ANALYSIS: Bombardier looks to China, structures for growth

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With its star commercial aircraft still grounded and once-promising partnerships with Russian industry less certain, Bombardier will shift attention to its neglected aerostructures business to drive revenue growth while continuing to attempt to unlock the Chinese market and return the CSeries to flight.

Second quarter earnings announced by Bombardier’s aerospace division paint a mixed picture. Revenues have increased year-over-year from $2.3 to $2.5 billion. Operating earnings also have improved by 0.9 percentage points compared to last year, but remain below expectations at $141 million, or 5.6% of revenues.

Bombardier chief executive Pierre Beaudoin was so dissatisfied with the sluggish performance – and, not least, the embarrassment of the CSeries grounding and Learjet 85 development delays – that he announced last week breaking the aerospace division into three businesses and accepting the resignation of its former chief, Guy Hachey.

Along with Hachey, Bombardier is laying off 1,800 of about 12,000 non-union employees by the end of the year, in an effort to boost operating margins amidst three concurrent aircraft development pogrammes.

In the new corporate structure, the heads of Bombardier Commercial Aircraft, Bombardier Business Aircraft and Bombardier Aerostructures and Engineering Services will report directly to Beaudoin. Aftermarket sales and distribution will be divided, but sometimes share common infrastructure, such as warehouses. More problematic is how to divide engineering resources between the three groups, but those complexities will be decided over the next two months.

In addition to giving Beaudoin more visibility over the aerospace development programmes, the restructuring also should improve the performance of the aerostructures business, he says. With 6,000 employees alone in Belfast and others in Canada, the aerostructures business plays a major role in Bombardier programmes and the wider aerospace supply chain.

With commercial aircraft backlogs at Airbus and Boeing rising to unprecedented heights, Bombardier senses that its own aerostructures division can play a larger role on other aircraft programmes. Buried inside the larger aerospace company, the aerostructures unit struggled to attract investment from within the company, Beaudoin says.

“When the aerospace group had to make decisions between capital allocation between airplanes and structures, the airplanes seemed to win all the time,” Beaudoin says.

The new organisation will ensure that Bombardier will invest the “proper amount of money to go and be competitive in this market”, he says.

Hachey’s departure and the lay-offs echo previous moves by Bombardier earlier this year, with the departure of former chief commercial aircraft salesman Chet Fuller and a staff reduction of 1,700 employees.

Bombardier’s moves have not impressed some analysts. “Bombardier’s executive leadership and organisation resembles the weather in Seattle—if you don’t like it, wait an hour and it will change,” says Richard Aboulafia, vice-president of analysis at the Teal Group.

“The reorganisation is either a way of bolstering profitability, or permitting unit divestitures, or possibly both,” Aboulafia says. “Given the risks associated with their structures business, the only unit that might realistically be sold is commercial aircraft. And there, it's very hard to imagine a buyer. China probably wouldn't be willing to pay, even if the Canadian Government allowed the sale.”

For his part, Beaudoin denies that possible spin-offs played any role in the restructuring and lay-offs announced last week. “No, this restructuring is not to get rid of any one division,” he says.

Bombardier is, however, ramping up discussions with China’s aerospace industry. Comac officials met with Bombardier executives in Belfast in early July. The two companies are discussing Comac’s role in the CSeries programme, Beaudoin says. Comac could perhaps provide aftermarket support for the CSeries in China, he adds.

Another promising opportunity in China are sales of the Dash 8 Q400 turboprop, but this would require finding a partner to assemble the aircraft locally, Beaudoin says. The company is in talks with Chinese authorities about such a proposal.

At the same time, Bombardier also is discussing a similar proposal for local assembly of the Q400 in Russia. Ilyushin Finance Corp agreed to buy up to 100 Q400s last August, but only if Bombardier agrees to transfer final assembly to Russian industry. Those discussions have continued despite new sanctions imposed by Western governments on Russia over fighting in Ukraine, Beaudoin says.

“For us, yes, we are concerned about what’s going on with Russia, and we are looking at the effect on our business,” Beaudoin says. “But, in the end, it’s the government that will decide on sanctions.”