Published on March 9th, 2016 | by Jim Lee0
Air Canada and Bombardier sign a “landmark order” amid job cuts and other developments at the company
Now that time has allowed the dust to settle, we can look at the significant announcements, made on 17th February, by Bombardier Aerospace in some detail, and access their impact on the company and the C Series programme. The twin announcements included the ‘landmark order’ from Air Canada for the C Series coupled with the news contained in its financial report, that it was continuing with its restructuring and planned to cut its workforce by about 7,000 over the next two years. In a related development shortly afterwards, Republic Airways Holdings, the United States second largest regional airline conglomerate, announced that it had filed for Chapter 11 Bankruptcy protection, providing more uncertainty and bad news, as it puts that carrier’s 40-aircraft C Series order at risk. This is significant, as Republic’s order represents 16% of the firm C Series, 243 firm orders. The Chapter 11 process allows Republic and its subsidiaries to continue normal business operations while restructuring the company’s finances and contractual relationships. Prior to the announcement, the airline had already begun the transition to a single-family fleet of Embraer E-Jets (mostly E170/75s as well as its five E190s), which has to be ominous for the Bombardier order.
The Air Canada order
The Air Canada “landmark order” is actually a Letter of Intent (LOI), for the sale and purchase of 45 CS300 aircraft, with options for a further 30 CS300s. Air Canada has at least two years to finalise the deal, which also includes conversion rights to the CS100 model. It is the first order in 16 months for the C Series, and based on the list price of the CS300 aircraft, the firm order for 45 would be valued at approximately $3.8 billion (around €3.45 billion). As well as being the first order from a North American mainline, international network carrier, it is now the largest of the 243 firm orders for the programme which has 678 total orders and commitments.
Present at a press conference to celebrate the signing of the deal was Calin Rovinescu, President and Chief Executive Officer, Air Canada, along with members of his leadership team including Benjamin Smith, President, Passenger Airlines and Michael Rousseau, Executive Vice-President and Chief Financial Officer. The event was hosted by Alain Bellemare, President and Chief Executive Officer, Bombardier Inc. Alongside Mr. Bellemare, were his colleagues from Bombardier Commercial Aircraft, Fred Cromer, President and Rob Dewar, Vice President, C Series Aircraft Programme and members of their leadership teams.
Commenting on the order, Mr. Rovinescu said; “We’ve been carefully assessing the capabilities of Bombardier’s C Series aircraft and its progress for some time and today we are very pleased to announce an agreement to acquire the CS300 for our mainline fleet.” He went on; “The C Series will be a key element of our on-going fleet renewal, which will result in Air Canada operating one of the world’s youngest and most fuel efficient airline fleets. With its optimal mainline performance range, superior economics, and greater seating capacity, the Canadian-built CS300 aircraft will allow us to compete more effectively, providing increased point-to-point service to domestic and trans border markets further afield, as well as feeding our network.”
Mr. Cromer added; “We’re thrilled to welcome Air Canada as our first mainline, international carrier located in North America. A landmark order from a marquee and iconic customer like Air Canada is a very significant strategic marker for the C Series aircraft programme and we’re looking forward to further strengthening a relationship that spans 30 years,” “The C Series aircraft has proven and exceeded its performance targets and can readily be used as a coast-to-coast mainline connector or to open direct flights to under-served destinations. Performance and exceptionally low operating costs are ultimately what make this plane a success and Air Canada is recognising that the C Series aircraft was designed in line with evolving market requirements” he added.
“Our recent focus has been to add a large North American international network carrier to complement our orders in both Europe and Asia, and with Air Canada we are achieving our goal of creating a strong global footprint for the C Series aircraft,” noted Mr. Bellemare. “We are bolstered and energised by Air Canada’s confidence in the C Series aircraft programme and very assured that the carrier’s commitment will be the catalyst for future orders in North America and around the world” he added.
