Following the announcement of massive layoffs at Bombardier, Inc. (TSX:BBD.B) and a long awaited Air Canada order for the “C Series,” investors find Bombardier stock more appealing. Since the company’s restructuring and new C Series announcement, BBD.B stock has gained some 25%. Does this mean Bombardier is finally out of the fog?
Not quite yet. Bombardier has many structural and governance issues to resolve.
Indeed, it is surprising that the company has delivered such a technically advanced aircraft as the C Series. There is no question that from an engineering standpoint, the product is world-class.
However, the profit margin targets for 2016 in all divisions and the 7,000 job cuts suggest management wants to turn the company around with a renewed sense of urgency.
But the risks are high. Moreover, it is unlikely that investors will be enthusiastic enough to push Bombardier stock beyond $2.00 per share—a price at which it traded around for most of last year—anytime soon.
One big point to be made: a big BBD.B stock price shift will not occur unless the Canadian federal government intervenes. The C Series needs that support now.
The C Series is a new generation of aircraft for commercial airlines that has been in development for a decade. It features an entirely new type of engine—the “geared turbofan.”
Moreover, the C Series puts Bombardier in direct competition with Boeing and Airbus. However, Bombardier has touted its airliner is an alternative to smaller models of passenger jets built by its rivals. Of course, the unfortunate facts are that the C Series is two years behind schedule and at least $2.0 billion over budget.
Because of the two- to three-year production delays, competitors have caught up and can match many of the C Series’ admittedly impressive performance targets. While many airlines have shown interest in the C Series, fears of deferrals and uncertainty have caused them to back away.
While the new Air Canada contract could fetch some $3.8 billion, airlines pay for product on delivery. Bombardier needs support in order to complete that crucial order—as well as the others.
But going back to the company’s production delays, the delay, in itself, is not as overwhelming a problem as many pundits have suggested. Cost overruns and delays are expected in the aerospace industry.
Boeing had similar—if not worse—problems with its “787 Dreamliner.” That plane was also advanced, yet it caused quite a nightmare at Boeing headquarters. The 787 flew for the first time in 2009—three years late. It faced major technical problems that caused the delay of its first commercial flight and cost Boeing $12.0 billion, 120% more than its original budget. Boeing was able to sustain the 787 program thanks to “bread and butter” “737” and “767” production. (Source: “For Boeing, the 787 Dreamliner Nightmare Just Won’t Stop,” Daily Finance, December 21, 2010.)
In comparison, a similar loss at Bombardier would have killed the company.
How the Canadian Government Could Save Bombardier Stock
The critics also forget that governments support the aerospace sector with subsidies and policies that substitute for billions in direct financial aid. Some governments are highly nationalist, essentially forcing national airlines (which also benefit from direct and indirect government money) to buy airliners produced domestically.
In that sense, the Canadian government has done no more or no less for Bombardier than the U.S. federal and some state governments have done for Boeing, or the French and German governments have done for Airbus. Unfortunately, Bombardier’s move to a seat at the “adult table” of airplane makers means the company needs similar support from its Canadian and Quebec governments.
The Canadian government, despite fears of economic turmoil in three years, has a limited margin for maneuver to offer Bombardier sufficient financial aid to sustain production of the C Series. Bombardier does have the seeds of a potentially promising recovery operation, though.
If the Federal government does these two things, it could boost Bombardier’s C Series order book to a point where investor confidence in BBD.B stock could increase substantially:
1. Allow Bombardier to Sell to Iran
Iran needs aircraft and Bombardier has not sold a single C Series there, even though it is an excellent plane for Iran’s market. Unfortunately, there are still legislative, financial, and political obstacles that hamper Bombardier’s sales in Iran.
These obstacles don’t apply to France’s Airbus, which recently sold several billion dollars’ worth of its aircraft to Iran. (Of course, the French government’s subsidization of the sale with export loans sweetened the deal.) Italy did likewise and Iran Air bought new ATR turboprops instead of Bombardier’s equivalent, the “Q-400.” Essentially, Airbus and ATR reached the Iran Air contracts after their respective governments already cleared the runway for business with Iran.
In early February, Canada eased sanctions against Iran. Bombardier can theoretically sell aircraft to Iran, but it still has to ask the governments of Canada and the United States before exporting a single plane.
2. Allow the Expansion of the Toronto Island Airport Runways
The Canadian federal government can help Bombardier, avoiding using taxpayers’ money or direct cash handouts, by allowing the Toronto Island Airport to expand its runways. This would attract exactly the kind of traffic the Bombardier C Series accommodates. The expansion would stimulate sales of the aircraft in North America.
The Bottom Line on Bombardier
Inasmuch as Bombardier is facing headwinds, these are expected in the modern aerospace industry. Forty years ago, a plane such as the Boeing “747” could go from drawing board to runway at JFK Airport in a matter of three to four years. Today, it would take at least 15 years. Safety, legal, and commercial airline profitability concerns have made aerospace developments much costlier and more complex.
Instead of playing the Bombardier management blame game, perhaps it is time for realistic expectations.
Bombardier is still airborne and, in fact, the latest events suggest BBD.B stock is stabilizing or heading toward cleaner air. The company must certainly make good use of public and private funds and any aid from the federal government.
Still, the authorities must also recognize that, if they are keen on Canada maintaining its presence in the aerospace sector, they must go beyond financial aid to support Bombardier employees and investors and boost Bombardier stock.