BARGAINING WITH BOMBARDIER
Government should hold out for strings attached in negotiations with Canadian manufacturer,
Talk this week of a stalemate between Ottawa and Bombardier Inc. over federal assistance to one of Canada’s most important enterprises is misguided. By this fall, the Trudeau government will have injected about $1 billion into the aerospace and rail company. The holdup is the strings Ottawa wants to attach to the deal, which it should hold out for.
It’s fair to ask why the new Trudeau government would continue the practice of injecting taxpayer money into a company that lost $6.5 billion in the past two years. Besides, Quebec has already ponied up $3.3 billion to ease Bombardier’s cash-flow worries.
But Ottawa wants to be part of a Bombardier turnaround story. The Trudeau government has met with Bombardier’s top officials no less than six times in the short time since it came to power.
Here are some factors in the Trudeau government’s keen interest in the 74-year-old Bombardier:
Given their traditional base in Quebec, the Grits won’t abide the Quebec government being seen as sole rescuer of the province’s biggest multinational firm. Nor are the feds eager to share the blame in a failed Bombardier that puts its more than 70,000 employees out of work.
After the death of Nortel Networks Corp., and with BlackBerry Ltd. struggling for survival, the Trudeau government is not going to be complicit in the demise of the most significant global ambassador of Canadian technological prowess.
Bombardier is one of the country’s largest companies, with 2015 revenues of $18.2 billion; and one of its biggest employers, notably of engineers. Bombardier is also one of Canada’s biggest exporters, with a whopping $34.2 billion in export revenues in the past five years.
Bombardier is a manufacturer, of course — a sector that has been “hollowed out” across the continent. It’s also the mainspring of a Canadian aerospace industry that is among the largest in the world. Its demise would be a historic failure in industrial policy, recalling the death of Avro Arrow.
Bombardier is surprisingly resilient. Its revenues have actually inched up by about 2 per cent between 2011 and 2015.
That post-Great Recession period was marked by turmoil. The troubled U.S. airline sector consolidated into just three big carriers. Hundreds of cities and regional governments that are customers for Bombardier’s rail products were effectively insolvent. And “corporate air forces” were thinned as public outrage over excessive CEO pay and perks put a dent in Bombardier’s private-plane business.
Yet Bombardier’s total sales held up. To be sure, the firm’s EBIT profit turned to loss in commercial and corporate aircraft. But orders from Bombardier’s worldwide base of loyal customers, assiduously developed over more than three decades, remained relatively stable.
Finally, Bombardier is among the most successful enterprises Canada has produced. Its bet-the-company transition from snowmobiles to subway systems laid the foundation for the world’s biggest rail-systems provider. In the 1980s and 1990s, Bombardier’s innovative commuter regional jet (CRJ) enabled airlines to introduce jet service in secondand third-tier destinations previously reliant on turboprop service that white-knuckle flyers had always rejected. And during its Industrial Revolution, China has turned to Bombardier for the country’s network of high-speed commuter rail systems.
For all that, Bombardier’s latest bet-the-company project has threatened to sink the firm. The nextgeneration CRJ family, the C Series, was a dicey proposition from the start, when it was announced in 2008. It would be competing with the vastly larger Boeing Co. and Airbus Group SE in the market for 100- to 160-seat single-aisle passenger jets. More challenging still, the new C Series was designed largely from scratch. It was not, like the original CRJ series, derived from a previous, tried and true aircraft.
The C Series is two-and-a-half years late, and about $2.6 billion over its initial $4.4 billion budget. To put those numbers in perspective, the $3.9 billion in EBIT losses in Bombardier’s commercial aircraft division exceed gross revenues of $2.4 billion.
But that is typical of industrial megaprojects. Production delays have dogged Boeing’s bet-the-company Dreamliner. And sales of Airbus’s A380 superjumbo have been underwhelming, since few airports are willing to retrofit to accommodate the huge aircraft.
Meanwhile, the planets appear finally to have aligned for the C Series.
This year, the C Series has proved its worth with buyers, including Delta Air Lines Inc., Air Canada, Korean Air Lines Co. (KAL) and the Swiss International Air Lines arm of Deutsche Lufthansa AG. The C Series’ advances in fuel efficiency and range have so far garnered approximately 370 orders from a total of 16 airlines and aircraft leasing companies worldwide.
Bombardier’s next challenge is to slash its C Series production costs, with a stated goal of turning a profit on each aircraft sold by 2020, just four years away. Success in costefficiency will also enable the firm to eradicate the sticker shock encountered by early prospective C Series buyers.
Bombardier needs to build a C Series plane profitably at a lower price tag of about $25 million apiece.
Finally, there’s Ottawa’s role in Bombardier’s potential reinvention.
Ottawa, like Quebec, will or should take an equity stake in Bombardier to make clear that this is an investment on which a return for the taxpayer is expected, and not another bailout.
Ottawa itself says its chief concern is with Bombardier’s corporate governance, and specifically a Bombardier dual-class share structure it wants the firm to get rid of.
Dual-class shares, by which the founding Beaudoin and Bombardier families control the firm with just a sliver of the equity, are both commonplace and an affront to “shareholder democracy.” Justin Trudeau would set a fine precedent in forcing an end to dual-class shares at such a high-profile firm.
But the negotiations between Ottawa and Bombardier over the summer are also an opportunity to think about turning Bombardier into a “pure play” aerospace firm, by spinning off the rail division.
Attempting to exert mastery over two complex businesses has cost Bombardier dearly in market share losses to Brazil’s plucky Embraer SA. Bombardier has allowed Embraer to best it in product innovation.
Like Boeing and Airbus, Embraer sticks to flying machines, for civilian, military and aerospace uses.
Spinning off Bombardier Transportation, the rail division, would provide a big one-time cash injection to enable a stand-alone Bombardier Aerospace to more easily finance the needed improvements to the next generations of C Series aircraft.
A stand-alone Bombardier Aerospace would be forced to succeed, because it no longer has a giant rail business to fall back on. An $8.3billion rail business, by the way, which for all its size and global reach can’t seem to deliver streetcars to the Toronto Transit Commission on time.