Bombardier, Inc. (TSE:BBD.B) has settled at a new plateau. Bombardier stock continues to close at $2.00 per share. The stock should see a strong bullish move next month, when Bombardier starts delivering the first “C Series” airliners to launch customer Swiss Airlines. But, there is another potential stock mover: the much talked about government aid.
Arguably, the fact that Bombardier has hinted it does not need the aid is one of the most bullish factors for Bombardier stock. The fact that the first deliveries will go ahead as planned without such aid is proof enough.
Still, the fact that the Canadian federal government is pondering investing in the C Series program doesn’t hurt. Indeed, it suggests Bombardier might consider moving ahead with its all but shelved plans to build a larger version of the C Series, the “CS500,” which would compete directly with the Boeing “737 MAX” and Airbus “A320” series.
As for Embraer, it may consider bringing charges against Bombardier before the World Trade Organization (WTO), accusing the latter company of exploiting government subsidies to win the order for 75 C Series airliners from Delta Air Lines. (Source: “Embraer: Bombardier’s Delta CSeries order enabled by unfair subsidies,” Air Transport World, May 12, 2016.)
The fact remains that there is nothing unusual about this. Embraer, for its part, recovers development costs from having the Brazilian government as a major owner of the group and from military contracts.
Moreover, this is not the first time Brazil and Canada have fought over the international business stage and government aid under the auspices of the WTO.
This time, Embraer’s case can only refer to the aid Bombardier received from Quebec’s provincial government dating back to October 2015. Moreover, Bombardier has not received any of the promised funds yet and the C Series development leading to the first deliveries next June was completed long before the provincial aid package was even discussed. Embraer’s case is weak at best.
However, federal aid, in addition to the promised provincial aid, would be very helpful in allowing Bombardier to ramp-up production of the C Series. That production increase would ensure that the company fulfills its current orders, which include more than 100 airliners between Air Canada and Delta Air Lines alone.
Any critics of the federal investment—and there are many in prominent Canadian business circles—might be more open to the investment if they consider it could create several hundred new well-paying manufacturing jobs.
The federal aid would also allow Bombardier to make sales pitches to customers around the world with a comfortable margin of discount potential. Bombardier is competing in a fierce sector against established players, including Airbus, Boeing, and Embraer. Federal government aid simply means that Bombardier can offer aggressive discounts to win more contracts from its peers globally.
If Bombardier does receive federal government aid, it will likely total $1.0 billion, which would match the investment that the provincial government of Quebec offered up last October. If Ottawa and Bombardier have not yet signed a deal, it’s because the two parties disagree over the Bombardier family’s refusal to let go of its multiple voting shares, which is the source of the company’s control. Otherwise, the Canadian media and prominent business pundits would have a field day disapproving the deal, potentially reducing the favorable effect on Bombardier stock.
Bombardier is often criticized for having spent at least $5.0 billion developing the current C Series airliners. The investment is not finished. Bombardier could add at least $2.0 billion into the program by 2020 to optimize the assembly line and generate an inventory of replacement parts. This may sound costly but none of this is unusual in the aerospace business.
No company, whether it’s Airbus, Boeing, or even Embraer in Brazil, has been able to build a new airplane both on budget and on time. It’s impossible. The strict safety measures and fuel efficiency concerns force engineers to spend an inordinate amount of time on all parts that make up the plane, from rivets on the fuselage to the bolts securing seats in the cabin.
It is important to note that Bombardier will not be turning any major profits on the C Series until at least 2020. By then it will have delivered a sufficient number of C Series planes to collect profit. (It’s important to note that airplane makers get paid on delivery of the product, rather than on the signing of the orders.) Yet, until then, Bombardier stock, priced at just less than $2.00 per share, has strong upside potential as the official C Series launch approaches—and/or as more orders come in.