Mark Collins – Bombardier Giving Planes Away as Ottawa Bailout Looks Inevitable

Well, almost giving them away, what with Air Canada’s reportedly getting CSeries jetliners at just $30 million a pop.  With such small sales revenue from the planes that federal funding will surely be needed to keep the company going.  Moreover Ottawa can hardly resist the intense public pressure coming from Quebec (harping on fairness given the earlier massive bailout of the Ontario auto industry).  And then the Air Canada deal can be touted as making the CSeries look like a decent bet.  Two pieces at the Globe and Mail:

1) News:

Bombardier gets lifeline as Air Canada places order for C Series jets 

An Air Canada purchase of Bombardier Inc. planes that was assisted by the federal and Quebec governments [not with cash] may help salvage one of the most ambitious industrial projects undertaken in Canada, but Ottawa is still assessing whether to participate in a bailout of the aerospace giant.

The country’s largest airline has signed a letter of intent to buy as many as 75 of Bombardier’s new C Series planes, giving the troubled Montreal-based transportation giant the first order it has landed since September, 2014, and a marquee customer.

The order came at a steep price for Bombardier. Industry sources said they believe Air Canada will pay just $30-million (U.S.) each for the planes, a discount of almost 60 per cent from the list price of $72.4-million. Bombardier also announced layoffs of 7,000 employees in Canada and other worldwide locations over the next two years.

But senior executives in the industry and even some existing customers had urged Bombardier to offer hefty discounts to land such prominent customers as Air Canada [emphasis added, see also final quote at end of the post]–but then you get that cash flow problem].

What’s still unknown is whether the federal government will join the Quebec government and provide $1-billion in financial help to Bombardier to give the C Series a further boost…

A senior federal official said the Liberal government will announce before the end of March whether it will help Bombardier with equity in the company or financial credits…

2) Opinion:

Why reward Bombardier families after their epic management sins?

The effort to save Bombardier from its self-inflicted wounds was always going to be a messy and expensive affair. But no one said it had to be obscene too. It’s obscene because the investors who will benefit most from the government-sponsored bailout programs – some in place, some to come – are the Bombardier and Beaudoin family members who remain in control of the company in spite of their epic management sins.

This is called rewarding bad behaviour, the equivalent of handing a BMW to your reckless son after he drove the Buick into a wall.

On Wednesday [Feb. 17], Bombardier’s new passenger jet, the C Series, scored a rare victory when Air Canada dropped its long aversion to the plane and signed a letter of intent for 45 aircraft, with options for another 30. If the orders are confirmed – there is no guarantee they will be – the slow-selling, overbudget jet will score a much-needed credibility boost and spare Bombardier’s Montreal-area assembly lines from echo chamber status.

Air Canada is a stock exchange company and is obligated to adopt the best value-creating strategies for all its shareholders. Maybe the efficient C Series is now deemed the perfect machine for Air Canada’s short- and medium-haul routes (a role now ably fulfilled by the airline’s Brazilian-made Embraer jets), and maybe the discount to the list price, which was not disclosed, was irresistible. Still, you can bet that Air Canada was on the receiving end of the best persuasive powers of the federal and Quebec governments.

Even as Air Canada revealed its intention to buy the jets, Quebec agreed to drop a lawsuit against Air Canada in exchange for the airline’s agreement to conduct maintenance on the C Series planes in Quebec. Sheer coincidence, to be sure…

…somewhere along the line, the [government] largesse turned into an apparently bottomless-pit rescue effort for the C Series without the Bombardier and Beaudoin families being forced to forfeit, or even dilute, their commanding position in the company they created. The extended family controls Bombardier through their A shares, which come with 10 votes apiece. The subordinate B shares, the ones that trade on the stock exchange, come with a mere one vote.

In 2008, shortly after the C Series was officially launched, (against the advice of a former chief executive officer, Paul Tellier), Bombardier negotiated a $350-million loan from Stephen Harper’s Conservative government to help cover the plane’s R&D costs. The Quebec and British governments stumped up small fortunes too [and well over 1,000 jobs are being lost in the UK, the great majority in Belfast, Northern Ireland]…

The Quebec government [has also now] pumped $1-billion into the C series project while the province’s pension fund manger, the Caisse de dépôt et placement du Québec, invested $1.5-billion into Bombardier Transportation in exchange for a 30-per-cent stake in the Berlin-based train division. On Wednesday, Bombardier CEO Alain Bellemare, who replaced the hapless Pierre Beaudoin last year, reiterated his appeal for help from Ottawa. “A partnership with the federal government into the [C Series] is very important to us,” he said.

