Bombardier yields to cost pressure, cuts workforce by 4.4%

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A week after announcing a new delay for the CSeries programme, Bombardier Aerospace announced on 21 January plans to cut 1,700 positions in Canada and the USA within the next three weeks.

The layoffs are concentrated at Bombardier manufacturing sites in for commercial aircraft in Mirabel and Montreal, Canada, and for business jets in Wichita, Kansas, Bombardier spokeswoman Haley Dunne says. Overall, 1,100 jobs will be reduced in Canada and 600 in the USA.

The announcement affects 4.4% of the Bombardier Aerospace workforce, although some 300 employees could still be re-assigned to unfilled positions within the company, Dunne says.

Bombardier is making cuts now as major investments in both the CSeries and the Learjet 85 business jet programmes face new cost pressure due to delays.

“It’s the continued cost containment with regard to the investments,” Dunne says.

Bombardier originally planned to start delivering the CSeries aircraft around now. A series of delays, including the latest announced last week, has pushed back entry into service by 1.5 to 2 years.

The Learjet 85, meanwhile, was also supposed to begin deliveries around this time, according to the original schedule. Bombardier delayed first flight in early 2013, but still missed a year-end deadline. The midsize business jet is now expected to fly in the “coming weeks”, Bombardier says.

Bombardier is also in the early stage of developing the Global 7000 and 8000 business jets.

All three major investments have put a huge pressure on controlling costs. In late 2012, Bombardier sent around an internal message urging employees to look for ways to contain expenses. As investment costs increased, however, Bombardier spent several months deciding on how deep it need to reduce head-count.

The company is still evaluating how the latest delay will affect the original cost estimate for the CSeries programme, which was set at C$3.4 billion ($3.2 billion) six years ago. In September, Bombardier acknowledged that a new accounting standard artificially increases the actual cost by about $500 million, but the real costs of the programme remains unchanged.

Still, the company’s investment in the CSeries programme carries heavy financial risks. RBC Capital Markets estimates that the CSeries will generate a margin of roughly C$5 million per aircraft, meaning Bombardier may need to deliver 800 aircraft to break even with a development price tag of $4 billion. If that cost estimate increases, Bombardier will have to sell even more aircraft to reach profitability.

If Bombardier’s forecast models are even roughly accurate, reaching the break-even point should be possible. Bombardier anticipates airlines will buy 7,000 aircraft in the CSeries class over the next 20 years.

However, the pace of those deliveries could present problems as Bombardier’s cash reserve dwindles while development drags on.

RBC Capital Markets estimates that each additional month of CSeries development costs Bombardier about $60 million.