Government Aid Is Bullish for Bombardier Stock
Bombardier, Inc. (TSE:BBD.B) has found some financial uplift. Since Air Canada placed a firm order for at least 45 “C Series” airliners, with an option for 30 more, Bombardier stock has traded in a band between CA$1.05 and CA$1.30. Shares have not found a stable operating altitude quite yet, but the overall prospect is bullish.
Bombardier is moving ahead with the C Series production schedule. The company is on target to deliver the first C Series to launch customer Swiss International Airlines next June. The Canadian federal government, meanwhile, has realized that Bombardier needs support. As it stands now, Bombardier cannot compete effectively against the Boeing and Airbus sales machines, backed as they are by lucrative defense contracts and direct state ownership from three EU governments.
Ottawa has now asked external firms, including a U.S. investment bank, reportedly Morgan Stanley, to study the feasibility of Bombardier’s request for CA$1.3 billion in financing aid. The sum, if it were to be approved, would match the CA$1.3 billion in aid that the Government of Quebec already pledged last October.
Bombardier said it needs CA$2.0 billion more to complete the C Series program. If Ottawa refuses the help, Bombardier will need to find the sum elsewhere. However, it is unlikely that investors will have to worry about Bombardier crashing. The chances of an Ottawa parachute for Bombardier are high. Bombardier investors won’t have to wait long for confirmation.
Ottawa will announce whether or not it will help Bombardier within weeks. The Canadian government is said to have finished studying the aid request for assistance from the Montreal aircraft manufacturer. And Canada’s Prime Minister, Justin Trudeau, has described the C Series as a “fabulous” aircraft. (Source: “Canada probe of Bombardier aid bid complete; decision due soon,” Reuters, March 17, 2016.) Bombardier stock could see a bullish move back toward $2.00 per share if—or when—the Canadian federal government intervenes.
However, 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; from an engineering standpoint, the product is world-class. 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.
The C Series has been in development for a decade and has put Bombardier directly in competition with Boeing and Airbus. The C Series is a new generation of aircraft for commercial airlines. Bombardier has touted it as an alternative to smaller models of passenger jets built by its rivals.
Critics of federal aid for Bombardier should note that in the event of a CA$2.0-billion federal injection, the Canadian government will have done no more 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. According to Bombardier, if the federal government makes the requisite show of support, orders will follow. The logic makes sense. Airlines want to ensure their orders are filled. Ottawa’s support gives them assurances to this effect.
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. Still, you needn’t be a regular at Las Vegas casinos to bet in favor of Ottawa aid for Bombardier. (Source: “Federal Bombardier aid announcement to come within weeks,” Montreal Gazette, March 17, 2016.)
Ottawa is ready to invest in Bombardier stock; if there is a problem, it has more to do with how to structure that investment. Ottawa is rather concerned about the fact that the Beaudoin-Bombardier family has more than 50% of voting rights, but a minority of the shares. The other issue is more political. (Source: “Ottawa completes probe of Bombardier aid: Report,” BNN, March 17, 2016.)
Accordingly, the Liberals will help Bombardier, but they will also secure assurances of a return on investment in order to reconcile the aid package with demands from Western Canada, which has suffered because of low oil prices. (Source: “Don’t forget oil sector: Saskatchewan premier watches Ottawa on Bombardier,” CTV, February 18, 2016.) That said, the current reversal of the bearish oil price trend makes Ottawa’s aid even more likely—and the story for Bombardier (BBD.B) stock far from over.