebec’s aerospace cluster, which employs about 42,000 and generated sales of $15 billion in 2018, according to industry group Aéro Montréal.
The job numbers explain why Quebec came to Bombardier’s rescue in October 2015 by announcing a $1-billion investment in the CSeries. The Caisse also helped the company to shore up liquidity, paying US$1.5 billion for a minority stake in the rail business. The federal government later chipped in with $372.5 million in loans.
How important was Quebec’s backing? In a 2016 interview with Radio-Canada, Bellemare acknowledged that without the government’s contribution, “Bombardier didn’t have the cash to continue operating.”
“The CSeries is great plane, but they had to take on a lot of debt to build it,” Karl Moore, a management professor at McGill University, said in a telephone interview.
“They tried to do it on their own and they couldn’t. The world is a better place with the CSeries flying, except that the feather isn’t in Bombardier’s cap anymore.”
This time around, Bombardier cannot count on another government cash injection. “It’s out of the question that we invest” in the A220, Premier François Legault said last week.
TOO MUCH, TOO SOON
Yet Bombardier’s current plight isn’t just tied to the CSeries.
Many analysts say Bombardier over-extended itself by trying to develop two other aircraft programs in parallel with the CSeries: the large business jet now known as the Global 7500, and the smaller Lear 85.
The latter proved particularly ill-advised. Engineers rushed to develop the Lear 85’s all-composite airframe just as market demand for smaller business jets was evaporating. Bellemare scrapped the program in October 2015, booking a US$1.4-billion writedown.
“Developing three jets at the same time was always going to be complicated,” Louis Hébert, a management professor at the HEC Montreal business school, said in an interview. “They didn’t have the necessary manpower to pull it off, or the financial resources. They bit off more than they could chew.”
Though it hit the market two years late, the Global 7500 at least looks like it was worth the wait.
As the only business aircraft that can fly New York-Hong Kong non-stop, the Global 7500 has allowed Bombardier to solidify its foothold in the profitable upper end of the luxury jet market. It is sold out through 2021 and has won numerous design awards.
TRAIN PAIN
Of late, business jets aren’t Bellemare’s greatest problem — trains are.
Last month in New York City, Metropolitan Transportation Authority officials pulled about 300 Bombardier-built railcars due to malfunctioning doors — prompting city comptroller Scott Stringer to blast the company for having “sold us lemons.” The trains returned to service after a 16-day interruption following inspections and software upgrades.
Bombardier is one of the world’s biggest makers of rail equipment, with a lineup that features highspeed trains, subway cars, tramways and signalling systems. Despite the bad publicity, the company continues to win business, with a backlog of about US$35.7 billion at year-end — three per cent more than in 2018.
Its Achilles heel over the past decade has been what the company refers to as “legacy projects” — a series of technically complex orders that have depressed margins in part due to late-delivery penalties. The contracts include deliveries to New York City’s MTA, Germany’s Deutsche Bahn, Switzerland’s SBB and London Overground of the U.K.
Various Bombardier train executives over the years have attempted to simplify production through more selective bidding, greater standardization and centralized procurement.
Things haven’t exactly gone as planned.
On Jan. 16, Bombardier said the train unit would likely post a pre-tax loss of $230 million in the fourth quarter. The setback reflects a charge of $350 million related to the London Overground and SBB contracts, as well as increased manufacturing costs for projects in Germany.
Bombardier is now negotiating with customers to reset schedules and agree on penalties.
“Everyone always has some problem contracts, it’s the nature of the industry,” Murray at AltaCorp said. “There just seems to be a disproportionately high number of programs with quality and delivery issues at Bombardier.
Some of the programs are incredibly difficult technically, and they probably didn’t do enough upfront research and development. They didn’t standardize fast enough.”
SBB’s double-decker trains — part of a US$1.8-billion contract awarded in 2010 — proved particularly challenging, in part because of a “passive tilt mechanism” allowing the vehicles to negotiate curves faster. SBB also wanted the carriages to be pressure-resistant to alleviate the strain on passengers’ ears in long tunnels.
After faulty doors and software issues held back deliveries, Bombardier said in November it expects to complete the SBB contract by mid-2021, two years later than first envisioned.
In a December 2018 interview, Bellemare admitted Bombardier initially didn’t have the manpower and the capability to support all of its rail contracts. “The system choked,” he said.
It’s sad to see Bombardier fallen from its perch. They still make great products, but it seems they will be considerably smaller within a year.
WHAT NEXT?
Bombardier is now attempting to solve its rail woes under new leadership. Danny Di Perna, an aerospace veteran, took over last year, becoming the fourth executive to lead the business since 2013.
“Alain should have made transportation deliver,” said Moore at McGill. “They’ve really hurt their reputation in the marketplace for not delivering. It will take some years to get over that.”
It remains to be seen whether Bombardier will still be making trains when the execution issues have been fixed.
Press reports out of Europe last month said Bombardier is discussing selling or combining its train business with rivals such as France’s Alstom SA and Japan’s Hitachi. And on Tuesday, the Wall Street Journal reported the company is also negotiating a possible sale of its business jet unit to Textron Inc. of the U.S.
“They are essentially down to two parts, trains and business jets,” said McGill’s Moore. “The question now is, which do you sell?”
“It’s sad to see Bombardier fallen from its perch,” Moore added. “They still make great products, but it seems they will be considerably smaller within a year. The Bombardier of the future will likely have much less debt, but one viable business.”