MIAMI— Earlier this month, news broke that beleaguered Canadian aerospace firm Bombardier has been shopping its flagship CSeries jet to Airbus, Boeing, other aerospace investors, Carl Icahn, Etihad, Donald Trump, the Chinese, and anyone else willing to listen to its pitch. The most developed of these talks occurred with European giant Airbus, who entered serious negotiations to partner with Bombardier. Under the proposed agreement, Airbus would have bankrolled Bombardier until it brought the next generation CSeries jet to market, providing support while gaining a controlling stake in the program. An Airbus takeover would have been a good way to end the threat Bombardier to the lucrative Airbus-Boeing duopoly for mainline jet aircraft, but the negotiations between Bombardier and Airbus fell apart, leaving Bombardier scrambling for another buyer or an alternate source of funding.
Bold Bets Leave Bombardier in Pain
The path to financial hell for Bombardier was paved with good intentions, as its bold bets on next generation private jets and the CSeries burned through enough cash to put the company on shaky footing. The CSeries is already $2 billion over budget and Bombardier spent hundreds of millions of dollars on the Learjet 85 private jet before abandoning the project, racking up $9 billion in debt, much of it costly, over the past seven years. The sum total of its financial missteps leave Bombardier burning through $600-800 million in cash each quarter while cash inflows from the CSeries and Global 7000 private jet won’t begin until mid-2016.
Now Bombardier’s ability to boost cash flow in the interim isn’t dead thanks to its existing regional commercial aircraft – the CRJ and the Q400. These programs have long been paid off and each delivery in these families is pure cash flow to Bombardier’s shaky bottom line. And while these aircraft are either soon to be obsolete (CRJ-700/900/1000) or getting whipped by rivals (Q400), Bombardier continues to win incremental orders. For example, earlier this month they announced an unidentified order for 8 CRJ-900s (plus 6 options) and Canadian giant WestJet indicated interest in growing its Q400 fleet. The CRJ in particular has been boosted by the low price of fuel, which makes regional jets (RJs) more economical. Conversely, that same fuel price is an existential threat to the CSeries, for which a large part of the sales pitch is its fuel efficiency.
Beyond fuel, Bombardier’s financial woes are not helping the CSeries’ backlog. Customer uncertainty over Bombardier’s future is at an all time high, and they are reluctant to commit when the fuel (and thus cost) savings are less eye-popping. Even for customers that can get past this hurdle, Bombardier lacks leverage in negotiations due to its finances. Since airlines are not desperate for new planes, many are holding out for last ditch deals with heavily discounted pricing from Bombardier.
Seeking an Escape Valve
With Airbus out of the picture, the natural next buyer is the Chinese (I expand on this in my three part analysis of the RJ and small mainline market running this week). Incidentally Chinese company with close ties to the government (as with most large Chinese companies) already offered to buy 60-100% of Bombardier’s transportation unit earlier this fall, but Bombardier rejected the offer. And China is far more desperate to boost its domestic aerospace quality than it is for additional rail industry asset. Whatever Bombardier’s financial woes, it is technically excellent, and that makes it a prime target for the Chinese. Despite the natural fit, the Canadian government has a history of not allowing companies seen as strategic national assets to fall into the hands of foreign companies or investors, especially those with ties to foreign governments. Along those lines, the Quebec provincial government has pledged to back Bombardier if it needs financial assistance. In fact, it has already prepared a special tax exemption that will allow Bombardier to reduce its pension funding obligations by $40 million. Cash-rich Canadian government pension funds that are invested in Bombardier represent another way for them to exert influence.
Even if the Canadian government moves aggressively to keep Bombardier afloat, the question remains as to whether Bombardier’s aerospace division is even worth saving. The relatively profitable private jet business has declining fundamentals due to challenges in China (some combination of the corruption crackdown, growth slowdown, and ATC concerns), European malaise, and general economic weakness worldwide. The Q400/CRJ are dead man walking and the CSeries, while visionary, is in bad shape. The CSeries represented bold strategic thinking for Bombardier, but they just weren’t ready to capitalize and at every stage the market fundamentals took a turn for the unfortunate. The CSeries is a fine aircraft in its own right, especially from a technical perspective, but it won’t be cash flow positive for a long time and it may bring down the company.
A Future Up in the Air
For the moment, Bombardier continues to seek out cash at any cost. These efforts are hampered by the company’s founding family, who won’t give up their control over the company’s voting rights despite the dire need for cash. The founding family’s stewardship put Bombardier into this mess, and they will have to give up control if Bombardier is going to get out of this. The transport unit presents a great example of their intransigence. With an enterprise value of $8 billion, the transport unit itself is worth more than two times the overall company’s market capitalization of $3.8 billion. By spinning off the unit or offering a 100% stake in IPO, Bombardier could raise enough cash to pay off much of its debt. But due in part to the founding family’s insistence on maintaining its control, the current plan is to only IPO 20-30% of the unit in Frankfurt. That simply will not raise enough cash.
A sale is also still possible, as talks with Airbus could resume. Even as the negotiations halted, our sources at both manufacturers indicated that there is still plenty of latent interest in the concept of a Bombardier-Airbus tie up on the CSeries amongst senior management. Whether this interest materializes is as much in the hands of Bombardier as anyone. Bombardier has also certainly shopped the CSeries to Boeing, who would still bust up the duopoly. In fact if the sale route is taken, some US aerospace firm as the buyer is a decent bet, whether Boeing or not. An American firm is more politically tenable than China, and with the right does of PR savvy, the American firm can commit to keeping jobs in Canada and thus win control of Bombardier. Despite the possibilities, our current prediction is that Bombardier will scrape through and the CSeries will get to market. For all the woes, they have $4.4 billion in short term financing including $3.1 billion in cash. But once the CSeries gets to market, its long term viability, and that of its parent company, is still very much in doubt.