Thursday, January 08, 2015

Jet Maker Bombardier Finds Bigger Proves Far From Better • Missteps Shake CSeries Project in Bid to Go Head-to-Head With Boeing and Airbus

The Wall Street Journal

Updated Jan. 8, 2015 8:35 p.m. ET

MIRABEL, Quebec—Just after he became Bombardier Inc. ’s chief executive in 2008, Pierre Beaudoin bet the future of the company his grandfather founded on a pair of passenger jets rivaling those from the two titans of global aerospace.

Bombardier had long produced smaller planes for wealthy individuals, companies and regional airlines. The technologically advanced, more fuel efficient CSeries would be its first jets capable of seating well over 100 passengers, aiming at a slice of the market dominated by Boeing Co. and Airbus Group NV.

But more than six years after the CSeries’ first orders, Mr. Beaudoin is revamping Bombardier and retaking control of the project to keep it from becoming a multibillion-dollar albatross.

In the latest blow, Bombardier said Thursday it was parting ways with its chief commercial-aircraft salesman. A series of missteps have shaken the project, starting with development problems that delayed the first model’s planned late-2013 delivery date by as much as two years, and continuing through software-development snags and a major engine failure last May that halted test flights for 100 days.

The cost of the CSeries has mushroomed, and the Swedish carrier lined up to be the first operator of CSeries planes declined the role in August—the second customer to do so. Bombardier said it has secured a new launch airline, though it isn’t yet naming it.

Meanwhile, Airbus and Boeing, as well as Brazil’s Embraer SA, have sharpened competition in the broader single-aisle market—the industry’s workhorse planes of 100 to 240 seats—that the CSeries must contend with. The other jet makers are upgrading existing models to offer improved fuel efficiency—which makes planes cheaper per seat to operate—while aggressively discounting sales prices.

Combined with other savings for airlines that come from only making incremental changes in their fleets, the moves have eaten into the cost efficiency of Bombardier’s new jets.

In an interview, Bombardier’s 52-year-old scion says he is confident the efforts will pay off. A major restructuring announced in July culled an entire layer of senior managers at the aerospace unit and gave Mr. Beaudoin a much more hands-on role, which he says is necessary to monitor the large investments Bombardier has made. After more than six years of marketing, Bombardier has about 80% of the 300 firm orders it plans to have when the jet is scheduled to be delivered.

“We’re getting there now, but it’s long and it takes a long time, so it needs a lot of patience,” he says. “It gives opportunities for a lot of people to question.”

Industry observers say Mr. Beaudoin has left himself with little room for error. “This is a really crucial window for the CSeries right now,” said Jerrold T. Lundquist, former head of McKinsey & Co.’s aerospace and defense practice who now runs his own consultancy, Lundquist Group. If it fails to win more orders soon and deliver the CSeries on time, Bombardier could be burdened for years with a program that churns out little or no profit, he said. “The choice to go with an aircraft…right into the competitive domain of Boeing and Airbus was very, very risky, and I think they’re paying the price for that now.”

Bombardier, its suppliers and governments in Canada and the U.K., where the wings are built, are now on track to plow at least $4.4 billion into the CSeries program—up from an original plan of $3.4 billion and equal to nearly two thirds of Bombardier’s total market value.

Bombardier’s aerospace sales have picked up recently, but revenue in 2013 was roughly flat with the level five years earlier, at $9.39 billion, while profit before interest and taxes fell by more than 53% to $418 million in the period. Results for 2014 are due out in February.

More is at stake than Bombardier’s bottom line. Founded in 1937 by Joseph-Armand Bombardier, Mr. Beaudoin’s grandfather and the man widely regarded as the inventor of the modern snowmobile, the company represents one of Canada’s few manufacturing success stories on the global stage. Bombardier Inc. no longer makes snowmobiles, but its products are omnipresent in Canada, from turboprop planes to commuter trains to subway cars, and it remains one of the country’s largest employers, with roughly 25,000 on home soil. Revenue at Bombardier’s transportation division, which builds the trains and rail systems, slipped over the past five years to $8.77 billion in 2013.

