As it prepares to become a pure-play business aviation company, Bombardier has launched a cost-cutting effort in a bid to be profitable on deliveries of 100-120 aircraft a year, down from the 150-plus expected before COVID-19.
Having completed its exit from the commercial aircraft market, and with the sale of its rail business on track to close in the first quarter of 2021, Bombardier finds itself with twice the infrastructure capacity needed for the current business jet market, Eric Martel, president and CEO, told analysts on Nov. 5.
A new transformation office has been created within Bombardier and seven workstreams identified to address costs across the company, he said.
Although the planned sale of Bombardier Transportation to French train maker Alstom is expected to yield net proceeds of $4 billion for the Canadian company, Bombardier Aviation will emerge as a stand-alone company burdened with $4.5 billion in net debt compared with the $2.5 billion projected pre-COVID-19.
“We need an effective debt management strategy and we need to learn how to operate profitably in the current environment, with a cost structure and backlog that allows us to make money delivering 100-120 aircraft a year,” Martel said.
Noting that its business jet product portfolio has been recently refreshed, Martel expects Bombardier Aviation to be “investment light” for the next five years at around $200 million a year. This compares with the billions spent developing the new long-range Global 7500 as well as the updated Global 5500/6500 large-cabin, Challenger 350/650 medium and Learjet 75 Liberty light jets.
“We need to concentrate on debt reduction as our priority to position the company for investment in the future,” he told analysts on Bombardier’s third-quarter results call.
“While we are encouraged to see that management recognizes the need to resize the business to be profitable, even at relatively low production rates, the bottom-line impact will likely take 2-3 years to be fully realized,” National Bank of Canada analyst Cameron Doerkson said.
Bombardier delivered 24 business jets in the third quarter, down from 31 a year earlier, but saw its aircraft revenues grow 10% year-on-year to $1.2 billion. This is because the quarter saw delivery of a record eight Global 7500s as production continues to ramp up.
Global 7500 deliveries are expected to increase to 12 aircraft in the fourth quarter, and Bombardier is projecting that higher cash generation in the last three months of the year will enable it to meet its target of breaking even on free cash flow for the second half of 2020.
Bombardier still expects aircraft deliveries for the full year to be down by more than 30% because of the pandemic, “and it will take a year to recover to pre-COVID levels,” Martel said. Order activity “improved significantly” in the third quarter—“especially Challenger,” he said—but deliveries outstripped orders and backlog fell 15% year-on-year to $12.2 billion at the end of the quarter.
The company puts the impact of COVID-19 at $2.25 billion at Aviation and Transportation. About a third of that is reduced orders. The rest–including $1 billion at Aviation–is working capital resulting from inventories being higher than required by the reduced production rates.
Bombardier Aviation will continue production into 2021 at the lower 2020 rates, Martell said, as it works to refill its backlog. The exception is the Global 7500, where the company is working off a multiyear backlog and trying to create production slots for new customers beginning in 2023.
“There is not much availability for a couple of years,” he said. “Customers typically want their aircraft in 18-24 months and it is more than that now.” Global 7500 deliveries are planned to increase to 35-40 aircraft in 2021, then stabilize at around 35 a year.
With 31 Global 7500s now in service, the aircraft is exceeding performance expectations, Martell said. Reliability is already matching the rest of the Globals and Challengers. There have been “very few” cancellations because of COVID-19 and customers were immediately found for those aircraft, he said.
Asked how Bombardier as a stand-alone business aviation company will deal with the market’s cyclicality, Martell said the strategy is for “a bigger portion of the revenue over the next five years to come from businesses that are more resilient.” He cited the aftermarket and missionized aircraft.
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