6. Debt. Debt. Debt
• Bombardier was heavily in debt in early 2000’s
• If you are bank, do you prefer to finance
Bombardier’s A/R, Inventory or Debt? (Hint: BUSI 764)
• Credit rating was downgraded to junk level
Year Moody’s Rating
1999 ~ 2002 A3
2003 Baaa3 (lowest investment level)
2004 ~ 2013 Ba2 (junk!)
Short Term Debt Cash Line of Credit
$4.8B (as of Oct 2002) $1.5B $11B
7. Asset Divestitures
Recreational Products
• Sold for $1.2B in 2003
• Buyer: Bain Capital and Bombardier Family
Military Aviation Training
• Sold for $90M in 2003
• Buyer: Spar Aerospace
Finance Business
• Sold for $1.4B (US) in 2005
• Buyer: GE
15. Background
CRJ’s success and limitation
- CRJ: Up to 104 seats
- C Series: 108 ~ 160 seats
Fuel cost
- Airlines want to save on fuel
Replacement of legacy Boeing 737
- Many legacy 737 planes are about
to retire
23. Government Bailout
Present:
$1.3B from Quebec (confirmed)
US $1B from the Federal (asking for; likely to
receive)
Past:
$65 per
Canadian
24. Some suggestions
Dual structure issue must be addressed
Spin off Bombardier Transportation
Focus on Low Cost Carrier
Joint venture (with COMAC)
25. Principal-agent Dilemma
Principal–agent problem in the context of a (giant)
family business
Dividend payout was cut until 2005, 2 years after “junk” rating
If you are bank, will you finance a heavily in debt company to
issue dividend?
26. Leadership conflicts
CEO controversial: “(former CEO) Pierre would never have been CEO of that
company if he didn’t have his name, period” (former senior executive)
vs
Pierre Beaudoin
CEO
Peter Edwards
President
(Business Aircraft)
Hello everyone. My presentation topic today is about Bombardier. I believe all of you know Bombardier. It is a Canadian multinational company that manufactures aircraft, trains, transit bus, etc. Recently, many of you perhaps also read lots of news reports on Bombardier. If you are interested in learning more about Bombardier, you are in right place with right person.
Here is an outline of my presentation. I will first introduce Bombardier’s history, how it grew from a small business to a multinational business. Secondly, I will talk about Bombardier’s governance and its products. Thirdly, I will discuss Bombardier’s C series aircraft, which has been on news quite a lot recently. Next, I will briefly go through Bombardier’s financial statement. Last but not least, I will share my opinions on Bombardier’s future.
Bombardier was created by Joseph-Armand Bombardier in Quebec in 1930s. Quebec’s winter is cold, and has a lot of snow. At that time, Quebec government did not clear snow from secondary roads. So mobility was a big issue for residents of those areas. Joseph-Armand Bombardier’s toddler son fell ill in a winter and died because the family cannot bring him to hospital in time due to heavy snow. Society’s needs, as well as his son’s tragedy, inspired Joseph-Armand Bombardier to develop a winter vehicle.
Mr. Bombardier’s winter vehicle business was very successful. Although sales went up and down from time to time, Mr. Bombardier managed to overcome all challenges and his business kept growing. Mr. Bombardier died of cancer in 1964. A few years before his death, he brought Ski Doo, a personal leisure snowmobile to his product lines.
Since 1960s, under the leadership of Mr. Bombardier’s son-in-law, Laurent Beaudoin, the company extended its products line beyond snowmobile. There were two acquisitions that fundamentally shaped today’s Bombardier. The acquisition of Lohnerwerke in 1970 and the Acquisition of Canadair in 1984. Those two acquisitions were the beginning of Bombardier’s entry into rail transportation and aircraft industries. In additional, Bombardier Capital, which provided finance to buyers, also grew very fast and had a sizable portfolio.
Bombardier’s credit rating was quite good till 2003. The aftermath of 9-11 terrorist attack is huge. Market demand was significantly reduced, sales went down but the cost was going up. By the end of October 2002, Bombardier had 4.8 billion short term debt, 1.5 billion cash, and 11 billion’s line of credit. In other words, it was debt (banks) that kept Bombardier running. A quick quiz: if you are a bank, will you prefer to finance your customer’s account receivable, inventory, or debt?
Bombardier responded to its debt issue by selling out its non-core business. Its recreational products division, the one Joseph-Armand Bombardier created, was sold for 1.2 billion. Buyer is a syndicate comprising of Bain Capital and Bombardier family. Its finance business was sold to GE capital for 1.4B. Bombardier also sold its other business, like airport, military training services, etc.
