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Cablegate: Bombardier Aerospace Focuses On Regional Jet

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A
SUBJECT: Bombardier Aerospace Focuses on Regional Jet
Market; CEO Tellier Focuses on Profitability

REF: (A) Montreal 1093 02, (B) Montreal 1656 02

1. This cable contains contributions from Embassy Ottawa.

2. SUMMARY: The flagship of Quebec's aerospace industry,
Bombardier Inc., identifies itself as the number three
airplane maker after long-haul jet makers Boeing and Airbus.
But the company is known in the aerospace business as the
leading maker of corporate jets and regional jets (RJs), two
plane sectors that Bombardier helped to develop and has
dominated for the past decade. The company is facing
increased competition in the RJ market, in the midst of
airline industry doldrums, and new CEO Paul Tellier's
efforts to increase company profits and shareholder value.

3. At the Paris Air Show in June, Tellier attempted to
publicly downplay Bombardier's long-time rivalry with
Brazilian regional jet maker Embraer noting that
"adversarial relations with your competitors are
unnecessary" and signaling that neither cut-throat
discounting nor World Trade Organization proceedings are
part of his plans to revive Bombardier's fortunes. END

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Bombardier Restructuring

4. A C$24 billion transportation manufacturing conglomerate,
Bombardier Inc. has been in a precarious financial position
in recent years (REF A), with accumulated debt of C$14
billion, falling profits and a declining stock price. After
restating its 2001 earnings to just C$36 million from the
previously reported C$391 million, Bombardier declared a
C$615 million loss for 2002 in April. President and Chief
Executive Paul Tellier (REF B) also announced layoffs of up
to 3,000 employees and efforts to sell some operations,
including its recreational products division and military
services operations. Bombardier announced the sale of the
military division in June, for US$90 million, to L3
Communications of New York. The company expects to complete
the sale of its recreational division this summer at which
point Bombardier will consist primarily of two divisions,
aerospace and transportation.

5. Bombardier Transportation, which accounted for 40 percent
or C$ 9.4 billion of Bombardier's total revenues for fiscal
year 2002, is experiencing growth. Most of the
transportation division's employees -- 80 percent -- work in
Europe, where the company says it held 50 percent of the
market in FY 2002. Despite last year's highly publicized
problems with Acela trains delivered to Amtrak (REF A),
Bombardier maintained a 28 percent share of the North
American market in FY 2002. The transportation group last
year captured 21 percent of the total share of new orders
worldwide, including a 352-car, C$941 million order from the
Long Island Rail Road and a 100-car, C$378 million order
from NJ Transit. This week, Bombardier announced a 298-car,
C$633 million order from Germany's Deutche-Bahn.

6. Bombardier entered the aerospace industry only in 1986,
with the purchase of Canadair. That acquisition was
followed by purchases of Short Brothers plc, of Belfast,
Northern Ireland in 1989, Learjet of Wichita, Kansas in 1990
and finally, de Havilland in Downsview, Ontario in 1992 -
all primarily makers of small planes. Bombardier's
aerospace focus initially had been the corporate jet market.
Corporate jets (also known as executive or business planes)
are typically purchased for use by senior executives, high-
level government officials or wealthy individuals; these
planes seat from 5 to 40 passengers and have a range of 1500
to 6000 miles. Deliveries of Bombardier corporate jets,
which peaked in the fiscal year ended January 31, 2001 at
203 jets, have sharply dropped off since then; Bombardier
delivered 162 business aircraft in FY 2002 and the company
delivered only 77 corporate jets in FY 2003. Not
surprisingly, would-be U.S. buyers of these planes see them
as luxury purchases, easily postponed during economic

Regional Jets

7. Though Bombardier unveiled three new business plane
models at the Paris Air Show in June, the company is clearly
focused on the Regional jet market. Regional jets (RJs) are
defined as small-body commercial aircraft having 50 to 100-
passenger seats and an average 2000-mile range. In recent
years, airlines have been increasing their use of RJs, as an
alternative to wide-body jets. Some airlines have been able
to develop new passenger markets by offering service to
smaller cities through the use of these RJs, which are more
fuel-efficient and cost-effective than wide-body planes.
Right now, the regional jet is the only growth sector in the
commercial airplane manufacturing industry, according to
Chuck Evans, Director, Airline Industry Analysis and
Strategy Marketing, at Bombardier Aerospace. Indeed, in
notes for his June 10 annual meeting speech, Tellier wrote,
"This aircraft [the RJ] is the cornerstone of the airline
industry restructuring. The aircraft meets the airlines'
needs. There are more regional jets flying now than before
September 1, 2001."

