Opinion: Can Bombardier Go It Alone In Business Aviation?
Twenty years ago, Bombardier was on top of the world. It was the leading producer of regional jets—the fastest-selling category of jetliners. The rest of its portfolio of turboprops, business jets and trains was also strong. It was a Canadian business icon.
Today, after radical restructuring, including its recent decision to terminate Learjet production, Bombardier is a pure-play supplier of large-cabin business jets with revenue of $5.6 billion. Some analysts are asking if the new Bombardier has the critical mass to survive in the crowded business jet sector—particularly as rivals Gulfstream, Dassault and Textron are supported by larger corporate entities with healthy defense revenue.
Can Bombardier really go it alone, and if not, what are its alternatives?
Pessimists worry about Bombardier’s weak balance sheet. It has more than $4 billion in maturities due by 2023 that need to be rescheduled and eventually paid off. It must service this debt even though it will not become cash-flow positive until 2022 at the soonest. Its deliveries were down 15% in 2020, thanks to the pandemic, R&D spending is just $25 million, and its Challenger 650 is badly in need of an update. Finally, it must execute the wind-down of Learjet production and reduce its cost base by hundreds of millions of dollars. There is little room for error.
Bombardier optimists point to accelerating deliveries of the Global 7500 as well as updates to the Global 5500 and 6500 models. There are also signs that business jet sales could be poised for growth. “Sales of pre-owned aircraft are on fire,” says industry analyst Brian Foley. “Just 5-6% of the pre-owned fleet is available for sale, and less than 10% is usually a bullish indicator for new equipment sales.”
Perhaps the greatest reason for optimism is Bombardier’s aftermarket growth opportunity. The company estimates that its installed base of nearly 5,000 aircraft will generate $4 billion in annual aftermarket activity by 2025. Bombardier’s goal is to dramatically expand its market share, capture half of this business and create a foundation of $2 billion in service revenue. To achieve this aggressive target, it is pursuing an unprecedented build-out of maintenance and distribution facilities, including several new service centers in Asia by 2023. Another upside opportunity is more orders for intelligence, surveillance and reconnaissance aircraft—a mission for which the Global 7500 is well-suited.
What are Bombardier’s alternatives to independence? It could participate in the much-anticipated consolidation of business jet OEMs by combining with a competitor. Textron Aviation’s Cessna Aircraft business is the obvious candidate, given its focus on small-cabin aircraft, which complements Bombardier’s large-cabin focus. The combined entity would account for more than half of all business jet unit sales and would create loads of synergies.
A second merger candidate is Embraer. Admittedly, this is a blue-sky idea, given their competitive history in regional jets and decades of Brazil-Canada World Trade Organization disputes. History aside, the business logic is compelling. After being spurned by Boeing, Embraer is feeling vulnerable as a subscale, $3.7 billion-revenue company competing in regional jets, business jets and military transports. Bombardier is no longer a competitor in regional jets, and the Praetor-Challenger 350 is their only overlap in business jets. The combined $9+ billion entity would boast the business jet portfolio, scale, global service network and supplier bargaining leverage to become a leader in business aviation and one of the largest global aircraft OEMs. On paper, the tie-up could make sense, but culture and politics remain formidable barriers.
Another alternative for Bombardier is acquisition by a U.S. defense prime. There is a lot of history here—and most of it is bad. Potential candidates include Lockheed Martin and Northrop Grumman. Although both dabble in commercial aerospace, neither appears motivated to take such a risk at this time. Canadian stakeholders would not be thrilled either.
Finally, there is private equity. The last PE-financed business jet deal—the acquisition of Hawker Beechcraft by Goldman Sachs and Onex Partners in 2006—did not go well. It would be a high-risk, high-reward endeavor. On the other hand, the world is awash in capital seeking investment opportunities, and Bombardier’s paltry $2 billion in market capitalization might attract a PE firm comfortable with the risk. Any merger-and-acquisition option will require approval by the Beaudoin family, which continues to control the super-voting A shares of the corporation.
Overall, it appears that Bombardier should be able navigate the crisis if it executes its aftermarket strategy, pays down its liabilities and has a bit of good luck in new aircraft sales. On the other hand, the Bombardier family owners might just decide it is time to cash out after decades of exhausting drama and destruction.