A Shadow Of Its Former Self, What Happens Next At Bombardier Is Crucial

To save itself after strategic missteps and pay down debt, Bombardier has divested most of its business units over the past few years. It’s finally realized its goal of slimming down to being solely a manufacturer of business jets, but what plays out next is critical to its future.

Bombardier has had a rough start as a business jet pure play. It reaped less cash than anticipated from the sales of it transportation unit to French rail company Alstom and its aerostructures division to Spirit AeroSystems SPR , as the buyers used the pandemic and Bombardier’s financial predicament as leverage to negotiate better terms.

In addition, 2020 wasn’t such a great year for business jet makers due to Covid-19. Bombardier’s airplane factories, like some others in the business, were closed for weeks and the supply chain for parts to build aircraft was disrupted. As a result, its plane shipments were off 20% compared to 2019 and the company believes that 2021 will only remain flat.

Initial obstacles aside, there are arguments to be made as to why things could still go well from here for Bombardier — or not.

On the plus side, there are signs that 2021 could be a better year for new jet sales than generally anticipated, and perhaps the company is hedging in hopes of releasing unexpected good news later this year. Supporting this view, sales of preowned business jets were spectacular in 2020, surpassing the number of 2019 transactions by 17% so far according to AMSTAT. Normally, the new and used aircraft markets are joined at the hip - what’s good for one is good for the other, although the timing may be somewhat staggered. This would suggest that 2021 could be the breakout year for new sales to finally catch up to used.

Another positive is that business jet usage is only around 15% lower than it was in 2019 despite business use, their prime mission, being decimated. It’s conceivable that when business travel finally does return as predicted in the last half of the year, utilization could surpass previous levels, which bodes well for new jet sales.

At the other extreme, if the business jet market were to unexpectedly take a turn for the worse the company could be forced to take additional action. In a worst-case scenario, Canadian taxpayers have already grown fatigued with helping the company out, with the most recent state aid coming in 2016 during a dire financial situation caused by cost overruns on the CSeries airliner program. Should there be a next time, Bombardier may have to fend on its own.

While its possible some hedge funds would be willing to provide funding at high interest rates and/or for an equity stake, the majority of interested investors would be more inclined to wait until Bombardier sheds its onerous debt load first. There is relatively recent precedent of a prominent business jet company doing just that.

In 2006, private-equity firms bought Hawker Beechcraft, the resulting structure of which created a highly leveraged company with $2 billion in debt dependent on a continued booming jet market. It was upended shortly afterwards by the 2007-08 recession, leading to bankruptcy in 2012 before a 2014 purchase by competitor Textron Aviation.

Hawker Beechcraft discontinued less profitable models during these tribulations. Bombardier, perhaps unwittingly, has already covered this base with its plan to end production of the storied Learjet line of entry-level aircraft. This allows it to focus on its more profitable Challenger midsize and Global large jets, and also makes the company more attractive should a sale ever ensue since tired Learjet overlapped the product lines of the most likely strategic suitors.

Bombardier could conceivably continue to operate on its own if a restructuring were to occur. But if it were to be sold, possible buyers would include strategics, private equity, defense and commercial aviation firms, sovereign wealth funds and perhaps even the company founders, the Beaudoin family.

In all, as the business jet industry tends to be cyclical it’s expected that over time things will vary somewhere in between these best- and worst-case scenarios. As a business jet pure-play, the company will solidly outperform others during industry upcycles, but in downturns the company lacks business diversification, resulting in fewer options to seek cover.

Whatever the outcome, investors will be following the situation closely, plus competitors like General Dynamic’s GD Gulfstream, Dassault, Textron’s TXT Cessna, Embraer as well as suppliers such as GE Aviation, Rolls Royce, Honeywell and Raytheon Technologies. In the interim, Bombardier will do what it’s best at - building, selling and supporting their highly respected line of corporate jets.