By Christopher Reynolds, The Canadian Press on February 13, 2020.
MONTREAL – Bombardier Inc. is selling its remaining stake in the A220 jetliner program, marking the end of its failed bid to take on the commercial aircraft duopoly of Airbus and Boeing Co.
The debt-laden plane-and-train maker said Thursday it has signed an agreement with Airbus SE and the Quebec government that hands Airbus a 75 per cent share in the A220 partnership, up from just over 50 per cent, while Quebec’s stake rises at no extra cost to 25 per cent, from 16 per cent.
In exchange, Airbus gives Bombardier US$591 million for the rest of its slice of a plane franchise that cost it more than US$6 billion to develop.
The agreement also frees Bombardier from $700 million in spending commitments toward the A220, which it launched as the C Series before selling a majority stake to Europe-based Airbus in 2018.
The news comes as Bombardier reported a loss of US$1.61 billion for 2019 and rumours continue to swirl around the potential sale of one of its two main divisions – trains and business jets.
Development of the niche plane, which seats 100 to 150 passengers, faced delays and cost overruns and lacked the marketing might of its two massive competitors. Chicago-based Boeing also sought to have nearly 300 per cent duties applied to U.S. imports of the C Series, though the U.S. International Trade Commission rejected the attempt in 2018.
Eventually Bombardier sought government support, securing a US$1-billion investment in the program from Quebec in 2016 and a $372.5-million loan from Ottawa the following year.
Since taking control of the C Series, Airbus has more than doubled the sales orders to more than 650. “Bombardier just did not have the bulk to do that. They bit off more than they could chew,” said Karl Moore, an associate professor at McGill University’s business school.
Bombardier, founded in Valcourt, Que., in 1942 as a snowmobile manufacturer, now stares down a US$9.32-billion debt load – nearly 60 per cent of it due within five years.
The company has ramped up production of high-margin business jets, which it expects will drive double-digit revenue growth with 160 unit sales in 2020 amid a $16.3-billion backlog. But delays and “some volatility” continue to plague several “large, challenging” rail contracts, Bellemare noted.
While its business jets are now at full production, analysts highlight the cyclical luxury market of private planes in comparison to the relatively stable field of rail car and network construction, which is fuelled by government infrastructure projects.
The two divisions represent Bombardier’s only remaining revenue streams after the Montreal-based company sold its waterbomber unit, Q400 turboprop business, CRJ regional jet program and flight-training enterprise over the past four years, among other appendages.
“The reason why weâ€™re looking at strategic options is to accelerate deleveraging of the business,” Bellemare said on a conference call with investors, referring to reported negotiations with France-based Alstom SA and other companies over the rail and business jet segments.
“The strategy was always to exit commercial aircraft,” said Bellemare on Thursday, who took the helm five years and one day earlier.
In 2016 – the year before it sold a controlling stake to Airbus – its commercial aerospace segment lost about US$400 million and sucked up roughly US$1 billion in cash, Bombardier said.
“The important thing was not only the initial payment that they will receive – that is a little bit better that I would’ve anticipated – but the ability to avoid the $700 million in contributions to the program,” said analyst Chris Murray of AltaCorp Capital.
Quebec Economy Minister Pierre Fitzgibbon called the new deal a “win-win” for all partners.
However, there were signs of skepticism on a conference call with investors Thursday. “It’s starting to look more like an asset liquidation than a turnaround,” Goldman Sachs analyst Noah Poponak told chief executive Alain Bellemare.
Under the new deal, Airbus can buy out Quebec’s stake in 2026, three years later than initially planned. Meanwhile work packages for the A220 and A330 airplanes will be transferred to Airbus through the aircraft giant’s subsidiary Stelia Aerospace, securing 360 jobs in Quebec, Bombardier said.
David Chartrand, Quebec co-ordinator for the International Association of Machinists and Aerospace Workers, deemed the deal “the end of an era” but also “the best scenario under the circumstances.”
“That said, we already know the intentions of Airbus, which plans to increase their footprint in Quebec. For us, the important thing has always been to preserve jobs, working conditions and our Quebec aerospace ecosystem,” he said in a statement.
Bombardier, which reports earnings U.S. dollars, saw revenues decline three per cent year over year to US$15.76 billion in 2019, and two per cent to $4.21 billion in the quarter ended Dec. 31.
The company reported a loss of $1.72 billion last quarter.
Bombardier Transportation revenues dropped seven per cent and earnings before interest and taxes (EBIT) fell 97 per cent last year. Bombardier Aviation revenues nudged up two per cent while its EBIT jumped more than 280 per cent.
Profit margins on nearly one-third of the rail division’s US$8.27-billion revenue was “significantly diluted” due to cost overruns and late-delivery penalties, said chief financial officer John Di Bert.
Bombardier updated its financial guidance Thursday, projecting revenue from continuing operations will grow to about US$15 billion from $13.7 billion. The company also forecasted margins for earnings before interest and taxes of 3.5 per cent. Both figures fell below analyst expectations.
On an adjusted basis, earnings took a loss of 10 cents per share last quarter versus earnings of five cents per share in the fourth quarter of 2018, roughly in line with analyst expectations.
Bombardier’s shares closed up 10 cents, or 6.37 per cent, to $1.67 on The Toronto Stock Exchange.
This report by The Canadian Press was first published Feb. 13, 2020.
Companies in this story: (TSX:BBD.B)
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