The feds will probably comply, even if they go to great pains to spin any bailout as a commercial proposition that is in the taxpayers’ best interest. But no sacrifice is being demanded of the Bombardier-Beaudoin family…

Bombardier is going through a bizarre metamorphosis. It’s on its way to becoming, in effect, a ward of the state under the control of a private family. It’s a clever trick that should never have been allowed to happen. If Bombardier wants another dollop of taxpayer loot, which it does, the family that oversaw the massive value destruction should be invited to step aside.

Rather.  Plus:

Order for Bombardier aircraft is proof Quebec made sound investment: [Premier] Couillard

“I want to reiterate that there’s no way, no way, that the federal government should not invest in Bombardier, in the CSeries. If the auto industry has been supported by taxpayer money, which is fine, then the aeronautical industry in Montreal needs also to be supported,” said Couillard. 

The Quebec government has been urging Ottawa to match its billion-dollar investment in the CSeries…

Meanwhile at the National Assembly, the Parti Québécois opposition tabled a motion asking that the Quebec government do everything in its power to convince Ottawa to pitch in. “And that the federal government recognize the strategic importance of the aeronautical industry for Montreal and the province of Quebec, just like it recognizes the importance of the auto industry for Ontario,” the motion read.

“Will the premier pick up the receiver and call the Prime Minister of Canada to convince him to invest in Bombardier?” asked PQ Leader Pierre Karl Péladeau.

The motion passed unanimously in the house [doesn’t everything with a nationalist tinge?]…

More planes to be sold super-cheap to bag major customers

Bombardier eyes new CSeries win after Air Canada deal

SINGAPORE, Feb 18 Bombardier is in talks with more potential buyers including United Airlines after winning a lifeline $3.8 billion order for its struggling CSeries jet from Air Canada, its sales chief said on Thursday [Feb. 18].

Visibly relieved after landing the first tentative CSeries order in 16 months, and the first from a top flag carrier since 2011, Bombardier basked in attention at the Singapore Airshow as larger rivals drifted home with a handful of orders…

…[Bombardier] remains in talks with United Airlines after losing a recent contest there to Boeing, [Colin] Bole [senior vice president for sales and asset management at Bombardier Commercial Aircraft] said.

It is talking to other major U.S. carriers and has its sights on another win before the Farnborough Airshow in July…

More recently, just before the Air Canada deal, on United (and Delta, note pricing):

Bombardier still hopeful for United Airlines CSeries order

Bombardier believes United Airlines’ recent decision to order 40 Boeing 737-700s does not preclude it from selling the CSeries to the Chicago-based airline.

The Canadian manufacturer is eager to land a CSeries order from a major North American carrier

Delta Air Lines is also considering the CSeries, which Delta CEO Richard Anderson recently called “a pretty impressive airplane.”

Whether Bombardier can break through on the CSeries with a major North American airline may depend on how aggressive it is willing to be on pricing [emphasis added]. Bombardier Commercial Aircraft president Fred Cromer “has indicated that on pricing we’ll make sure we do what it takes to be competitive,” [Bombardier Commercial Aircraft VP-commercial operations Ross] Mitchell said. “I can’t comment on how low we’ll go, but I think we’ll be competitive in the marketplace … We will capture a North American mainline carrier, no doubt.”..

As the company now has with apparent super-“aggressive” pricing (amongst other considerations).  Fed funding support really required.

Mark Collins, a prolific Ottawa blogger, is a Fellow at the Canadian Global Affairs Institute; he tweets @Mark3Ds


19 thoughts on “Mark Collins – Bombardier Giving Planes Away as Ottawa Bailout Looks Inevitable”

  1. Then there’s the Quebec vs Alberta/Saskatchewan political angle:

    1) Alberta: “Deborah Yedlin asks why Quebec’s Bombardier is getting a $1B when Alberta’s oilpatch is suffering in silence?”

    2) Saskatchewan:

    “Sask. premier wants Ottawa to remember the oil sector”

    The squeeze (financial and political) is on for the new gov’t.

    Mark Collins

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