However, as with all things with Bombardier’s C Series programme, which is some two years behind schedule and at least $2 billion (around €1.82 billion) over budget, the Air Canada deal raises a number of questions. It comes at a time when Bombardier is still in talks on its request for Federal Government financial support. In a comment, Transport Minister Marc Garneau said his government had put no pressure on Air Canada to order the aircraft from Bombardier. His comments came as it was confirmed that the Québec government, which gave Bombardier a $1 billion (around €1.41 billion) bailout last year, would drop a lawsuit against Air Canada under the 1988 Air Canada Public Participation Act, which required the airline to keep heavy maintenance operations in Québec, Ontario and Manitoba.
The lawsuit which was made in conjunction with the Manitoba government arose from the closure of Aveos Fleet Performance Inc. (Aveos) which filed for bankruptcy filing in March 2012. Aveos was a maintenance, repair and overhaul (MRO) provider of airframe, component, engine and maintenance solutions, which did around 85% of Air Canada’s aircraft maintenance. It had started out as Air Canada’s technical services division, but was spun off in 2007 as a separate company. Its liquidation led to the layoff of 2,600 employees, including about 1,700 in Montreal. At the time Aveos claimed that Air Canada had “reduced, deferred, and cancelled maintenance work,” costing the company about $16 million (around €11 million) in lost revenue in less than two months. It was also claimed that Air Canada had solicited undercutting bids from low cost rivals for work. In taking legal action, the provincial government had argued that Air Canada breached its legal obligations under the Air Canada Public Participation Act.
The Québec provincial government won the original court decision in 2013 and the Québec Court of Appeal decision in November. More recently, Air Canada had asked the Supreme Court of Canada to overturn the appeal court ruling.
The province’s decision to drop the lawsuit came on the same day that Air Canada announced the letter of intent for the C Series and in return, the airline has agreed to conduct all heavy maintenance of the C Series aircraft in the province by “operators who haven’t yet been determined”. However with the deliveries of the C Series not due to start until 2019, heavy maintenance will not fall due for five or six years after that.
Air Canada’s CEO described the deal with the Québec government as a “good compromise” and an important ingredient in the C Series order, but not the main factor adding that it ensures the “status quo” which will see the airline continue to conduct most of its existing heavy aircraft overhauls outside of Canada in places like Hong Kong, Singapore and Israel, as well as in other parts of Canada. He added that the agreement paves the way for establishing a centre of excellence that could attract other airlines if labour and cost conditions are right. “It is up to the government to create the conditions acceptable to encourage others to come here and to create opportunities for other potential activities,” he noted.
Bombardier announces Financial Results
In a mixture of good news/bad news, Bombardier announced its Financial Results for the fourth quarter (Q4) and for the year ended 31st December 2015. The key figures included:-
- Revenues of $18.2 billion (around €16.55 billion); backlog of $59.2 billion (around €53.82 billion),
- EBIT before special items of $554 million (around €503.61 million),
- Special items of $5.6 billion (around €5.09 billion), mainly related to the completion of in-depth reviews and de-risking of aircraft programmes.
For 2016, the company expects to generate between $16.5 billion and $17.5 billion (€15 – €16 billion approximately) in revenues, with EBIT margin improvements across Transportation, Business Aircraft and Aerostructures, as Commercial Aircraft ramps up the C Series programme. EBIT is expected to be within a range of $200 million to $400 million (€181.8 – €363.6 million approximately), while free cash flow usage materially improves, to between $1 billion and $1.3 billion (€908.13 million – €1.18 billion approximately) for the year. Looking at each programme separately, for Business Aircraft, Bombardier expects growth and deliveries of approximately 150 aircraft, with revenues greater than $5 billion (around €4.54 billion), and an EBIT margin of approximately 6%. On the Commercial Aircraft side, it also expects growth and deliveries of 95 aircraft, with revenues of approximately $3 billion (around €2.72 billion). Nevertheless, it expects a negative EBIT of approximately $550 million (around €500 million), mainly due “to the dilutive impact of the initial years of production of the C Series aircraft programme”.
Revenues at Aerostructures and Engineering Services are expected to remain at approximately $1.8 billion €1.63 billion), mainly from “intersegment contracts with Business Aircraft and Commercial Aircraft”, with an EBIT margin of approximately 7.5%.
