Bombardier Inc. is beset by a chronic problem: disappointing results in its aerospace business.
The Montreal-based manufacturer is abandoning its goal of earning 10 cents in operating profit for every dollar in revenue in its aircraft unit by next year. In fact, the company said its operating margin this year will be only half that level, due to “the prolonged current economic downturn.” That’s lower than the 5.8-per-cent margin, or $502-million, the company earned on $8.6-billion in aerospace revenues in the year ended Dec. 31.
“Certainly aerospace margins in 2012 are a negative surprise,” said Chris Murray, an analyst with PI Financial in Toronto. “We were expecting the company to start to show year-over-year improvement” to about 7 per cent for the year.
The poor forecast, which sent Bombardier’s shares down 9.5 per cent to $4.30, highlights the difficult transition the company is trying to make in its commercial aircraft business. It continues to ramp up development of its 100-plus seat C Series airliner, which has received 133 orders, weaker than market watchers would like for a plane that is just one year away from entering into service. But in the meantime, demand is soft for its other commercial aircraft, such as regional jets.
Following its emergence from a company-wide overhaul in the mid-2000s, Bombardier set a long-term goal of earning 12 per cent margins in aerospace, which it adjusted to 10 per cent when it began reporting to new accounting standards last year.
It managed to get those margins up to 9 per cent in the year ended Jan. 31, 2009, after which demand soured for business jets in the global recession. The aerospace division’s margins have been suffering ever since.
The latest reason for the weakness is a collapse in demand for its commercial airliners. Bombardier received just 11 total orders for its turbo-propeller and regional jet airliners in the 11 months ended Dec. 31, one-tenth the number it received three years earlier. (The company shortened its fiscal year by one month in 2011 order to change its year-end to December.)
As a result, its firm order backlog has dropped to just 24 turboprops and 48 regional jets, down sharply from three years ago. In total, the company forecasts it will deliver 55 airliners this year, down from 78 last year, a steeper decline than analysts had expected. “Although the commercial aircraft group is profitable, it is quite clearly holding back margins,” said Scott Rattee, an analyst with Stonecap Securities.
The business jet market, however, is doing better. Demand for the company’s Learjet, Challenger and Global jets remains buoyant, at 163 units for the fiscal year. That was up 5 per cent.
Bombardier expects to spend $2-billion this year developing the C Series and two new Global jets – close to half its available capital resources of $4.1-billion – after adding 3,300 people to its aerospace staff last year.
“I don’t think you hit the panic button but [the weak profit forecast for aerospace]certainly reduces their room to manoeuvre and increases the pressure to execute through the year” Mr. Murray said. “No matter what you do, unless you get volumes through the system, you’ll never see a recovery in margins.”
Meanwhile, Bombardier’s train division continued its steady performance of recent years, earning $700-million profit before interest and tax in 2011, or 7.2 per cent of revenues. “Everybody likes to focus on the planes, but the trains get it done,” Mr. Murray said.
In total, Bombardier reported Thursday that it earned 12 cents per share in the fourth quarter – one penny ahead of expectations – on revenue of $4.3-billion, slightly below expectations.