Airbus lifts pressure but Bombardier still faces challenges
While the European jet maker has taken over the Canadian firm's CSeries plane unit, other areas of the company need attention
Bombardier has secured the future of its struggling CSeries jet but it still needs to find ways to spur growth in other units that have ageing products or face larger rivals, industry players and analysts said.
A blockbuster deal with Airbus that saw the European company take control of the CSeries for a nominal $1 this month leaves Bombardier's commercial aviation division with the soft-selling turboprop and regional jets lines.
Meanwhile, on the rail side, Bombardier recently lost out on a merger with Germany's Siemens and now faces off against China's merged rail company CRRC and a soon-to-be-formed European behemoth in Siemens-Alstom.
Macquarie said it would tweak 2019 company valuations to focus on corporate jets and rail in the wake of the Airbus deal and media speculation on further commercial aircraft sales, according to Reuters
While the Airbus partnership boosts the CSeries and potentially Bombardier's small aerostructures and engineering division, which produces aircraft components, the remaining lines in its commercial aerospace arm are "mature and stay stable at best as the industry changes around them", according to the AltaCorp analyst Chris Murray.
Removal of the CSeries headache means the company can focus on its more profitable rail and business jet divisions.
Yet even there, concerns remain with Moody's last week downgrading Bombardier partly on "longer-term concerns" about the competitiveness of its rail business and concerns about its "future in the commercial aircraft space." Bombardier said Moody's action was "ill-founded".
Bombardier's chief executive Alain Bellemare said recently the firm continues to weigh options for the rail unit. Asked about the future of the commercial aerospace unit last week, he said: "Right now the focus is to keep on selling these aircraft."
"I think they will be forced to take a decision [to] either fix, coast or sell," the US analyst Richard Aboulafia said of the commercial plane unit. "But fix means putting some serious money into product upgrades."
Upgrading a regional jet with a new engine and wings would cost upwards of $1 billion, an amount likely to be prohibitive for the company as it spends on ramping up its CSeries and bringing its strong-selling Global 7000 to market, analysts say.
Bombardier has long weighed a sale or partnership venture to boost orders for its Q400 prop planes, which trail European rival ATR, owned by Airbus and Leonardo. Such a deal, however, would be complicated by the need to ensure Canadian job security because the aircraft are assembled in Canada, government and union sources said.
Bombardier tried unsuccessfully in 2013 to sell 100 Q400 turboprops in Russia and set up a joint-venture assembly line there.
"I'm sure they'd love to sell the Q400 if they could get a serious buyer," said an industry source specialising in the prop market.
The Airbus deal itself raised eyebrows amid claims the Canadian government encouraged Bombardier to make a deal with Airbus for its CSeries planes to thwart a potential venture with Chinese investors.
It signalled its preference for Airbus after Bombardier failed to reach an agreement with Boeing earlier this year that would have given the US company a stake in the CSeries jetliners, according to five sources familiar with the matter. The Canadian government's role has not been previously reported.
The prime minister Justin Trudeau's administration took a calculated risk in steering Bombardier toward Airbus, according to the sources. It helped save a key product for Bombardier and probably resolved a brewing trade dispute with the United States, but potentially set back efforts to improve trade and economic ties with China.
The deal with Airbus came at a critical time for Bombardier. The $6bn CSeries programme, already losing money, had become the subject of a trade dispute in which Boeing charged in a complaint to US authorities that the jetliners benefited from Canadian government subsidies and unfair pricing.
It has also been under pressure from rivals including Brazil's Embraer, which last week posted third-quarter profits of $110 million, as earnings recovered from a loss of $33.7m a year ago.
The Brazilian company warned, however, that it would enter "a transition phase with negative impacts on short term results" in 2018 as it ramps up production of its first E2 model commercial jet, due to come into service in April, according to AFP.
Third-quarter revenues were $1.31bn, a year-on-year fall of 13.5 per cent due to "lower deliveries in the commercial aviation and executive jets segments as well as a 12 percent decline in the defence and security segment as compared to 3Q16."
The world's third-largest commercial plane maker after Boeing and Airbus delivered 25 commercial aircraft and 20 executive jets, down from the respective 29 and 25 it delivered in the same period last year.
Earnings before interest and taxes was $139.8m versus $54.3m in the third quarter of 2016.
The company's highest revenues of $846.1m came in commercial aviation, representing 64.6 percent of net turnover.
Over the first nine months of 2017, revenues were $4.1bn versus a shade under $4.2bn over the same period in 2016, a decline of about 2 per cent.
Bombardier had already been trying to tie up with other plane makers and considered a Chinese partnership as early as 2015, after talks about a possible merger with Airbus became public and fell apart, Reuters said. This year, as negotiations with Boeing over its CSeries partnership faltered and concerns about the future of the programme mounted, Bombardier's interest in a deal with China intensified, two sources said.
The prospect of such a deal raised concern within the Canadian government, two of the sources said, where officials believed jobs or technology could be "syphoned away" to China. They also expressed uneasiness about what some saw as inadequate Chinese safeguards against intellectual property theft.
In a series of calls with Bombardier in August and September, the innovation minister Navdeep Bains and the trade minister Francois-Philippe Champagne, as well as senior officials in Mr Trudeau’s office, urged Bombardier to contact the European company, the two sources said.
“From the federal government’s point of view, anything was better than a link-up with China," according to an Ottawa source. The source said the government suggested to Bombardier that Mr Bellmare reach out to his counterpart at Airbus, Tom Enders.
The government's efforts eventually helped pave the way for the October 16 agreement with Airbus.
But they also came at a time when Ottawa is pushing for closer economic ties with Beijing. Canada, concerned about Washington’s threats to scrap the Nafta trade deal, wants to bolster relations with China in order to cut its heavy dependence on exports to the United States. Talks between Ottawa and Beijing are ongoing.
Bombardier declined to discuss its CSeries negotiations. Representatives of Mr Bains, Mr Champagne and Mr Trudeau declined to comment. Beijing officials declined to comment. Boeing also declined to comment.
Asked whether Airbus had stepped in because of concerns about China obtaining a stake in the CSeries, Mr Enders said: “We were obviously not privy to these discussions.”
Bombardier's most recent discussions about a Chinese tie-up centred on Comac, a Chinese state-owned firm developing passenger jets, according to a source familiar with the Canadian company's thinking. Financial terms of any potential deal were not known. Comac did not immediately respond to requests for comment.
Sources said Comac was also among the companies Bombardier held talks with in 2015, along with national aerospace conglomerate Avic and possibly a state-owned investment fund.
For Bombardier, a tie-up with the Chinese would have offered access to the world's fastest-growing aviation market, providing a boost to the CSeries programme. Bombardier has not a secured CSeries sale in 18 months.
Updated: October 30, 2017 05:26 PM