Transportation is expecting growth with revenues of approximately $8.5 billion, based on the assumption that foreign exchange rates will remain stable in 2016, compared to 2015. This will give an EBIT margin above 6%.
As part of the financial announcements Bombardier plans to present a proposal to its shareholders for a consolidation (also known as a ‘reverse stock split’) of its issued and unissued Class A shares (multiple voting) (the ‘Class A shares’), and Class B shares (subordinate voting) (the ‘Class B subordinate voting shares’). This proposal will be presented at its annual and special meeting planned for spring 2016 (the ‘Share Consolidation’). According to Bombardier’s statement “the consolidation ratio will be selected by Bombardier’s Board of Directors from within a range of ratios, subject to shareholder approval, which would be expected, at that time, to result in an initial post-consolidation share price in the range of CAD 10 to CAD 20 (€6.82 – €13.64 approximately) per Class A share or Class B subordinate voting share. Assuming receipt of shareholder and Toronto Stock Exchange approvals, the Share Consolidation, if any, would be completed at such time as the Board of Directors shall deem appropriate”. Bombardier believes that a higher share price resulting from the proposed consolidation “would heighten the interest of the financial community as it would broaden the pool of investors” that may consider or may be able to invest in Bombardier.
The statement added; “Implementation of the Share Consolidation is subject to a number of conditions, including but not limited to, Toronto Stock Exchange and shareholder approval, and subject to the Board of Directors’ authority, notwithstanding approval of the Share Consolidation by shareholders, to determine in its discretion not to proceed with the Share Consolidation, without further approval or action by, or prior notice to, shareholders. There can be no assurance that the Share Consolidation will be implemented as proposed or at all, or as to the timing thereof, or that the Share Consolidation will result in the contemplated initial post-consolidation share price of Class A shares or Class B subordinate voting shares”.
Bombardier also used the opportunity of its financial statement to outline the highlights for its Business and Commercial Aircraft programmes. This included David M. Coleal becoming President, Bombardier Business Aircraft effective 15th June 2015, an in-depth review to validate all aspects of the Global 7000 and Global 8000 aircraft programme, which should see the entry-into-service of the Global 7000 aircraft in the second half of 2018. However, due to the lack of sales following the “prolonged market weakness”, Bombardier cancelled the Learjet 85 programme on 28th October 2015. As a result, the company recorded a charge of $1.2 billion (€1.09 billion) in special items in the third quarter of 2015, mainly related to the impairment of the remaining Learjet 85 aircraft programme development. The company emphasises that it remains committed to the Learjet family of aircraft. In November 2015, the Challenger 650 aircraft entered into service. Bombardier continues to restructure and enhance Business Aircraft’s business model to improve long-term profitability. Subsequent to the end of the fiscal year, on 13th January 2016, the company announced that it had “completed initiatives to increase the number of direct-to-market channels, including termination of select sales representative and distribution agreements”, and to restructure customer commercial agreements. This resulted in the cancellation of 24 firm orders, valued at approximately $1.75 billion (€1.59 billion) based on 2015 list prices, with an additional cancellation of 30 optional orders. Mainly as a result of these “completed initiatives”, in the fourth quarter of 2015, Bombardier recorded $327 million (€297.33 million) in special items.
Looking to the Commercial Aircraft division, Fred Cromer became President, Bombardier Commercial Aircraft effective 9th April 2015. As noted previously, in October 2015, Bombardier Inc. entered into a memorandum of understanding with the Government of Québec, to invest $1 billion (around €1.41 billion) billion in the C Series aircraft programme in return for a 49.5% equity stake in a newly created limited partnership to which Bombardier would transfer the assets, liabilities and obligation of the C Series aircraft programme.
The financial statements note that “this newly created limited partnership will carry on the operations related to the C Series aircraft programme and this will be consolidated in the Company’s financial results. The execution of the definitive agreements and the disbursement of the investment are expected to take place in the second quarter of 2016, subject to the closing conditions. The Government of Québec’s interest in the partnership will be redeemable at Bombardier’s option, in certain circumstances”.
