Bombardier Inc. – Canada’s Too-Big-To-Fail

Bombardier CSeriesBelow is my latest article on Seeking Alpha which you can access for free. There are already some interesting discussions in the comments section.  Below is just a sample of the article because Seeking Alpha has the rights to it.  The article are my general comments on the bailout of Bombardier by the government of Quebec.

Summary

  • The Quebec government invested US$1 billion (CA$1.3) for 49.5% of Bombardier’s CSeries and 200m warrants for BBD.B.
  • The government is not in for the money, but to solve a confidence crisis. The CSeries is not expected to deliver free cash flow until 2020.
  • Bombardier’s CSeries is in a Catch-22. The CSeries program can’t survive without orders, and there’s won’t be orders unless the CSeries program survives.
  • I’m disappointed in the deal. I wish the government had better represented the interest of the taxpayers.
  • Bombardier is too big to fail in Quebec and Canada. It’s the heart of the aerospace industry.

TSX: BBD.B and BBD.A

U.S.: OTCQX:BDRBF and OTCQX:BDRAF

Bombardier Inc. is primarily traded on the Toronto Stock Exchange under the tickers BBD.B and BBD.A. Class A has ten votes per share, and Class B has one vote per share. The Beaudoin-Bombardier family has 54.35% of all the voting rights. BBD.B is the most commonly traded ticker.

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. The price of 1 USD in CAD as of October 31, 2015 is USD-CAD 1.3146.

This is not a valuation of Bombardier (BBD). I’m providing my general comments on the latest Bombardier bailout by the Quebec government. I was never a shareholder of the company, I’m “not a shareholder today”, and I don’t plan to invest in the company in the future. I used quotation marks because, as a Quebec taxpayer, I’m now indirectly a shareholder of Bombardier. Actually, I should clarify that the taxpayers are a shareholder in BBD’s CSeries program, not the parent company. If you don’t read the media report carefully, it might lead to the conclusion that the Quebec government is a shareholder in Bombardier, which they are not. Like many others, I woke up on Thursday morning as an indirect shareholder in the now-infamous CSeries program that’s sinking the company.

This leads to many questions. What’s the upside for the taxpayers? What are the risks? Why would the government get involved? Plus, the timing of the investment was a little insulting. It came a day after a one-day strike in the public sector to protest the government’s austerity budget, after cuts in the education and health sector. Without getting sidetracked, the government’s rationale for investing in Bombardier is that the cost of not investing is greater. Well, this rationale also applies to education. The cost of not investing in education is higher than not investing.

Let’s find out what my dear provincial government got me involved.

Full Article here.

Advertisements

9 thoughts on “Bombardier Inc. – Canada’s Too-Big-To-Fail

  1. Hi Brian, Much enjoyed your BBD article, and it’s view from the cheap seats…or the people involved, without being asked of course. One important item is the fact that this aircraft has been hurt by the drop in fuel prices (which may continue for a few years) and also the massive number of used A320/B737 family of aircraft that are out there, and getting cheaper (to buy and lease) due to valuation pressures from the new neo and MAX.

    Even though they are bigger aircraft, this may be a positive to an airline fleet planner depending on the mission they need to fly. Since it is a cost-per-seat mile game, the market has been moving towards larger aircraft for decades now. BBD will also have trouble competing on price, since Airbus and Boeing have more resources and many other products to offer as well…

    You are correct that the world is skewed towards the rich/powerful, and that is a shame for so many in the U.S. too. W really did wonders, and it is amazing Jeb could get any money at all…

    Best regards, William Loh (www.intlaviation.com)

  2. Thanks William for your very insightful comment. I just visited your website and you seem to be a credible source in the aviation industry.

    Can you elaborate on why the drop in fuel prices would hurt the sales of the CSeries? The plane has a reputation for great fuel economy, wouldn’t that be of interest to a plane buyer/leaser? I understand that cheaper fuel might mean that you want to buy bigger plans since they will cost less to operate but anything to improve your margins…right?

    Thanks,

    Brian

    1. Hi Brian,
      Cheaper fuel negates some of the advantage of operating a more fuel-efficient aircraft, and since range and noise are secondary concerns this is a big hit for the CSeries (and the neo/MAX) as this is its main selling point. It is also a risk to use the new technology P&W geared turbofan, and this makes all those used aircraft more attractive. They have track records of safe and reliable operation that stretch back for zillions of flight hours, plus the support networks of their OEMs. For an airline guy to take the risk of a new airframe and engine all at once may continue to be a tough sell…especially when he can ring up a lessor and just start paying lease payments (on a 10 year old A320…about $190,000 per month, or buy one for $19mn) instead of needing to arrange the financing for buying a new CS100… You end up with less useful life, but you paid less too, so this logic has its own power…

      After the airplane enters service and performs well enough, airlines will order it, but it is a bit of a niche aircraft, and even the CS300 has to push it to get to 160 seats. You could also choose a 10 year old A321-200 and seat up to 220 in one class (185 in two)…and pay less for it. I think this had a lot to do with Airbus not wanting anything to do with this…

      Best regards,

      William

  3. William,
    This is another very good comment. I’m not a plane/airline expert. I know the basics. I know that fuel is sometime one third of the operating cost. That and labor is what cost the most to run the airline. I figured if you can save on something that cost so much why not, even if fuel prices are “low”. But I understand there’s a lot that goes into a decision. BBD is not that far off to hitting target sales for their CSeries program. I think the bailout might be the catalyst needed to get those orders in. You wouldn’t want to leave your deposit without any assurance that the company will be around.

    Since you are an industry insider, do you know what’s the general industry’s reception to BBD’s CSeries? (great plane, stupid idea, or other thoughts?)

    1. Bailouts are not a good sign in my view…but they were certainly enjoyed in the Hamptons…and the markets are still propped up.
      The industry always uses a “wait and see” approach…that’s why real airline data is so important, especially for such a new engine type. Airbus was smart to let BBD go first…even though the delays have messed this up for them (Lufthansa says they will get their first neo in December…so BBD is aiming for a tie now). The CSeries is well-regarded and it is so far so good in the testing/certification process, so hopefully the $1bn is enough…but the federal government may have to step up and step on all of the taxpayers…no problem because most will not notice… The whole software thing was a big concern, but that seems to be going well…now there will be upgrades which will incorporate improvements from all of the analyses/findings during testing… The Swiss dispatch reliability after EIS will be closely monitored…

  4. Yes I’m sure the Hamptons like that. At least they made money of it. It will take many years before the province sees a dime out of this bailout. BBD has brutal cash flow management really needs to improve their margins. I hope the program turns out to be successful for them and as a indirect shareholder. Thanks for the great comments.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s