COVID-19 Could Impact Bombardier Deliveries, Divestitures, Analysts Say
The COVID-19 pandemic could impact Bombardier’s business jet deliveries and the planned divestitures of its CRJ aircraft business and rail division, analysts say.
Flying restrictions from the threat of the novel coronavirus is likely to affect Bombardier business jet deliveries in the first quarter of 2020, with sources suggesting most pending business jet sales have been put on hold, Cowen analyst Cai von Rumohr wrote in a note to investors.
“There’s hope that a desire to avoid using public air transportation could bolster bizjet demand; but we think this potential plus will be outweighed by the sharp decline in the equity markets and likelihood of a global recession,” von Rumohr wrote.
While the first quarter is typically Bombardier’s weakest, as it is at other manufacturers, several Global 7500 deliveries have slipped into the fourth quarter, he wrote.
Bombardier on March 24 announced it was temporarily suspending aircraft and train production in its Canadian plants following government mandates that nonessential businesses close through April 16. A small number of employees in Wichita will also be affected, it said. It also suspended its 2020 financial guidance.
National Bank of Canada analyst Cameron Doerksen expects business jet demand to weaken with a recession on the horizon. As a result, many businesses will likely cut capital spending, Doerksen wrote in a note to investors.
“We believe this will be centered on demand for smaller and midsize jets, but larger jets, including Bombardier’s Global family, will be impacted,” he wrote.
As a result, Doerksen has lowered its business jet delivery forecast for the next three years. National Bank of Canada now forecasts 145 deliveries for Bombardier in 2020, down from 154, although its forecast for 32 Global 7500s remains unchanged. For 2021, it forecasts 120 deliveries, down from 150. And in 2022, it trimmed it forecast from 148 to 134.
“We note that the business jet industry is currently not overheated heading into a potential downturn, which was not the case prior to past industry downturns, so we do not expect a severe reduction in deliveries,” Doerksen wrote.
Bombardier hopes to boost its cash position by the sale of its CRJ aircraft business to Mitsubishi for $550 million and its Belfast and Morocco Aerostructures operations to Spirit AeroSystems for $500 million in cash and the assumption of liabilities.
“Both deals were expected to close near midyear, but their prospects are weakened b the airlines’ massive liquidity crunch,” von Rumohr told investors. “Thus, buyers may push for lower prices.”
In addition, given that Spirit AeroSystems has its own liquidity crunch because of lower delivery prospects of the Boeing 737 MAX, it may try to cancel its deal, invoking a Major Adverse Change clause in the contract. Mitsubishi could do likewise, he said.
The proposed sale of Bombardier’s transportation division to Alstom could also be jeopardized by the coronavirus, von Rumohr wrote. Doerksen with National Bank of Canada says he remains confident Bombardier will ultimately conclude the sale.
“But we do see risk that other pending asset sales could be pushed to the right,” he wrote.
In February, France-based Alstom SA agreed to buy Bombardier’s rail division for up to $6.7 billion, creating the world’s No. 2 train manufacturer. The deal was expected to close in the first half of 2021.
Doerksen expects the sale of the CRJ program, previously expected to close in the second quarter of 2020, to move into the third quarter. He also expects the deal with Spirit AeroSystems, expected in the second quarter, to be pushed into the fourth quarter.
“We see Canadian/Quebec governments as likely to offer support if [Bombardier] gets close to the edge,” von Rumohr wrote. “However, their interest will be to save jobs, not shareholders.”