At the same time, as a result of an in-depth review of the C Series aircraft programme, the Company recorded a charge of $3.2 billion (around €2.91 billion) in special items in the third quarter of 2015, mainly related to “the impairment of aerospace programme tooling”. The Company continues to believe that the C Series aircraft programme meets specific market requirements and that it has long-term market potential.
Crucial to this is further investment. Mr Bellemare, Bombardier’s CEO says he expects the company will need about $2 billion (around €1.82 billion) in additional financing before it can become cash-flow positive by 2018. He believes that the programme should break even by 2020. However, federal government is clearly needed and he said he still wanted that assistance adding “We are hoping the federal government would come very close to what Québec did,” and noted that “Québec came with a very good structure where they have equity ownership, and we’ve been benefiting significantly from that.”
While talks with the federal government “are progressing” Bombardier must be hearted by comments of Canadian Prime Minister Justin Trudeau who said that the C Series was “a superlative product.” Mr. Trudeau who swept to power in October elections said in an interview that the question was “very much, well, how do we make sure that airplane is a success and how are we making sure it is a Canadian success story?” His comments reinforce the likelihood that the Canadian Federal Government will step in with financial aid for the programme and although he declined to say when a decision will be made on the aid request. He also signalled strong support for the aircraft and the broader aerospace industry, which employs about 42,000 people in his home province of Québec alone. The question that Mr. Trudeau’s government must also consider is why past aid hasn’t worked. Canada has already contributed $250 million (around €227.43 million) to the C Series (in 2008), while the federal export development bank has provided about CAD 8.5 billion (around €5.8 billion) in financing to Bombardier’s customers.
However, Québec’s Transport Minister Jacques Daoust has already said in the province’s parliament, that he would be willing to help Bombardier once again, if the Canadian Federal government failed to invest in the company by 31st March.
“If by March 31 the federal government isn’t there, the Québec government will have a decision to make. But we have always supported Bombardier. It is a jewel of our economy and we will make sure it continues that way,” he is quoted as saying in a local French-language publication.
7,000 jobs to go as part of ‘global workforce optimisation’
The sting in the tail of the 17th February announcements was Bombardier decision “to take steps to optimise its workforce with a combination of a manpower reduction and strategic hiring throughout 2016 and 2017”. Over this two year period, its global workforce will be reduced “by a targeted 7,000 production and non-production employees, including 2,000 contractors”. Bombardier said that this reduction would be partially offset by hiring in certain growth areas, “notably to support the ramp-up of strategic programmes and projects worldwide, such as the C Series”. These adjustments will enable Bombardier “to resize its organisation in line with current business needs and to increase its competitiveness”.
The reductions were based on an in-depth review of the company, carried out over the past year. With production rates modified for some aircraft models due to macroeconomic conditions, Bombardier is now adapting its workforce to meet market demand. In addition the company’s transformation plan is now taking hold, driving productivity across the entire organisation.
“Throughout 2016 and 2017, we will adapt our global manpower to current market conditions, while hiring to support growing segments, such as the C Series,” said Mr. Bellemare. The number of employees directly assigned to the C Series programme for example, has increased in the past few months, reaching a total of 3,450 employees worldwide, and is expected to keep growing over the next few years. In addition, Bombardier Transportation’s impressive $30.4 billion (around €27.64 billion) backlog includes certain large orders, which will mobilise additional manpower in regions where it has a limited presence.
The jobs to be lost are mostly based in Canada and Europe, where the company’s aerospace and rail transportation activities are concentrated. Bombardier said it would “support affected employees and will provide them with resources to help them manage through their transition”. The reductions will begin in the coming weeks and throughout 2016, on a full year basis, Bombardier expects to record $250 million to $300 million (€227.37 – €272.86 million approximately) in restructuring charges, that will be reported as special items, when accrued.
“These adjustments are always difficult” said Mr. Bellemare. “They are important to ensure that, with our 64,000 employees worldwide, we continue to create superior value for our customers, be more competitive, and deliver improved financial performance,” he added.
