Today Bombardier got another bail out from the Province of Quebec, this time by getting Caisse de depot et placement du Quebec (CDPQ), Quebec’s long term public and private pension fund, to buy 30% of its Bombardier Transportation (rail business) for $1.5 billion (valuing the division at only $5.0 billion), on top of the recent $1.0 billion it received from the Province of Quebec for a 49.5% stake in the CSeries program.
It is time to start asking tough questions in Quebec about why the Bombardier and Beaudoin family still control 54% of the voting rights with only 14% of the equity ? Investors know who is to blame for the fiasco now underway at Bombardier, its is ex-CEO Pierre Beaudoin, and the Boad, which he is now Chairman of. Why is public money going into the company and no change in governance and accountability ? wake Quebec your tax payer money is being used to keep the 2 families in control, they have money so let them put put in more, I say NO to federal money going into that company till the 2 families control a minority of the voting rights, it is just the right thing to do, why reward those that mismanaged it ?
The latest investment has raised raises Bombardier liquidity to $6.5 billion, money that is needed for the CSeries which should burn through another $1.0 billion in 2016 as 1st CS100 deliveries are made, CS300 is certified and production revs up, and each delivery will loose millions of dollars for a long time.
Though NOT talked about by anyone yet, the program will be a financial loser for a long time, because of the price dynamics of the market, where discounts on A320/B737 aircraft from Airbus and Boeing are +40%, this Bombardier will have to do to win any big orders and has done already for existing orders, and the CSeries will NOT make a profit in such a competitive market, and Airbus and Boeing will do ALL to make sure Bombardier does not WIN any BIG airline orders, you can count on that. One only has to look at the buying power of Airbus and Boeing, you think Bombardier gets the discounts from suppliers the duopoly get ? no so unit costs are higher and price has to be competitive, a tough mandate in a tough market, especially when Airbus and Boeing are about to deal with new incumbents like the Irkut MC-21 and Comac C919, though nothing “game changing” they will force a “price war” in the narrow body market by 2019, and guess who the odd man is in that group of 5 ?
The last announced cost of the CSeries program was $5.3 billion, though surely higher now, but the end of October $4.9 billion loss by the company for 3Q/2015 included a write down of $3.2 billion for the Cseries, which lowers its development cost to $2.00 billion and another $1.2 billion write down on the Lear 85 program, which already had a $1.40 billion write down when it was “paused” last year. How in heck did they lose $2.6 billion on the Lear 85 program ? that is total mismanagement, and the CSeries was $2.0 billion over budget at the same time, where was senior management for the past 7 years while they ran up cost over runs of $US +3.0 billion on the CSeries and Lear 85, and now having to write them down by $US 5.8 billion ? Yet, the Board is still there and the two families still control the company, why would any investor put money in with such inept top leadership running the show that has almost killed the company ? disgraceful indeed.
A lot of public money, and yet the company is till controlled by 2 families through the special voting shares ? with that kind of money raised it should have been a condition of funding that the Board and majority control of the company be changed, yet it is Quebec, which is infamous for its corruption from many corrupt Mayors in Montreal, sleezy construction and highway contracts to Lavalin doing business through big bribes around the world, and I guess one should have expected this as local businessmen are politicians are deeply very close, each dependent on the other, sad as it is, it is reality of business in Quebec, a mini-Russia.
The CSeries problems are not over, it still only has 140 ‘real’ orders, and the company will lose lots of money for each delivery for some time, no way in hell they will break-even by 2020 as they claim, even with the huge write down, which by the way was bigger than the market capitalization of the company (market value of the company) today. They plan to deliver 20 CSeries next year and finish CS 300 certification then slowly ramp up to 10 units per month, so at best they will deliver 20 in 2016, 50 in 2017, 80 in 2018, 110 in 2019 and 120 in 2020 that is a realistic production of 380, remember they have only 140 real orders, so they have to hustle to get new orders as their existing backlog is good thru 2019 at best, but break-even will not be easy and NO WAY by 2020 as Bombardier claims, because of heavy price discounting as Boeing and Airbus are planning about 125 units per month of their narrow body airliners (A320/B737) vs 10 by Bombardier, and the big boys have other products with which to make money with, Bombardier will NOT have any CRJ or Q400 revenue by 2019.
They joined the BIG league with Airbus and Boeing, a sort of NHL versus the AHL and in the BIG league today, discounts on narrow body airliners brings the ‘real’ price down to $50 million for A320’s and B737’s in other words at least +40%. Bombardier will have to discount their LIST price of $US 82 million for the CS300 and $US 72 million for the CS100. To match Airbus and Boeing on a per seat price ($US +/-330,000), Bombardier will have to REALISTICALLY but not publicly price (what you read in press releases is based on list not real prices, that is very confidential information) their CS300 around $US 45 million and their CS 100 at around $US 38 million, which leaves $0 for profit and surely each units old will lose money for the a long time. This is the industry today, and while Bombardier now has liquidity the “elephant in the room” is price discounting in the industry, and the program WILL NOT achieve break even for a long time, if ever, without some fancy accounting in Montreal.
