Indebted and on the brink, Bombardier played its last card by betting everything on business jets. The aircraft manufacturer isn’t over the hill just yet, but its survival no longer seems threatened and the skies finally seem to be clearing up after several painful years during which its face was profoundly changed.
Posted at 7:00 am
A year after the presentation of a new five-year plan to save the furniture, the strategy is beginning to bear fruit. In addition to securing $1.3 billion in new orders between January and March, Bombardier generated $173 million in cash – an indicator closely watched by investors.
“I can’t remember seeing a positive first quarter in that regard in more than 10 years,” ATB Capital analyst Chris Murray said in a phone interview Thursday after the earnings presentation. The plan is still in its infancy, but it is expected that the goals will be met. »
It was the fourth straight quarter that Bombardier released cash, something that hadn’t happened in at least a decade. Most of the time during this period, the company was forced to draw on its reserves, particularly to fund the development of programs such as the C-Series and the Global 7500. This contributed to the explosion of his long-term debt. It reached about $10 billion last year.
It is early to draw conclusions on the plan being pursued by Éric Martel, Bombardier’s President and Chief Executive Officer since April 2020. There are still challenges on the horizon. For now, the move to business jets, which came after a series of asset sales, looks promising.
I think we’re past the stage where we’re wondering if the company will survive. We are currently checking whether she can implement her plan.
Chris Murray, financial analyst at ATB Capital
In a sign that the situation is improving, the quarters in which Bombardier has to draw on its reserves will now be the exception to the rule, according to President and Chief Executive Officer Éric Martel, who believes this will give investors peace of mind.
“The way we have repositioned the company, there will rarely be negative quarters [pour les flux de trésorerie], he explained during a conference call with the media. The stars are aligned. »
Mr. Martel is targeting sales of approximately $7.5 billion in 2025 and ambitions to achieve adjusted operating income of $1.5 billion. Last year, the company had sales of $6.1 billion and adjusted operating income of $640 million.
The current context, which few could have foreseen, is due to the COVID-19 pandemic. The health crisis has prompted the ultra-rich and wealthy to turn to luxury private jets to get around.
“The pandemic has made the realignment [vers les jets d’affaires] was the right one, says Professor Karl Moore of McGill University’s Department of Management. Am I disappointed that Bombardier doesn’t have the same scales as it used to? Absolutely. But given the bets received in the past and the high level of debt, their decision seems to have been the right one. »
Demand did not falter in the first quarter. While commercial aviation struggled to recover, business aviation activity grew 23% in the United States and 53% in Europe in the most recent quarter compared to the same period last year.
Bombardier won about 60 orders in the first three months of the year. The ratio of incoming orders to deliveries reached 2.5. As of March 31, the backlog was $13.5 billion, up 11% from the end of 2021.
Used devices are also in demand. According to Jetnet IQ, the number of jets for sale at the end of February accounted for just 3.1% of the global fleet. This increases Bombardier’s sales and revenue in maintenance and after-sales service, a niche in which the company is heavily invested.
Of the $1.2 billion in sales in the first quarter, $364 million came from customer service. Sales in this division increased by 34% compared to the previous year. The aircraft manufacturer operates nine service centers worldwide, and a new plant is under construction in Melbourne, Australia.
The company is in good shape to raise its guidance, which it should do when it releases its second-quarter results.
Walter Spracklin, analyst at RBC Capital Markets
Bombardier expects to deliver 120 aircraft this year and generate over $50 million in cash. Questioned on several occasions by analysts, the big boss of the company preferred to play it safe and refused to comment on a possible upward revision of the outlook.
Despite strong results, Bombardier’s stock took a nosedive on Thursday, shedding more than 8% and contributing to the 2.3% decline in the S&P/TSX index.
Challenges that await Bombardier
Despite recent efforts, Bombardier’s long-term debt was $6.6 billion as of March 31. The debt ratio is 7.1 times adjusted operating income, which is high. The company wants it to rise to 3.5 by 2025, which means it will have to set aside money to pay off creditors. “It’s still a long-term job,” says Karl Moore, a professor in the Department of Management at McGill University.
Several analysts consider the aircraft manufacturer’s product range to be up-to-date. Competitors like Gulfstream and Dassault will soon be offering new models that will intensify competition. The Challenger 650 platform dates from the late 1970s, sooner or later Bombardier will have to invest. “The company can’t afford a new plane,” says Chris Murray of ATB Capital. The Challenger 650 remains a good seller, but ultimately a decision must be made. »
Russia’s military offensive against Ukraine has not caused disruption in business aviation, but that could change quickly if the conflict escalates. The interest rate hikes ordered by the central banks to dampen inflation could also lead to an economic slowdown. Business aviation is particularly vulnerable to the vagaries of the economy. “We will take our time,” replied Bombardier boss Éric Martel when asked about his forecast for the year.
The supply chain
With more orders, Bombardier is preparing to deliver more aircraft next year. In order to avoid production interruptions, parts must be procured on time. “We’re in a mode just in case, said Mr. Martel, about the supply difficulties that spare no one. We have [bonifié] our stock. Our supply chain is heavily concentrated in North America. Perhaps we experience the logistical problems in the ports less than our colleagues. »
- 60,000: Before the sale of its rail division to Alstom in January 2021, Bombardier employed more than 60,000 people worldwide. The workforce shrank to 13,500 workers.