8. In 2002, Bombardier's CRJ line of planes accounted for 54
percent of the total world RJ market and 44 percent of
Bombardier's total airplane production (56 percent of the
company's production was corporate jets). The planes in
Bombardier's CRJ series can seat between 50 and 85 people
and have a 2000-mile range. Atlanta-based Delta Connection
is the largest operator of CRJ's with over 273 in operation.
According to Evans, a major advantage of the CRJ line is
reduced pilot training time; all models use the same cockpit
configuration, making it possible for pilots to learn how to
fly a different CRJ model in just four days, instead of the
standard 30 days of training required to fly a new airplane

--------------------------------------------- --
Challenges to Growth in the Regional Jet Market
--------------------------------------------- --

9. The biggest challenges to growth in the North American
regional jet market have been airline pilots' collective
agreements and airplane purchase financing for cash-strapped
airlines. Union "scope" clauses, which protect higher pay
scales for pilots who fly long-haul jets, have limited
carriers' ability to use RJs. But U.S. pilot unions have
recently made large concessions on airlines' use of RJs,
making these planes much more financially attractive. The
financing of airplane purchases, however, through vendor
discounting, government loans and loan guarantees, and
private financing, continues to contribute to the overall
shaky picture of the aerospace industry. Airlines most in
need of the RJs for restructuring purposes need financing to
purchase the more efficient planes. Both Bombardier and its
Brazilian competitor Embraer are rumored to have heavily
"discounted" the purchase price of their planes in a US$4.3
billion 170-jet order from US Airways. The order, announced
in May, was split between the two plane manufacturers.

10. The Export Development Bank of Canada (EDC), in its 2003
report, noted its large loan exposure (33 percent) to the
aerospace industry (C$9.3 billion). Atlantic Coast Airlines
and AMR Corp (American Airlines), both Bombardier clients,
account for 10 percent of the EDC exposure, and both
companies are reportedly on the brink of bankruptcy. Evans
said that airlines continue to get purchase financing, but
was unwilling to say whether the financing for Bombardier
purchases was primarily offered by the vendor or from
private or government sources. The Montreal Gazette
reported (7/5) that Britain's Export Credits Guarantees
Department plans to provide export credits for two loans
amounting to more than US$200 million, allowing two Delta
Air Lines subsidiaries to purchase Bombardier RJs
(Bombardier's Shorts plant in Northern Ireland qualifies the
company as a British exporter). The Gazette pointed out
that Investissement Quebec, the provincial export promotion
vehicle, has also extended considerable loan guarantees to
Bombardier customers.

11. Analysts believe the present plane financing situation
is unhealthy for both the aerospace and airline industries;
however, clearly it is more in Bombardier's interest for
governments to provide airplane financing than for the
company to engage in discounting and financing deals on its
own balance sheet. Tellier has made a concerted effort to
pay down Bombardier's debt since January 2002, halving the
company's dividend and raising C$854 million in an April
sale of stock.

Rivalry with Embraer

12. Bombardier's chief competitor in the RJ market, Embraer,
has begun offering the Embraer 190, an RJ which seats 100
passengers. While the 190 has not yet flown in commercial
operation, New York-based JetBlue Airlines recently
purchased 100 of these planes. "The sale of the 100-seaters
[Embraer] to JetBlue, has made us [Bombardier] think of re-
opening up development for BRJx," says Chuck Evans.
Bombardier had been developing the BRJx as its own 100-seat
RJ but shelved the project last year because of the downturn
in the U.S. airline market. In Paris, Tellier confirmed
that Bombardier may relook at the BRJ-X program once the
company's economic problems are resolved. Europe's Airbus
A318 and Boeing's B717, while marketed as regional jets,
have many wide-body characteristics and costs, and have not
yet acquired a major share of the RJ market. Boeing
recently announced sale of 10 B717s to Airtran. Reportedly,
Air Canada is looking at the Boeing 717s, among other RJs,
to revamp its fleet following its bankruptcy reorganization,
but most analysts think Bombardier, as a Canadian company,
would have an advantage over other manufacturers. Air
Canada already operates 26 Bombardier RJs.

13. Embraer and Bombardier's bitter rivalry has led to at
least five disputes at the World Trade Organization and
rulings against both the Canadian and Brazilian governments
for illegal subsidies to the companies. At this year's
Paris Air Show, however, Tellier made headlines by paying a
courtesy call on Embraer CEO Mauricio Botelho. Tellier
later told the press "adversarial relations with your
competitors are unnecessary." He also made it known that
for the first time in more than six years, neither company
is interested in a new WTO complaint against the other. The
WTO activity in this case concluded in December 2002 when
the WTO authorized Brazil to take trade countermeasures
against Canadian goods to the value of C$328 million.
Previously, in December 2000, the WTO authorized Canada to
take C$1.2 billion worth of countermeasures against
Brazilian products. Neither Canada nor Brazil is expected
to impose the countermeasures, however, representatives of
the two governments continue to meet to discuss how they
might repair the damage to the bilateral relationship caused
by the dispute.

14. Comment: Tellier has made some difficult decisions in
his first six months as CEO at Bombardier. While the
aerospace division has been criticized for not recognizing
the potential market for larger, 100-seat RJs, Tellier
appears willing to sacrifice market share in order to get
Bombardier's profit margins up, and increase shareholder
value. While no one believes that Bombardier will give up
its fierce competition with Embraer, in seeking to lower the
profile of that competition, Tellier is signaling investors
that neither cut-throat discounting nor World Trade
Organization proceedings are part of his plans to revive
Bombardier's fortunes.


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