For the regular readers of my Blog, you know that I have been very critical of Bombardier Aerospace for some time, and I do take pride in the fact that I believe I was spot on for calling for BIG changes at the top.
Back on January 20, 2015, I was the first to call for a change at the very top, CEO Pierre Beaudoin and sure enough it came a month later, and now the shake-up at Bombardier Aerospace is in full swing.
This is the CSeries, the aircraft program cost is up to $5.4 billion and has really hurt Bombardier’s reputation and financial performance. Now, a new man is at the helm with some new and very capable executives in tow, its time to put things in order, and sweep away the mediocrity that has crept into the company the past 10+ years. The next 12 months are crucial to the future of Bombardier and Canada’s aerospace industry, all eyes are on new CEO Alain Bellemare.
More on Bombardier-please read previous articles.
The latest changes were the “replacing” of Mike Arcamone as President of the Commercial Aerospace Division, with industry veteran Fred Cromer (ex-President of ILFC once the largest commercial aircraft lessor in the world), and the departure of CFO Pierre Alary.
It is not that Mike Arcamone was not a good executive, but just like the previously “replaced” Bombardier Aerospace executives like Chet Fuller, Guy Hackey, Philippe Poutisson and Raymond Jones, they were not effective and could not get the job done, something was lacking in the way the CSeries was marketed and organised.
It is what I have been saying for almost 2 years, that something was seriously broken at Bombardier, but no one had the balls to say “the emperor has no clothes”. The executives that were replaced, were very experienced and good qualified people, but in my opinion could not see outside ‘the Box’ and were still dreaming they had this “Game Changer” when all the other OEM’s re-enegined it was not a game changer anymore, but just another aircraft using new fuel efficient engines like Boeing, Airbus, Embrear and Mitsubishi, and that required a new perspective, new positioning, new value proposition and a new approach to sales and marketing. I do not think the CSeries has a cash operating advantage per ASM versus A320neo, E2-195 or B737Max, at best a slight advantage on trip cost, but it is all about CASM (cost per available seat mile) or cost per seat flight hour.
Now, new CEO Alain Bellemare is making the changes that were needed from the TOP DOWN, long overdue, and they do not have to be French Canadians anymore, time to throw out the “Quebecois nepotism” and bring in anyone that can bring positive change to Bombardier, whether or not they speak French and out with those that have nothing new to add to the company, mediocrity has to go, it has been holding Bombardier back for too long.
Every dynamic company wants and needs ‘A Players’, (Harvard Business Review) these are highly productive individuals that have achieved many goals and successes by their ability to set high goals and standards, ability to solve problems, expertise in some area, embrace change, take initiatives, walk the talk, have good judgement, have personal resilience and this has been the problem at Bombardier, “sandbaggers” instead of “go-getters” running the show in senior and middle ranks.
Bombardier’s rise in the Aerospace industry was quick, in 6 short years it went from nothing to one of the biggest Aerospace OEM’s in the world, all through acquisitions (Canadair in 1986, Shorts Brothers 1989, Learjet in 1990 and de Havilland in 1992), this was going to be Quebec’s show case in a possible independent Quebec, at that time there was a great deal of talk to separate from Canada, and Bombardier would be its industrial conglomerate show case of what Quebec can achieve. I know from many ex-de Havilland employees how quickly new French Canadians were hired and placed in positions they were not qualified for, or were tagged on to some aerospace expert to learn quickly and then the expert was laid off.
Thank good separatism is gone (for now), but this was the beginning of the rise of mediocrity within de Havilland which then spread throughout Bombardier. I have discussed this with many airline executives and Bombardier employees who have confirmed that the corporate culture and professionalism within the company had clearly deteriorated over the past 10-15 years.
Back to the issue at hand, on top of bringing in Fred Comer, Bellemare has brought in Colin Bole as Senior VP Sales/Asset Management, a very important position, one that Bole a veteran aircraft leasing and OEM sales executive will hopefully turnaround, as the future of the CSeries and ultimately Bombardier Aerospace depends on new sales of the CSeries, still stuck at a dismal 243 after 6 years of effort ! For this Bellemare is bringing in Plane View Partners and its Chairman Henri Courpron (again ex-CEO ILFC, ex-CEO Airbus North America) as strategic advisers to conduct an extensive review of Bombardier’s Commercial Aircraft operations, from marketing, contracts, communications, airline operations to how deals are done, WOW about time ! this is what I have been recommending for too long. They forgot how to promote, sell, market, communicate and close deals, for too long dependent on large US regional orders/re-orders, hence poor international penetration (versus Embraer’s success internationally), go too comfortable in North America.
