Bombardier turn | Cruising speed within reach?

In debt and on the brink, Bombardier played its last card by betting everything on business jets. The aircraft manufacturer is not yet out of the woods, but its survival no longer seems threatened and the sky finally seems to be clearing up after several painful years in which its face has been profoundly transformed.

Julien Arsenault
The Press

A year after the presentation of a new five-year plan to save the furniture, the strategy is starting to bear fruit. In addition to securing US$1.3 billion in new orders between January and March, Bombardier generated cash of US$173 million – an indicator closely watched by investors.

“I don’t remember seeing a positive first quarter in this regard in more than 10 years,” said analyst Chris Murray of ATB Capital in a telephone interview Thursday after the results presentation. The plan is still in its infancy, but it is reasonable to believe that the objectives will be achieved. »

It was the fourth consecutive quarter that Bombardier released cash, something that hadn’t happened in at least a decade. During this period, most of the time, the company was forced to dip into its reserves, in particular to finance the development of programs like the C Series and the Global 7500. This contributed to the explosion of its long-term debt. . It reached about 10 billion US last year.

It is still early to draw conclusions on the plan deployed by Éric Martel, President and Chief Executive Officer of Bombardier since April 2020. Challenges are still looming on the horizon. For now, the shift to business jets, which materialized following a series of asset sales, looks promising.

A sign that the situation is improving, the quarters where Bombardier will have to draw on its reserves will now be the exception to the rule, according to its president and chief executive officer, Éric Martel, who believes that this will reassure investors.

“The way we have reorganized the company, it will be a rarity to see negative quarters [pour les flux de trésorerie], he explained, during a conference call with the media. The stars are aligned. »

Mr. Martel is targeting revenues of approximately US$7.5 billion in 2025 and ambitions to generate adjusted operating income of US$1.5 billion. Last year, the company posted revenue of US$6.1 billion and adjusted operating profit of US$640 million.

Unexpected boost

The current context, which hardly anyone could have anticipated, is attributable to the COVID-19 pandemic. The health crisis has prompted the ultra-rich and the wealthiest to turn to luxury private jets to get around.

“The pandemic has made the refocusing [vers les jets d’affaires] was the right one, says Professor Karl Moore of McGill University’s Department of Management. Am I disappointed that Bombardier no longer has the same scale as before? Absolutely. But given the bets that have been made in the past and the heavy debt, their decision seems to have been the right one. »

Demand did not falter in the first quarter. While commercial aviation struggled to recover, business aviation activity grew 23% in the United States and 53% in Europe in the last quarter compared to the same period last year.

Bombardier won about 60 orders during the first three months of the year. Its ratio of new orders to shipments reached 2.5. As of March 31, its backlog was worth US$13.5 billion, up 11% from the end of 2021.

There is also demand for second-hand devices. The number of jets for sale was just 3.1% of the global fleet at the end of February, according to Jetnet IQ. This boosts Bombardier’s sales and revenues in maintenance and after-sales services, a niche on which the company is betting heavily.

Of the turnover of 1.2 billion US made in the first quarter, 364 million came from after-sales services. Revenue for this division jumped 34% from a year ago. Around the world, the aircraft manufacturer operates nine service centers and a new facility is under construction in Melbourne, Australia.

Bombardier expects to deliver 120 aircraft this year and generate cash in excess of US$50 million. Asked several times by analysts, the big boss of the company preferred to play it safe by refusing to come forward on a possible upward revision of the outlook.

Despite good results, the title of Bombardier took a nose dive on Thursday, losing more than 8% and contributing to the 2.3% drop experienced by the S&P/TSX index.

Challenges Awaiting Bombardier

Debt

Despite recent efforts, Bombardier’s long-term debt was US6.6 billion as of March 31. Its debt ratio is 7.1 times adjusted operating income, which is high. The company wants to see it rise to 3.5 around 2025, which means it will have to set aside money to repay creditors. “It’s still a long-term job,” says Karl Moore, a professor in the Department of Management at McGill University.

competition

Several analysts believe that the aircraft manufacturer’s product line is up to date. Competitors like Gulfstream and Dassault will soon be offering new models, which will make the competition fiercer. The Challenger 650 platform emanates from the late 1970s. Sooner or later, Bombardier will have to invest. “The company can’t afford a new plane,” says Chris Murray of ATB Capital. The Challenger 650 remains a good seller, but ultimately a decision will have to be made. »

uncertainty

Russia’s military offensive against Ukraine has not caused any upheavals in business aviation, but that could quickly change if the conflict escalates. Interest rate increases decreed by central banks to curb inflation could also cause an economic slowdown. Business aviation is particularly vulnerable to the vagaries of the economy. “We will give ourselves time,” replied Bombardier boss Éric Martel, when asked about his forecasts for the year.

The supply chain

With more orders, Bombardier is preparing to deliver more aircraft next year. To avoid production interruptions, parts must be obtained on time. “We are in a mode just in case, said Mr. Martel, on the supply difficulties that spare no one. We have [bonifié] our inventory. Our supply chain is very concentrated in North America. The logistical issues in the ports, we experience them perhaps less than our colleagues. »