Mr. Beaudoin set the CSeries in motion in 2004, when he was heading the aerospace division. Bombardier faced a major challenge from Embraer, and sales of its commercial planes, after rapid growth in the 1990s, were slowing. He tapped Gary Scott, a former Boeing executive, to develop the CSeries, giving him a team that grew to 600 people. In 2006, with the engine it needed still years from becoming available, Mr. Beaudoin scaled the team back to 50 but kept the project going.

“This was Pierre’s baby,” said Mr. Scott, who retired from Bombardier in 2011. Mr. Scott likened the project to Boeing’s development in the 1960s of the 747, then its largest jet by far. “We all kind of loosely used ‘betting the company’,” when describing the Bombardier project, he said, and the board “saw it as the biggest bet the company ever made.”

Mr. Beaudoin said the big investment in the CSeries isn’t unusual for Bombardier and other aerospace companies.

Mr. Beaudoin became CEO on June 4, 2008, replacing his father, Laurent, who remains chairman. Less than six weeks later, Bombardier announced its first airline commitment for the planes, and its board voted to proceed with producing it. The new CEO said the planes would “revolutionize the economics and network strategies for airline operations in the 100- to 149-seat commercial market.”

In a way, the CSeries already has reshaped the industry. The jets were designed to be 20% more fuel-efficient than similarly sized planes, in part thanks to a new engine from United Technologies Corp. ’s Pratt & Whitney unit, as well as quieter and less-polluting. With up to 125 seats for the smaller CS100 model and up to 160 for the CS300, which list for $63.4 million to $72.4 million each, the jets would go head-to-head with the less-efficient, smallest versions of the popular single-aisle offerings from Boeing, the 737, and Airbus, the A320.

Bombardier estimated in 2014 that the market for jets of 100 to 149 seats over the coming 20 years would be 7,100 aircraft, worth more than $465 billion. It said it expected to capture half of that.

Alarmed by the CSeries, Bombardier’s rivals soon responded—leading to what has become a record jet sales binge. In December 2010, Airbus launched its A320neo line—three single-aisle jets that now range from 124 to 240 seats—boasting 15% or more fuel savings from its previous models and scheduled for delivery in November. Boeing in August 2011 launched its 737 Max line—three jets ranging from 126 to 220 seats—slated for delivery in 2017, also touting fuel savings. Embraer in June 2013 decided to add new wings, engines and longer bodies to its regional jets for 2018, though it stopped short of directly challenging Boeing and Airbus. Both Airbus and Embraer offered the same Pratt engine used on the CSeries.

Bombardier was blindsided. “We did not fully expect and prepare” for the competitive response led by Airbus, said a Bombardier executive.

It had thought Airbus and Boeing would discount their existing aircraft, and later make all-new, pricier jets, according to two people familiar with Bombardier’s planning. But it didn’t think it was likely the duo would simply put better engines on existing models, they said. The move meant Airbus and Boeing avoided the expensive and risky investment in developing new models.

Boeing and Airbus, in competition with each other, cut prices in deals for their upgraded models, and further blunted Bombardier because their larger planes spread fuel and other operating costs across more seats. The larger planes are attractive as airlines, even in smaller markets, opt to fly bigger jets with more passengers, rather than add more flights at congested hubs.

A Boeing spokeswoman said the company competes “based on the best combination of price and value” in all its sales campaigns for single-aisle jets. John Leahy, Airbus’s chief salesman, dismissed the idea that it engaged in a price war, and said customers prefer jets with more seats than the CSeries offers. “I don’t want to upset my friends in Montreal, but we do not take them very seriously as a competitive threat,” he said.

Bombardier officials say that they relish their underdog status and that the company also was discounted by rivals when building its first business and regional jets. Bombardier says that in addition to the increased fuel efficiency, its new planes are quieter and more useful at small airports with shorter runways, and offer more comfortable cabins.

Defenders say not all routes can accommodate the bigger single-aisle jets, and the size of the CSeries aircraft will be needed by airlines.