Unfortunately, the market is very competitive, Neo’s and Max’s got in some cases for 50% off and more on really big orders, that means that a $90 million Boeing B737-Max7 (max 148 seats) can go for $45-$50 million ($304,000 per seat to $337,000 per seat), while the $72 million CS300 (max 160 seats) lists for $72 million ($450,000 per seat), which will require a 32% price discount ($23.4 million to $48.6 million) to be competitive on a per seat basis, something Bombardier, cannot afford with a planned 120 production run per year vs 100+ Boeing Max’s and Airbus Neo’s combined per year, and a whole family line to spread out discounts. The pricing issue is big, but so far little talked about at Bombardier., Fred Cromer will have to do his magic to win some desperately BIG fleet orders from airlines and lessors.
There are still BIG challenges, the certification and flight testing MUST stay on schedule as best as possible, confidence in the CSeries program is low in the market, customers are restless and airlines like Qatar Airways have expressed that many times. Next, when will they announce a launch customer ? why is it so difficult ? again creates anxieties in the market, Austrian Airlines passed on the CSeries, preferring to go with Embraer 190/195’s, like Air Canada a year earlier. It looks like Swiss Global Air Lines (ex-Swiss European Air Lines as of Feb/2015) should be the launch, as there really are not many what I would call Grade A airlines in the customer order book. Lastly, NEW orders are a must, and a BIG must is a North American airline which should be either UA or AA as DL is seriously committed to older B717’s for now.
Without a large North American airline order, the CSeries will struggle in sales for sometime, and no I do not think the Republic Airways order for 40 x CS300’s will ever, that was a long time ago when it owned Frontier Airlines, its a regional airline undertaking regional jet ACMI operations (maximum seating of 76 or less) for the Big 3 US airlines, do you think they really need a 135 seat airliner ?? The order is on the books, it looks good but it is one of the 107 aircraft on order that I believe has a probability of happening below 20% and Bombardier knows that, and I get it, for now let’s pretend they are real, deal with it later when order book is at 400.
I was intrigued by a comment made by Bellemere that really got me thinking, he said “It’s a 20 billion business today with a market capitalization of $4.5 billion, something does not compute there”, and he is right Bombardier is a HUGE failure in creating value for its shareholders, and I did some exploring to look into how well it does.
On March 25, I pulled some financial date on the biggest Aerospace firms, based on this I found the following:
- Bombardier (BBD.A.TO)
Revenue (TTM-trailing twelve months) = $22.24 billion, Market Capitalization (stock value x number of outstanding shares) = $4.54 billion, Enterpise Value (EV = market value of common stock + market value of preferred equity + market value of debt + minority interest – cash and investments = $10.93 billion
Cap to Rev Ratio = 0.20 and EV to Rev = 0.49
NOTE: A Cap to Rev Ratio greater than 1 indicates total market capitalization has grown at an inflated rate not supported by total revenues. A cap-to-rev ratio less than 1 indicates total market capitalization is lagging behind the total revenues of the market. Between 1979 and 2008, the cap-to-rev-ratio averaged 1.12 on the stock market listed firms.
- Airbus Group (EADSY)
Revenue (TTM) = $82.56 billion, Market Capitalization = $50.4 billion, EV = $50.86 billion
Cap to Rev Ratio = 0.61 and EV to Rev = 0.61
- Boeing (BA)
Revenue (TTM) = $90.76 billion, Market Capitalization = $104.38 billion, EV = $102.92 billion
Cap to Rev Ratio = 1.15 and EV to Rev = 1.13
- Embraer (ERJ)
Revenue (TTM) = $6.28 billion, Market Capitalization = $5.58 billion, EV = $6.24 billion
Cap to Rev Ratio = 0.89 and EV to Rev = 0.99
- Textron (TXT)
Revenue (TTM) = $13.88 billion, Market Capitalization = $12.27 billion, EV = $15.62 billion
Cap to Rev Ratio = 0.88 and EV to Rev = 1.13
- Northrop Grumman (NOC)
Revenue (TTM) = $23.98 billion, Market Capitalization = $31.58 billion, EV = $34.22 billion
Cap to Rev Ratio = 1.31 and EV to Rev = 1.42
- Lockheed Martin (LMT)
Revenue (TTM) = $45.60 billion, Market Capitalization = $62.83 billion, EV = $68.88 billion
Cap to Rev Ratio = 1.37 and EV to Rev = 1.51
Clearly Bombardier has a long way to go to improve its financial performance, and I think we may see some consolidations undertaken, presently Alstom the French conglomerate is elling its power generation business to GE for $14 billion and will allow it to concentrate on its train business, and has an eye out for Bombradier’s train business, while China’s COMAC would love to buy Bombardier Aerospace, and save 10+ years in developing its own aerospace that can truly compete with the west.
