Big news this morning as Bombardier announces its fourth quarter and year end 2015 results. The PR lists all these items, but we believe the first two to be the most critical:
- Air Canada signs for up to 75 CS300 aircraft
- Global workforce optimization resulting in a reduction of ~7,000 positions partially offset by hiring in growth areas
- C Series certified and on track for entry-into-service with SWISS
- Transformation plan focused on expanding margins and cash flow
- Renewed leadership team executing turnaround
- Strong pro forma liquidity at $6.5 billion
- 2016 a year of transition
- Revenues of $18.2 billion; backlog of $59.2 billion
- EBIT before special items of $554 million
- Share consolidation to be proposed at upcoming shareholder meeting
- Management provides 2016 full year consolidated and segment guidance
- Special items of $5.6 billion, mainly related to the completion of in-depth reviews and de-risking of aircraft programs
The numbers don’t look good compared to 2014. Revenues down nearly 10%, 2015 EBIT margin -26%. But the message here is turnaround. “We are turning Bombardier around to make this great company stronger and more competitive,” said Alain Bellemare, President and Chief Executive Officer. “Over the past year, we renewed our leadership team and developed a clear plan to significantly improve our performance. We de-risked major development programs and stabilized the company, securing our liquidity position and taking a series of actions to rebuild margins.”
The statement is predictable. But that statement is backed up with the Air Canada news. The deal had been in play for months. No details on the transaction have emerged. But it would seem plausible to think the deal might be a “Made in Canada” solution, combining the airline, Caisse de dépôt et placement du Québec and Bombardier. For example, it could be the fund buys the aircraft from Bombardier and then leases them to the airline. We do not expect details to emerge on the deal any time soon. But doing the deal inside Canada takes off exchange rate risks for all involved.
Crucially the LoI with Air Canada sends the signal a market has been waiting for since the previous order in 2014. The order is for 45 firm and 30 options with deliveries slated to start in 2019. The deal also includes swap rights to the CS100. This is the second order from a key Star Alliance partner, after the SWISS order via Lufthansa. Of course we mention this because everyone is waiting to see how United moves on their own selection.
Bombardier has 243 orders for the CSeries and the 45 new firm orders takes them closer to 300 they once were aiming for at EIS.
The new management team’s primary goal had to be an order, ideally a big order from a marquee brand. Now they have that. The program’s momentum now changes direction. But the pressure to announce a follow up order remains. Momentum requires steady progress reports, and the technical performance of the aircraft is no longer an issue. The type of progress the program needs is orders.
The 7,000 layoff news is awkward. The plan is to reduce the workforce by 7,000 over the next two years, while ramping up hiring to support production of the CSeries. Of the target number, 29% (2,000) are contractors. The breakdown is as follows:
- 3,200 jobs from its transportation division
- 2,500 jobs from its aerostructures and engineering services division
- 800 jobs from its aerospace product development engineering group
- 500 jobs from its business aircraft unit
Note no job losses at commercial aircraft. But Belfast will lose about 1,000 jobs. Bombardier is the largest manufacturing company in Northern Ireland currently employing 6,000 people and it produces ~10% of Northern Ireland’s total manufactured exports.
Media will focus on the layoffs because bad news sells better. But the truth is that, perhaps, Bombardier has bottomed out. The Air Canada order is really big news. If the new management team does indeed perform the turnaround they talk about, and they build sales momentum, then a number of the layoffs will likely get jobs at the company again.