Global airlines in the market for the single-aisle jets have snapped up the Airbus and Boeing upgraded planes, eating away at the potential market for Bombardier. Airbus has more than 3,400 firm orders for the A320neo family, and Boeing has over 2,600 for its 737 Max jets. “A lot of the market is already taken,” says Scotia Capital Inc. analyst Turan Quettawala. He estimated in September about 75% of the market for single-aisle jets for the next 10 years is already sold to Airbus, Boeing and Embraer.

While Bombardier’s 243 orders for its CSeries jets equal about half the 457 disclosed orders for the smaller models in the next-generation single-aisle market, the vast majority of orders so far are for the larger planes.

Mr. Beaudoin says they would rather have a small number of orders to be delivered now so they can command a higher price later, once the jet is certified and the performance is proven. “There’s no advantage for us to go build the next 10 years of production at launch price,” Mr. Beaudoin said.

Mr. Lundquist, the aerospace consultant, says Bombardier should be focusing on securing orders from large established airlines that act as a validating force for the jet’s new technology.

Bombardier has secured orders from large airlines like Deutsche Lufthansa AG and Korean Air Lines Co. , but it is challenged by the power of incumbency. A readily available pool of pilots for Boeing and Airbus aircraft and a global technical infrastructure built for the more than 10,000 single-aisle jets from those makers in service make acquiring the European and American models comparatively less risky or expensive for airlines.

A Bombardier spokesman said the CSeries is the right aircraft and that Airbus and Boeing have “neglected” this market segment.

The company said Thursday that Raymond Jones, the former senior vice president of global sales, marketing and asset management for its commercial-aircraft business, was leaving for personal reasons. He was appointed in December 2013, following the abrupt departure of his predecessor, who also struggled to reel in big airlines for the new CSeries jets. A replacement hasn’t been named. Mr. Jones didn’t respond to a request for comment.

Jure Dubravica, head of portfolio management at KBM Infond, a Slovenian fund manager, sold his entire Bombardier holding of 121,350 shares last year and invested in rival Embraer. Bombardier is “still a great company…but we didn’t like the delays in the CSeries and the [lack] of orders,” he said.

Bombardier’s most important shareholders won’t likely follow suit. The four living children of founder Joseph-Armand Bombardier, including Mr. Beaudoin’s mother, together own 79% of the supervoting A class shares, giving them 54% of the total voting rights. There has never been a serious push by shareholders to collapse the company’s share structure. Bombardier’s B-share price has fallen about 14% since the end of 2009.

Bombardier also has the backing of the Canadian government, which through last year had disbursed 350 million Canadian dollars, or about US$300 million, in low-interest loans to Bombardier to help develop technology for the CSeries. A Canadian government official declined to make details of the financing available.

Bombardier hopes its hardest days are behind it. The CS100 test fleet is again airborne, having flown more than 750 of the 2,400 hours needed to certify the new jet after Pratt developed a fix for the engine’s oil system. Its software snags are also in the past, and it is flying jets with a version representative of what airline pilots will experience. The first CS300 jet is readying for air trials.

At the same time, Bombardier is juggling other major aviation challenges that are consuming attention and resources. It is developing a pair of larger corporate jets as part of its successful Global line to be delivered in 2016 and 2017, including the longest-range business jet ever designed.

It is also working on an all-new carbon fiber model for its Learjet unit originally due in late 2013, which has struggled with design issues and has no new delivery target. Meanwhile, political tension caused it to shelve plans for an assembly line in Russia tied to up to 100 orders for its turboprop aircraft, now in limbo.

The restructuring of the aerospace operations started in July, with the division’s CEO, Guy Hachey, abruptly retiring and some 1,800 jobs cut. Mr. Hachey declined to comment through Hexcel Corp., where he now serves on the board of directors. Top executives for marketing, strategy, communications and some CSeries sales staff were let go. Unit presidents now all report directly to Mr. Beaudoin, who says Bombardier needs the new structure “to be able to be agile with all the growth that’s coming up.”

Mr. Beaudoin continues to believe the investment will pay off and his focus today is completing the jet’s certification. “I’m very confident that the market will be there” when the CSeries is done, he said. “I’d like to think it’s not a bet, I think we’ve done our homework.”

—Alistair MacDonald contributed to this article.

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