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Fri, Apr 14, 2023

Bombardier Surviving Divestiture Gamble

Fighting Weight

In 2016, Bombardier commenced progressively selling off the entirety of its commercial aviation assets, culminating in the 2020 sale of the company’s stake in Airbus’s A220 program.

The sale of its transportation division left Bombardier—a once widely-diversified concern with stakes in the snowmobile, real-estate, and finance sectors—with only its business jet unit.

Comes now 2023 and Bombardier has transformed itself from a multinational conglomerate with a crushing $9-billion debt load to a svelte and efficient operation enjoying 23-percent year-over-year growth and quadrupled post-COVID profitability.

The going has been less than consistently smooth up Montreal way—where the company founded in 1942 by Joseph Armand Bombardier makes its world headquarters. The closure of Bombardier’s aircraft production facilities in the wake of COVID lockdowns mandated by an overreaching Canadian government threatened to sink the company, as did COVID-related supply chain disruptions. The crash of the global airline industry in the wake of widespread COVID lockdowns proved a boon to business jet makers, however, as monied citizens acutely and inveterately predisposed to globetrotting plunked down fortunes for private aircraft.

Bombardier—the producer of popular, proven, and comprehensive lines of first-rate business jets—found itself an unlikely beneficiary of otherwise dismal global circumstance. As the world’s inventory of pre-owned aircraft dwindled and demand for new jets increased relentlessly, Bombardier’s negotiating leverage and pricing discretion waxed increasingly advantageous.

As 2023’s first quarter draws to a close, Bombardier’s aircraft backlog continues to grow and the company, circumspect borrower that it is, has dutifully paid down its debt by nearly half, thereby significantly bettering its credit rating.

Citing the combined strengths of revenue growth, dramatically-increased profitability, and the company’s recent diversification beyond the civil business jet sector—instantiated by its year-old Defense Division—Bombardier has revised its 2025 financial projections upwards by a hefty twenty-percent for revenues and eight-percent for profits—while anticipating further debt reductions. Furthermore, by dint of its expansion into the military aircraft market, Bombardier has better positioned itself to weather the vicissitudes of the highly-cyclical, civil private jet market.

Solid financial, operational, and market positions notwithstanding, Bombardier’s evolving Cinderella story is not without latent risk. Consumers of private jet aircraft are far and away a fiddly and volatile bunch, fervently desirous of the newest and cleverest in all things lest they risk being one-upped by their contemporaries. The freshness and novelty of Bombardier’s top-end Global family of aircraft has won favor with 21st Century jet-setters. Regrettably, the company’s venerable Challenger series of super-mid-sized aircraft has grown long in the tooth since its 1980 introduction. To remain competitive with rival offerings such as Cessna’s Longitude, Gulfstream’s G280, and Dassault’s Falcon 2000LX, Bombardier’s Challenger series must be extensively and expensively revamped.

Also, revenues generated by the popular Global family stand to be disrupted by Bombardier’s ongoing efforts to move Global jet production to a new facility

What’s more, the subsiding of COVID issues has occasioned downturns in new business aircraft book-to-bill sales activity and charter operations while inducing a sharp influx of inventory into the preowned jet market. Nevertheless, aviation industry analysts posit the business jet sector will enjoy a permanent ten-percent addressable market expansion attributable to the taste many first-time buyers have developed for private jet travel.

The sudden and concomitant popularity and scarcity of new aircraft puts plane-makers at higher risk of their order-books being infiltrated by speculators. By means of relatively modest deposits, such unscrupulous parties can buy aircraft delivery positions with no intention of taking them—hoping, instead, to flip the positions to impatient buyers at a premium. Owing to their tendency to cancel aircraft orders at the first sign of a lagging market, speculators are looked upon by aircraft manufacturers as hated agents of uncertainty.

Additional risk to Bombardier lurks in the fact that one-third of 2022’s worldwide business jet deliveries were made to large charter and fractional fleet operators. Such companies, after the fashion of Part 121 airlines, are wont to reflexively cancel or defer aircraft orders should demand for their services ebb.

In the post-COVID era, charter activity in North America, the world’s busiest market, has fallen 23-percent year-over-year. Even so, charter bookings remain ten-percent higher than pre-COVID levels. Bombardier has oversized exposure to a particular fleet client, the failure of which would flood the preowned aircraft market with over 150 late-model Bombardier aircraft, thereby engendering direct competition for sales of new Bombardier jets.

Finally, business jet sales fare poorly in times of economic downturn or uncertainty. That a recession proves short-lived is among business aircraft executives’ most ardent prayers.

All told, the slimmed-down Bombardier—despite the prevailing backdrop of uncertainty—is proving an eminently capable pure-play business jet manufacturer.

FMI: www.bombardier.com

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