Other issues now coming up, and I have talked about this before, is the BIG question marks over the current 243 CSeries orders, as Ilyushin Finance Corporation (IFC) is re-evaluating which holds orders for 32 CS300’s since Fenruary, 2014. As IFC is partly owned by Russia’s United Aircraft Corporation (UAC) which builds the Sukhoi Superjet SJ100, it will be NO surprise that the Russians, struggling with economic sanctions over their annexation of Crimea, plus low oil prices and a falling ruble (RUB) don’t want to help western OEM’s and IFC will now support Russia’s SSJ-100 program, a major priority for Russia today.
As I said before, orders from Republic Airways (40 x CS300’s), Odyssey Airlines (10 x CS100’s), Iraqi Airways (5 x CS100’s), Lease Corporation (3 x CS100’s and 17 x CS300’s) and IFC (32 x CS 300’s) will NOT by my calculation materialize, that is 107 orders, 44% of current order book ! that is the tragedy unfolding, its just a matter of WHEN NOT IF it will happen. There are unfortunately weak airline/lessor orders in the current order book.
Lastly, Learjet is in trouble, the Lear 85 will NOT happen, too much on the plate at Bombardier, as a OEM, it cannot survive on the 33 Learjet 70/75’s in delivered last year at big discounts from what I hear. So this is a company that I expect to be sold off, Textron ? or the the Chinese ? but I do not think it has a future with Bombardier without the Lear 85, the writing is on the wall. Recently Bellemare was quoted to say “I know Challenger is strong, I know Global is strong, Learjet ? I need to spend some time on this”. With the CRJ and Q400 in the declining stage of their product life cycle, though a new “refocus” is planned, little can be done to revive those two programs and I do not see Learjet playing any future aircraft manufacturing role at Bombardier past 2016 at best, other than sub-contract work-maybe.
There is now hope for Bombardier to get the CSeries finished, yes the schedule will change and EIS as I have always said it will not be until 2Q/2016 at best, but it will happen, Bombardier now has new equity, more debt and a new crop of very good executives that can change the boat around, and I am one of millions of Canadians looking forward to better days at Bombardier, the next 12 months are crucial to its survival.
The Global 7000/8000 certification continues and it will need a large number of the world’s 1,645 current billionaires to buy it to be successful, no easy task in a global slowdown, public outcry about inequality where the top 1% control more wealth than the bottom 50%, and who really controls Governments today, the rich ? and in China the government’s drive against corruption by President Xi Jinping has greatly slowed down the sales of private jets and other luxury goods. Only 35 private jets were sold to China last year, off from a peak of 55 private jets in 2011, so the market in China is not favorable at this time, and across the board in China, in clamping down on “show-offs”, this anti-corruption campaign will be on for some time, and the market everyone thought was the ‘holy grail’ is no more. Even charters are off in China and President Xi Jinping will be around for many years to come, so all OEM’s need to revive their forecasts for business jets in China !
In Russia, the market is off as well, with the economic difficulties Russia is in, falling ruble (RUB), low oil prices and EU sanctions, and don’t expect that to change anytime soon, sanctions will not go away until Russia leaves the Crimea, which will be ‘never’ and low oil prices are here to stay till 2018 at least, and Russia wants its billionaires to buy Russian VIP versions of the Sukhoi SSJ-100 airliner and not Gulfstream and Bombardier products.
As for the wealthy Middle East, well at oil priced below $50 per barrel, the money is not flowing as before, while the Shia versus Sunni struggle and Jihadism gets worst and Syria, Libya, Iraq and now Yemen are failed states and unrest is spreading and at some point will show up in the absolute monarchies of Saudi Arabia, UAE, Qatar like it has in Bahrain, and it can escalate real fast, something to be mindful as it can all blow up real fast in the Middle East
Yes, times are changing fast indeed as people are asking more questions and demanding change to the system that has made the rich richer and the poor even poorer. Not the best environment for selling $70+ million business jets for Bombardier and its Global brand, and that is going to be bring the next crisis for the Canadian aerospace manufacturer.
Till next time, thank you.