Government Should Bail Out Bombardier Stock
All aerospace eyes are targeting one of Canada’s largest companies—multinational Bombardier Inc (TSE:BBD.B). Recent years have been quite tumultuous for the company, which employs some 74,000 people worldwide, and have somewhat undermined its reputation. Structural problems and production delays for its most ambitious project to date, the “C Series” airliner, have affected Bombardier stock’s performance. After all, aerospace companies generate revenue upon delivery of the aircraft—Bombardier must deliver before BBD.B stock benefits.
Bombardier stock took a “Stuka” bomber–like nosedive in January. Shares dropped to their worst result of the past 25 years, as the stock price touched CA$0.89. BBD.B stock has since managed to climb, though not without resistance, to around CA$1.05. Analysts, however, are somewhat optimistic. Goldman Sachs is “Neutral” on Bombardier, having revised its price target upward to $1.26 in a potential upside of 57.5% from BBD.B stock’s current price.
Turbulence continues to hamper Bombardier’s performance, but the worst may be over. A clearer picture of the future is emerging and the company is not at risk of collapsing. Indeed, the premiers of Quebec and Ontario, where Bombardier aerospace has its main facilities, have pushed for Canadian federal government aid for the company’s C Series aircraft. At climate change talks in Vancouver, Quebec’s premier, Philippe Couillard, argues that the C Series was the most “important innovative project now in Canada that will benefit all of Canada.” (Source: “Ontario, Quebec premiers push for federal help for Bombardier,” CTV News, March 2, 2016.)
The smart money is on Canadian Prime Minister Trudeau responding favorably to requests for Bombardier aid.
When it enters service with Swiss International Air Lines (SWISS) in the second quarter of 2016, the Bombardier C Series will be one of the most environmentally efficient airplanes in the world. Its new geared turbofan Pratt & Whitney engines, also Canadian-made, are touted as models of fuel economy and quiet operation.
Simply put, the C Series fits Trudeau’s CO2 reduction rhetoric like a tailored suit on James Bond. In other words, the government and Bombardier can find common cause and speak of an aid package in lofty PC terms. Lest the critics charge Parliament Hill, let investors and voters alike not forget the $14.0-billion lifeline Ontario’s auto industry received. (Source: “Taxpayers in the dark over billions spent on auto bailouts, auditor says,” Toronto Star, November 25, 2016.)
Investors may not like the deal, but Bombardier will get the help it needs to start delivering the C Series, which is an excellent plane that should see more orders coming in as more of the new airliners hit the runway. The aid of $2.0 billion, which was recently announced, will cover the losses resulting from the construction of the first aircraft.
Note that this is a common phenomenon in the aviation industry, though. Just ask Airbus and Boeing about their delays in delivering the “A380” and “787.” For the record, Boeing lost $12.0 billion.
However, if the units of the C Series are not selling as well as hoped, it is not because of their technical characteristics. Aerospace engineering experts consider the new Bombardier airliners outstanding.
Bombardier’s main problem is its fierce competition from Boeing and Airbus. The companies want to protect their duopoly. Oh, and they both get plenty of aid. Boeing has received billions in government military contracts over the years—make that decades. As for Airbus, several European governments, especially France, own the majority of it.
There is no shame in a government supporting its aerospace sector. The development of a new aircraft needs the highest technological and scientific expertise. Investments, because of safety concerns, have ballooned. Meanwhile, airplanes and airplane engines/parts are among the highest value-added exports Canada produces. The perils of relying on resources have become rapidly apparent to all, especially in Alberta, so supporting the country’s aerospace sector makes sense.
Bombardier is one of the champions of innovation in Canada and the world. The company’s research budget amounted to CA$2.0 billion, which is more than twice that of BlackBerry Ltd. (Source: “Bombardier blows past BlackBerry as Canada’s top R&D spender,” The Globe and Mail, November 4, 2013.)
In the end, it is far cheaper for the government to help Bombardier take off than to pick up the pieces after it crashes from a lack of such support. It will be too late then, when the black box reveals a resounding, “I told you so.”