Quebec’s US$1B deal gives Bombardier ‘breathing room’
With Quebec's contribution, Bombardier will have US$5 billion in cash next year, which gives potential customers confidence it can support the program
MONTREAL—Bombardier says a US$1-billion lifeline from the Quebec government will help complete development of the CSeries and restore customer faith in the delayed and costly commercial jet program.
“It’s all about giving confidence that the CSeries will be there and that Bombardier will be there to support these programs that are going to be in service for many, many years,” CEO Alain Bellemare said Thursday as the company posted weak third-quarter results.
Montreal-based Bombardier lost US$4.9-billion, tied mostly to large writedowns in the CSeries and the abandoned Learjet 85 business jet programs, along with operating results that were substantially below already low expectations.
Bombardier says it will match Quebec’s investment by also spending US$1 billion to complete the CSeries, which is about two years behind schedule.
Up to 20 of the aircraft will be built next year as Bombardier ramps up to full production in three to four years and aims to break even by 2021, the company said.
With Quebec’s contribution, Bombardier will have US$5 billion in cash next year, plus proceeds from the sale of a minority stake in its railway division that will provide a cushion to bring the CSeries to production and develop its Global 7000/8000 business jet.
Bellemare said later in an interview that Quebec’s help in shoring up its finances will give the company room to manoeuvre and answer skeptics who wonder if it can sell the CSeries at prices that better compete against large rivals like Airbus and Boeing.
“I understand, and the new team understands, that to relaunch or to regain traction in the marketplace we’ll need to be aggressive,” he said.
Bombardier plans to transfer the CSeries program to a new partnership to be chaired by former Quebec premier Daniel Johnson and owned 50.5 per cent by the company and 49.5 per cent by the province.
The company has committed to maintain CSeries operations in Quebec for 20 years. The deal includes warrants that allow Quebec to purchase up to 200 million Class B shares representing about 8.9 per cent of outstanding shares.
Premier Philippe Couillard described the financial contribution as an investment, not a subsidy, in a company that is an important driver of the provincial economy. Bombardier directly employs 18,000 people and supports 40,000 in Quebec’s aerospace industry.
“I want to remind all Canadians that aerospace is as important to Quebec as the automotive sector is for Ontario. It is quite normal that the state gets involved,” he said in Quebec City.
The CSeries, which competes with smaller planes from Airbus and Boeing, is about 97 per cent of the way through final testing—one of the last steps before the aircraft can be put into service by mid-2016.
Bellemare, who was brought in earlier this year to overhaul the struggling company, conceded that Bombardier has been overwhelmed by too many development programs.
He added that the company has no plans to alter its dual-share structure that gives the founding family control, adding it wasn’t discussed during negotiations with Quebec.
While Bombardier approached many governments and potential private sector partners, Bellemare said it didn’t use talks with foreign groups to leverage a deal with Quebec.
“Our strategy was not to start pitting one against the other, it was to look at all opportunities and find the one that does make the most business sense for us and that’s where we landed with Quebec,” he said.
Analyst Chris Murray of AltaCorp Capital said Quebec’s contribution adds certainty that Bombardier can finish the program and support it for decades to come.
“I don’t think it’s a Hail Mary so much as it’s probably the best solution that’s out there,” he said, referring to the company’s discussions with Airbus, the Chinese and other potential partners.
Karl Moore, professor at McGill’s Desautels Faculty of Management, said the deal doesn’t solve all of Bombardier’s cash flow problems, but does give it “breathing room.”
The cash infusion also adds security for Bombardier workers, said Dave Chartrand of the International Association of Machinists and Aerospace Workers.
“Knowing that all the employees inside have been worried for the last couple of years because of everything that’s going on … this comes as a good surprise,” he said.
Bombardier’s US$4.9-billion net loss _ which amounted to $2.20 per share _ includes a $3.2-billion writedown related to the CSeries program and a US$1.2- billion charge for the Learjet 85.
Adjusting for the CSeries and Learjet 85 losses and other items, Bombardier would have had a US$2 million profit _ essentially break-even, down from US$222 million or 12 cents per share a year earlier.
Revenue for the three-month period ended Sept. 30 fell to US$4.1 billion, down $800 million from a year earlier.
Bombardier’s shares closed down 17.3 per cent at $1.33 in Thursday trading, reversing Wednesday’s gains on the Toronto Stock Exchange.