Turbulence not over for Bombardier after $5B loss

[Bombardier CEO Alain Bellemare (3rd L) and Air Canada CEO Calin Rovinescu (3rd R) hold a news conference with their executives in Montreal, Feb. 17, 2016. REUTERS/Christinne Muschi]

Bombardier’s fortunes may be improving as the Quebec-based aerospace company begins shipping its C Series jets to customers, but aviation experts say the turbulence is far from over.

The Montreal-based company announced on Wednesday that it plans to eliminate 7,000 positions over two years, including 2,830 in Canada, after losing US$5.34 billion in 2015.

That loss is the latest in a long line of troubles for Bombardier, which is known for its business jets and turboprop passenger airplanes. It also has a substantial rail business.

Bombardier’s new C Series jets, designed for medium-range flights, were supposed to bring the company into a new market, but experts say delays in development and manufacturing have let competitors at Airbus and Boeing catch up with what was supposed to be a next-generation design.

Air Canada said on Wednesday that it has ordered 45 of the C Series planes, with an option to buy 30 more.

Karl Moore, an aviation expert and professor at McGill University’s Desautels Faculty of Management, said the sale is an indication that the company is on a better path after years of losses.

“The darker days are over,” he said. “The C Series will bring light and goodness, but it will take a year or two as they ramp up production and learn how to make them effectively.”

Moore said the layoffs look to be part of a larger restructuring under new CEO Alain Bellemare, who took over the top job in February 2015, and that some of the job losses were planned as a part of the end of the design cycle for the C Series.

“The new team has led a transformational effort to improve the business and get the margins up, which is in the long-term interests of the shareholders and the employees,” he said.

Last year, the Quebec government offered the beleaguered company a $1-billion bailout in exchange for half of a new subsidiary that will own the C Series jets.

“All the major players in aerospace get government help; it’s the nature of the industry,” Moore said, though he admitted Bombardier’s bottom line is more challenged than Airbus or Boeing.

He said the C Series, which is designed to be quieter and more fuel efficient than its competitors, is a great start for a turnaround in Bombardier’s fortunes.

“Now would be a dumb time not to be supporting them with where they are in their product lifecycle,” he said.

Bombardier formally asked the federal government for financial help last year, and on Wednesday Transport Minister Marc Garneau said it’s still considering the request.

Innovation, Science and Economic Development Minister Navdeep Bains said in a statement on Wednesday that the government will only take action in the interest of Canadians.

“We are continuing our dialogue with Bombardier on its request for federal assistance,” he said. “We have been clear that such an important decision will only be made after due diligence, careful consideration and a strong business case.”

No Third Act

Fred Lazar, an aviation expert at York University’s Schulich School of Business, says the outlook for Bombardier remains bleak.

“All they’ve bought is maybe 10 years of production and then that’s the end of it,” he said. “They don’t have the financial resources and obviously they don’t have the risk-taking abilities to figure out what comes post-C Series. What’s next? There is no Act Three.”

Lazar said research and development of the next aircraft has to begin within the next two or three years and could cost billions.

“Given the fiasco they’ve just gone through, given their very weak financial position and very weak balance sheet, no one is going to help them with that,” he said.

Lazar said the fuel efficiency of the C Series, an all-new design as opposed to the updated versions of existing platforms sold by its rivals, no longer makes sense as the main selling point for an aircraft.

The price of oil, which is correlated to the cost of jet fuel, has fallen from a high above $105 in June 2014 to levels below $30 in recent weeks.

“Fuel is still an important cost factor, but not as important as it was eight or 10 years ago when this was being designed,” he said.

The best thing for the company, he said, would be to abandon the commercial airline market at the end of the C Series’ life to focus on corporate jets and turboprop short-haul planes, and perhaps seek a partner in an emerging economy such as Russia or Brazil despite the possible political controversy.

“If they’re going to remain in the aerospace business, they’ve got to find a partner,” he said. “You can have the head office in Canada. You can have production here. At least that offers a possibility of the company being a viable competitor beyond 2025.”