By Chirag Gandhi
Bombardier Today
Bombardier Inc. shares (BBD.B: TSX) closed near a three-year high approaching $4 per share for the Quebec based multinational aerospace and transportation company. Bombardier has come a long way from their dark days in early 2015, as the company was considering bankruptcy after facing a massive cash-crunch. With over 50,000 direct Bombardier employees and hundreds of thousands of indirect jobs in the economy, the provincial government decided to bail out one of the biggest manufacturing companies in Canada.
The C Series Program in Jeopardy
In early 2015, newly appointed CEO, Alain Bellemare, decided that the company would need new cost saving measures and vision to save the company. Hence, Bellmare announced an aggressive turnaround plan that rested heavily on the delivery of its new, Global 7000 business jets to achieve sales of $20 USD billion by 2020 (a 25 percent increase compared to 2017). At the same time, the C Series program was in serious trouble, as it was already two-and-a-half years behind schedule and $2 billion USD over budget. This lead to thousands of jobs being cut across Quebec and an immense $3.2 billion USD impairment charge on the program in October 20152. Consequently, there was significant pressure on the government to save a gem that had lost its shine from poor management decisions and economic conditions. In early 2016, the Quebec government decided to pledge a $1 billion USD investment in the C Series commercial jet program in return for 49.5 percent of a new limited partnership for the C Series program.
Blockbuster Deal: A Win for Both Parties?
Bombardier had struggled to close out any major buyers due to fears of its long-term viability and the limited production capabilities of the C Series program. Finally, in October 2017, Bombardier decided to give the keys to the its program to Airbus SE (AIR:FP). Bombardier gave them a 50.01 percent interest in the C Series limited partnership for no cash consideration (Airbus assumes no debt of the program) while the C Series became Airbus's aircraft product. In exchange, Airbus gave its global procurement, sales and marketing and customer support expertise to the C Series program. This deal reduced Bombardier's stake to 31 percent and the Quebec government’s stake down to around 19 percent. Airbus’ CEO, Tom Enders believes that this new partnership would help sell thousands of planes, calling the C Series a "superb single-aisle aircraft”. Therefore, Bombardier felt this was the best opportunity to maximize sales on the C Series program.
A Short-Term Strategy Shift
Currently, the market demand is flat for other Bombardier jets, while demand for the new Global 7000 planes is expected to rise closer to 2020. Hence, Bombardier has shifted its short-term focus to the “aftermarket business” of servicing existing jets. This business includes maintenance packages (such as minor upgrades) on existing planes, specifically for airline clients. The demand for this package comes from the growing need for improved GPS systems and faster internet transmission. Bill Molloy, VP of Bombardier’s business jet division believes that aftermarket business services “will help generate double-digit revenue growth this year [2018], which is expected to rise by $500 million by 2020”. It comes as no surprise that Bombardier has shifted its short-term plan to provide aftermarket business services, seeing as margins are high and they expect to maintain over 35 percent of the 4,700 in-service jets sold over the past few years.
In early March 2018, Bombardier took advantage of a 31 percent share gain to raise approximately $500 million USD, marketing its first stock sale in three years. The last stock sale came in 2015, when the company was desperately trying to increase their cash and working capital to keep day-to-day operations afloat. This time around, management is taking advantage of the high stock price to shore up its finances and build further operational flexibility on Bombardier’s Balance Sheet. Likewise, Fadi Chamoun, BMO Capital Markets analyst reaffirms this position by attesting that a stock sale is “an insurance policy that might be worth the costs given the unpredictable nature of the aerospace segment” including the danger of potential risks of new U.S. tariffs and increasing interest rates.
The Bottom Line
The Quebec government has invested over $1 billion USD in Bombardier, which currently represents a 19 percent stake in the C Series program (around $150 CAD per Quebec citizen). Bombardier is also directly responsible for 50,000 jobs and generates hundreds of thousands of indirect jobs in Canada. CEO Alain Bellemare is more than halfway into his transformation plan of the company, and the results have been impressive. The stock price has more than doubled since 2015 and management expects double-digit growth as the demand for C Series planes surges and the launch of the new Global 7000 planes approaches. Once a shining gem in the Quebec manufacturing sector, Bombardier has started to re-establish its position in the industry and there is no question that investors will keep a close eye on its future performance.
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