Next, Bombardier’s governance. Although Bombardier is a multinational public company, it is indeed a family business. Bombardier has a dual share structure: BBD.A and BBD.B. Bombardier family own about 80% of BBD.A shares. One BBD.A is equivalent to 10 BBD.B in terms of voting rights. Therefore, even Bombardier family only owns about 15% of the company, they have about 55% voting rights. So a decision coming from a family’s dinner table is perhaps the more important than that from a board room.
Let’s take a look over Bombardier’s products. It has two lines of products. First, Bombardier Aerospace. Bombardier Aerospace has two divisions: business aircraft and commercial aircraft. Its business aircrafts are designed for chart flights. Target clients are senior executives, very rich people, or companies providing services to those people.
Traditionally, Bombardier’s commercial aircrafts are all small aircrafts that can seat up to 104 passengers, like the image above. Bombardier calls it Canadair Regional Jet, or CRJ. Its CRJ aircrafts sell very well. The aircraft below is Bombardier’s C series. We will cover that shortly.
In aerospace industry, Bombardier’s main competitors are Boeing and Airbus. Narrow body aircraft industry is a duopoly industry and is controlled by Boeing and Airbus. Bombardier ranks the third, but is very far from the top 2. There are also some other competitors. Worth of mention is Embraer. It competes with Bombardier neck to neck.
Compared with Bombardier Aerospace, Bombardier Transportation is not a very risky division. Other than high speed railway system, typical rail transportation industry and metro transit industry are pretty stable business.
There are many competitors in this industry. Compared with competitors, Bombardier can offer full scale of services. But does that also mean Bombardier does not focus on certain areas? Is being capable in all areas an advantage in this industry? I do not have answers to this question yet.
Now, here comes C series. If you read Bombardier news recently, chances are you have already read C series many times. What is C series? Why C series?
C Series is Bombardier’s ambition to greater success. CRJ series is successful, but it can only seat up to 104 passengers. Bombardier wants to have a bigger aircraft that can seat 100 ~ 105 passengers. Up until ten years ago, neither Boeing nor Airbus had aircraft that exactly provided this type of seating capacity. Another reason for C Series is fuel cost. Bombardier’s C Series was introduced around 2005, at that time, oil price started to climb up, airlines wanted to save on fuel. C series is designed to save up to 15% fuel. Last but not least, thousands of old Boeing 737 and Airbus 320 are to be replaced by new aircrafts in next a couple decades. In short, it is a big market.
C Series is a major project. Unfortunately, it is a failed project. Why? It is over time and over budget. It is 3 years behind schedule and 2 billion over budget. Compared with 2 billion over budget, 3 years behind schedule is more devastating to Bombardier’s business.
Of course, Boeing and Airbus won’t sit idle and let Bombardier take their market shares. In respond to C Series, Airbus started to develop Airbus 320 Neo; Boeing started to develop Boeing 737 Max. Both aircrafts are similar to C series. Although from technical perspective, C series is still superior.
But business competition is more than just technology. To kill C Series, Boeing and Airbus work hard on pricing strategy. First, they offer bundle sales, such as Boeing 777 and 737 Max. Second, they offer huge discount on 737 Max in order to win or keep clients. Insiders have said Boeing and Airbus are willing to offer 75% percent discount. Bombardier cannot compete with them on this price. Boeing and Airbus can do that thanks to economy scale, but Bombardier cannot. Even worse, Boeing and Airbus already received thousands more confirmed orders than Bombardier for new aircrafts
Here is Bombardier’s income statement for last two years. As you can see, Bombardier aerospace is losing money, a lot of money. It is not sustainable.
This is Bombardier’s balance sheet. Notice its current assets, especially cash and its current liabilities. It is heavily in debt again.
For any company that is so heavily in debt, we must consider that company’s possibility of going bankrupt. Here is Altman Z score. Surprisingly, it is a negative number! And it has been negative for a few years! During the past 13 years, Bombardier Inc's highest Altman Z-Score was 2.86. The lowest was -0.28, and the median was 1.29.
Bombardier is too big to fail. When it comes to employment, Bombardier certainly has a compelling political argument for government bailout. There are more than 40000 people employed in the aerospace sector in Quebec. Bombardier is the biggest employer in the industry. Many small or medium size aerospace businesses rely on the Bombardier to buy their goods and services. Bombardier has made itself too big to fail.
Government is Bombardier’s friend. Bombardier has received more than 40 bailouts in past 40 years. Is this type of corporation welfare fair? Is it a violation of market economy principles? Right now, Bombardier is asking again for 2.3B, or $65 per Canadian? Will you give $65 to Bombardier?