Bombardier has issued the following table giving an overview of targeted workforce reductions by business segment.
Comment from Bombardier Belfast
In a comment from Bombardier in Belfast, the company said that in in line with its parent company’s announcement, it had reviewed its requirements in Belfast and regretted “to confirm that we must adjust our workforce levels downwards by around 580 this year. In addition, we expect to have a further potential reduction of some 500 next year”.
Its statement added; “Around 200 Bombardier employee jobs in Northern Ireland are currently at risk of redundancy. The company will be lodging a formal HR1 redundancy notice with the Department for Employment and Learning, following which there will be a 90-day consultation period when we will explore opportunities to mitigate the number of compulsory redundancies”.
It went on; “In addition, around 380 members of our Complementary Labour Force (CLF) and other agency workers are being released from their assignments with the company in 2016. This includes 60 CLF who already left the company in January”.
“We deeply regret the impact this will have on our workforce and their families, but it is crucial that we right-size our business in line with market realities. We will continue to evaluate all opportunities to significantly reduce our costs, improve our competitiveness, and boost our profitability, whilst focusing on the unique capabilities that will help shape and secure our future” it concluded.
Bombardier is not seeking any further investment from the Northern Ireland Executive specifically in its C series aircraft programme, according to Michael Ryan, vice president and general manager of Bombardier Aerospace Belfast. Noting that Executive had “helped us hugely” in the process of securing the design and manufacture of the C Series aircraft wings for its Belfast facility and in supporting the programme, he confirmed it would not be looking for further finance, mainly because of EU competition rules.
Separately, in a statement to the Assembly on 22nd February, Minister of Enterprise, Trade and Investment in Northern Ireland Jonathan Bell said, that while the news was “deeply disappointing”, Bombardier had made it clear that the decision was taken, “to safeguard the company’s long-term future globally and here in Northern Ireland”. “I want to take this opportunity to assure the House that I am already working with my colleague the Minister for Employment and Learning to do all that is possible to limit the impact of the redundancies that will take place during the coming weeks and months” he added.
The Minister noted that the UK Government and the Northern Ireland Executive, primarily through Invest Northern Ireland, had worked closely with Bombardier both in Belfast and at its corporate headquarters in Montreal. This was to ensure that the company’s Northern Ireland operations “are fully recognised in the strategic contribution that the company makes to UK aerospace”. He confirmed that he had met senior and top management of Bombardier on five occasions since taking up the post of Minister of Enterprise, Trade and Investment, and that he intended “to continue that contact”.
Since the privatisation of Short Bros plc by the UK Government in 1989, Bombardier has invested £2.6 billion (around €3.36 billion) in its six sites in and around greater Belfast; in facilities, equipment, research and development; and in the training and development of its workforce. Between 2002 and 2015, Invest Northern Ireland offered £75 million (around €96.95 million) worth of assistance to Bombardier, including £21 million (around €27.15 million) for the C Series, in support of investment commitments totalling £844.5 million (around €1.091 billion).
Bombardier and Swiss International Air Lines prepare for the C Series
Meanwhile the C Series programme has begun the ramp-up to full production, as the CS100 aircraft readies for delivery and entry-into-service (EIS) with launch operator Swiss International Air Lines (SWISS), in the second quarter (Q2) of 2016. The final assembly facility is fully equipped and production is progressing according to plan with aircraft in various stages of the build sequence. “It’s truly a spectacular sight to see the C Series final assembly line fully stacked with production aircraft in various stages of assembly. The line itself has been designed for maximum production efficiency” said Fred Cromer, President, Bombardier Commercial Aircraft
He went on; “It’s been a very productive start to the year with a lot of activity around the SWISS team completing its initial phase of training on-site for pilots, ground and maintenance crews.” “It was a special treat to celebrate Swiss’ first aircraft ‘powering on’ – meaning electricity and systems ran for the first time on the aircraft. Excitement is building as crews await the maiden flight of their aircraft in the coming months,” he added.
