The announcement of job cuts is never a pleasant message, but in the case of Bombardier, appear to be both a financial and economic necessity.  Bombardier is facing numerous challenges across its multiple business lines, rail, business aircraft, and commercial aircraft.  The latter, particularly the C Series, is the key to the company’s future.

The C Series began life with an sizable economic advantage over existing models, but is facing re-engined competition that has somewhat leveled the playing field.   The competing A319neo, 737 MAX 7 and Embraer E2 jets are all existing models that have been upgraded.  The cost of a re-engining program is much lower than an all new aircraft, providing these companies with an economic advantage in that they have lower development costs to amortize over the life of the aircraft.

With strong existing customer bases, selling a re-engined jet versus an all new program requires much less effort for an airline.  Pilot training is a few hours rather than a couple of weeks, maintenance training is minimal, given that the major difference is in the engines, which are typically maintained by the OEM, and a new inventory of spare parts won’t be required.

Each of these aircraft have existing models already in production and well down the “learning curve” in getting costs down.  Bombardier has just started that process, and has another 12-18 months to go to reach steady state cost levels.

As a result, the competition is able to undercut Bombardier and offer aircraft at lower prices.  And those lower prices can offset the economic advantages the C Series provides.  Airbus, Boeing, and Embraer are all masters at “pricing to the point of economic indifference” by computing the present value of any C Series advantage and discounting their product to match on a cash flow basis.

The highly competitive marketplace is one reason Bombardier has had a difficult time increasing its order book, and when it has won an order, as indicated by the write-offs after the Delta and Air Canada orders, it has done so at unsustainable pricing.

The marketplace is also changing.  The large order cycle over the last 10 years has declined, as lower fuel prices have eliminated the imperative for new aircraft and the industry, over the next 10 years, must absorb the equivalent of the last 30 years of orders for new aircraft.  Existing backlogs are tremendous, and aircraft on order are now being delivered in a period of economic and political uncertainty.  Orders for Airbus and Boeing are down, and the industry, after years of positive book to bill ratios, is now working off its backlog.

Bombardier missed a window of opportunity with this aircraft, partially because of delays and partially because of management decisions, that it must now overcome in a more difficult environment for aircraft orders.

The good news is that the aircraft is performing very well in service, achieving its targets for dispatch reliability very early in the program.  The aircraft itself is attractive, and as more enter service and the aircraft’s economics and durability are proven, orders should follow.  Unfortunately, the “Wait and C Series” is still facing delays, as Pratt & Whitney has been unable to deliver engines, resulting in only 7 of 15 planned deliveries for 2016.  That’s a significant hit to cash flow, as the largest aircraft payments come when the aircraft is delivered.

How should a company react to such a competitive environment?  The answer is to become leaner to fight for every order.  That means cleaning house of activities that don’t contribute directly to the bottom line, or are “nice to have” but functions Bombardier can live without.  The trick is cutting fat without cutting muscle.

Fortunately, economies of scale in aircraft manufacturing do not require 40 or 60 aircraft per month.  Airbus’ new final assembly line in Alabama is starting at four aircraft per month, and the current line could accommodate a maximum of eight per month should demand rise.  Bombardier can reach competitive economies of scale within the next 12-18 months if it is aggressive, and the problems with engine supply are quickly resolved.

The Near Term Challenge

Bombardier is in a tenuous financial position, even after the $1 billion investment from Quebec.  With about half of that allocated to projected losses on the Delta and Air Canada deals, cash flow will become tight.  One way to solve that problem is to eliminate anything unnecessary.

For Bombardier to get back on an equal footing with its competitors, it will need to continue to change its cash flow.  The two levers are to increase revenues, or lower expenses.  The former isn’t happening fast enough, and the latter remains the only lever management has other than a restructuring of the company.

Please follow and like us:
Pin Share
%d bloggers like this: