Bombardier will be in rarified air should the proposed sale of its train business to Saint-Ouen, France-based Alstom close in the first half of 2021. The memorandum of understanding between the two companies, announced February 17 in conjunction with Bombardier’s full-year 2019 financial results, would leave Bombardier as a standalone business jet manufacturer with more than 18,000 employees and a $14.4 billion backlog.
Unlike competitors including Dassault, Embraer (for now), Gulfstream, and Textron Aviation that have parent companies with business in the commercial aviation, defense, and helicopter sectors, the Montreal-based airframer would be in the unique position as a pure-play business jet OEM. For business jet manufacturers, it’s a business model that has yet to be tested—analysts noted—in terms of the ability to develop new products, including clean-sheet jets, as well as to withstand a downturn in the market.
The business jet industry can be extremely cyclical, which makes for some very rewarding highs followed by bone-crushing lows,” business aviation analyst Brian Foley explained about an OEM’s reliance on a singular market. “The biggest unknown is just how the company will weather the next swoon with all of its eggs in one basket.
Teal Group v-p of analysis Richard Aboulafia agrees, but notes that the segment of the market that is the most profitable part of Bombardier’s jet business—large-cabin, long-range aircraft—has remained relatively unscathed by downturns, including in 2008. “The top part of the market hasn’t seen a downturn in decades—possibly by some definitions, never,” Aboulafia told AIN. “But what if there was one and there was no counter-cyclical part of the company. Or there’s no part of the company to cushion it?”
That’s a question he said will be unanswered until such a scenario plays out. Foley, however, noted that a singular-market-focus business model didn’t work out so well for general aviation manufacturers such as Eclipse, Piper, and Mooney, the last of which “just shut its doors again.”
Bombardier could soon be tested on its ability to endure a suppressed market, business aviation analyst Rolland Vincent told AIN. “If we do go through a slowdown, which we are forecasting we are going to between 2021 and 2024…it’s going to be a lean time for orders. And that usually means you’ve got be very aggressive on pricing and all that other good stuff,” Vincent said. “So I think it’s going to be a test for this business model.”
Aside from a slowdown in the market, analysts are split on Bombardier’s ability to finance new product development. Aboulafia doesn’t think it will be a problem for Bombardier, largely because most of its aircraft—Globals and Challengers—are at the top end of the market, where margins are higher. “That’s probably not a problem, just because, historically, returns from business jet companies are pretty good,” he explained. “Typically, [companies that] have hard times financing new product development are in the lower margin parts of the aviation business, particularly regionals—that’s notorious for not being able to generate the money needed, which is why we haven’t had a new regional aircraft in a very long time.”
But Vincent thinks it may be a while before Bombardier would invest in developing a new jet or even upgrading an existing model. First, it would need to retire some of its $9.3 billion in debt, much of which it plans to do with the completion of the sale of its train business to Alstom. Even then, it may be a while before Bombardier can invest in new products, especially the Challenger 650, which Vincent has previously said there’s nowhere left to go for Bombardier in terms of upgrades. “I don’t see any product development of any magnitude until they get through this,” Vincent explained. “Even then, they’ve got to re-establish credit lines. None of that gets fixed until they not only close the deal with [Alstom], but after they pay off their debt. [And even then], it’s going be some time before they get their credit rating back in a healthy way. That opens up a pipeline for them to have capital again.”