Additionally, the CS300 aircraft has completed over 70% of its certification activities to mid-February and is on target for full certification approximately by the middle of the year, followed by its planned EIS in the second half of 2016 with airBaltic of Latvia. The first CS300 aircraft for airBaltic is also in production. “It’s great to know we’re pacing well to meet our programme and customer targets for the year,” Mr. Cromer noted.
Bombardier is very advanced in preparations for SWISS’ entry-into- service. Key conferences and workshops for initial provisioning, start-up support, supplier orientation, technical publications and data reporting have all been completed; and technical training is well advanced. Their intensive training will prepare them for the route-proving flights where they will operate alongside Bombardier’s flight crew, when the CS100 route-proving aircraft flies to Europe, in the coming weeks.
“In addition, Bombardier and supplier on-site support is in place; more than 500 users have access to our online Customer Services portal; and we are beefing up our state-of-the-art C Series Customer Response Centre for 24/7 worldwide support” said Todd Young, Vice President and General Manager, Customer Services, Bombardier Commercial Aircraft.
In December 2015, Bombardier announced that the CS100 aircraft had received its Type Certificate from Transport Canada. Bombardier’s CS300 aircraft, the larger model, is on track to obtain its Type Certificate approximately in mid-2016, followed by EIS in the second half of 2016 as planned.
Bombardier continues to pitch both the CS100 and CS300 to North American carriers such as Delta Air Lines, jetBlue Airways, Southwest Airlines and United Airlines, as it seeks that elusive large order, from a major carrier. So far only Delta Air Lines has indicated that is seriously considering the C Series. CEO Richard Anderson is quoted as saying that Delta “actually think that at right price it’s quite a competitive airplane particular given the engine technology”. “So we’re taking a very serious look at it” he added.
Other recent highlights for Bombardier
On 2nd March Bombardier Commercial Aircraft announced that it had extended its Authorised Service Facility (ASF) agreement with Hawker Pacific of Sydney, Australia, for an additional five-year term. Under the agreement, Hawker Pacific is designated as an authorised service provider for base and other maintenance on all Bombardier Dash 8 / Q Series aircraft, including aircraft modifications and upgrades.
Earlier the company and Air Inuit Ltd. announced on 1st March, that they are working together on a passenger-to-freighter conversion, for the Dash 8 Q300 turboprop aircraft. The freighter will include a large cargo door. Dorval, Québec-based Air Inuit, a long-time operator of Q300 aircraft, has championed this modification and will be the launch customer for the conversion. In support of this conversion, a new Supplemental Type Certificate (STC) will be developed under license by a specialised third party entity. The converted Q300 aircraft is expected to have a cargo capacity of 12,500 lb (5,670 kg), with an optimised cargo door. The aircraft will accommodate palletised and free load cargo.
Also in a confirmation of Bombardier’s focus on continuous improvement aimed at addressing traffic growth and customer bottom line, Bombardier has expanded its Q400 aircraft cabin configuration to 90 seats. Compared to other turboprops, the Q400 aircraft offers unique speed flexibility driving higher scheduling efficiency; and 12 to 14 additional seats, which when combined, deliver over $8 million (around €10.34 million) in extra value to customers. It also announced a 2,000 lb (907.2 kg) increase in payload and an escalation of the A-Check and C-Check intervals from 600/6,000 to 800/8,000 flight hours, all available for entry-into-service as early as 2018.
It followed confirmation that Air Berlin PLC would lease three new Q400 aircraft from GE Capital Aviation Services (GECAS). The Q400 aircraft, part of GECAS’ order book of five announced on 31st December 2014, will increase the Air Berlin Q400 aircraft fleet to 20.
Bombardier Business Aircraft also marked a major milestone with the delivery of the 75th Learjet 75 Aircraft to Aurora Jet Partners. The milestone was reached slightly more than two years after the first Learjet 75 aircraft, the fastest light business jet on the market, entered service in November 2013.
While there are many challenges ahead both with the C Series and with the falling demand for business jets. Whether Bombardier can rise to these challenges remain to be seen, but the importance of this company, particularly in Northern Ireland, make it imperative that it succeed.