The CSeries is now a Quebec program, and all future jobs will go to Quebec at a time when jobs will be reduced at Downsview, Ontario as the Q400 and CRJ lines are slowly winding down and now probably in their final 2 to 3 (max) years of production, and even now wing and cockpit work on the Q400 is planned to go south to Mexico, and yet those leaders in Quebec still want the Canadian Federal Government to kick in at least $1.0 billion more ?
So Quebec ends up with 49.5% of the program that already received $700 million from the Canadian and UK governments back in 2008 or so when the struggling program was unfortunately resurected. I am also sure Air Canada based in Montreal is under intense pressure to order the CSeries from politicians and the business community, and do not be surprised when it does make an order, even though last year it said it was happy with its 45 x Embraer E190’s.
Still only 140 CSeries ‘real’ orders, and the high end business jet market is changing as Gulfstream’s new G500/G600/G650ER up the Bombardier G5000/G6000 and why their production rate is coming down as new models are ‘better’. By the way, for its investment, Quebec received job and no relocation guarantees for at least 5 years, so if you are a Bombardier worker in Ontario, you should be worried about your job.
The G7000/8000 market is a risk, you are now competing with Boeing’s BBJ’s and Airbus’s ACJ’s once you get to the $75 million range, and boy you get a whole lot of airplane when you buy a A320ACJ or B737Max model, a market segment that is not that big, 20-25 units per year, OMG another “hope” play by Bombardier that can destroy it if it gambled on the wrong market segment, like the 100-149 seat commercial market, where there are few annual sales today by Embraer, Airbus and Boeing, just look at the numbers, its not pretty. Lastly, its a must to have a North American CSeries order, Porter Airlines is out as is Republic Airways, so whose next ?
A new holding company was created, Bombardier Transportation (Investment) UK Ltd. with convertible shares that will give bond like protection on the downside to CDPQ and equity like access if profits grow, and its 30% common equity stake could fluctuate between a min. 25% of the company to aa high of 42.5% depending on how well the rail division does versus its business plan, but no matter what it is promised a minimum 9.5% return. This could be difficult, the rails side has its problems, presently late to deliver street cars to Toronto Transit Commission, it is being sued, while China’s 2 biggest rail firms merged earlier this year, and competition is going to be fierce across all segments, the future is not all bright and sunny as Bombardier likes to pretend.
As for reving up production, Bombardier still faces many unknown variables, is the supply chain ready after sitting and waiting for 2+ years while the company gets itself sorted out ?and unlike Boeing and its B787, Bombardier cannot afford any in service breakdowns, delays in deliveries or any breakdowns that are part and parcel of the business, and nothing ever runs 100% smoothly. The past few years have seen major problems at Airbus and Boeing with new aircraft and not having all suppliers and systems working as planned. Such a an issue with a fragile Bombardier, would have major consequences.
In the end, I still believe that the program will end up in Chinese hands, I believe sales will continue to struggle in a very price competitive market that will have for the first time in a long time 5 players in the 120 to 200 seat market (Airbus-A320neo line, Boeing-B737Max line, Bombardier-CS300, Comac-C919, Embraer-E195E2 and Irkut-MC-21) and not all will be successful.
Bombardier Stock (TSX:BBD.B ABOVE GRAPH)) in the past 6 months has been a slow slide downwards, NOT anything investors are lining up to invest in for sure and as you see from above graph, only in September did the stock value go up on the ‘phony’ news that a Chinese company wanted to buy Transportation for $US 8.0 billion and that United Airlines as interested in possibly buying a great deal of 100+ seat airliners IF pilot union agrees to a new deal, in other words a “ruse” also tried by Delta in March, where the pilots rejected the deal and Delta’s CEO Anderson cancelled its aircraft order.
I do not expect pilots at UA to agree to extending current contract, as North American airlines are making LOTS of money this year, best year ever, and after years of concessions by UA unions its time to claw back some of what they have given up in the past 7 years, but let Bombardier dream, anyway UA has its third CEO in 3 months (one quit under federal criminal investigations for ‘funny business at Newark Airport, second fell ill) so they have leadership and trust issues with employees to deal with.
Today the stock was up for awhile on the CDPQ news hovering around $1.35 a share, but closed down at $1.28 (down 70.3% this year from $4.29 one year ago today), another 22.6% drop and it is at $0.99 a penny stock !
Let’s see where it all goes, till next time, always interesting !