It was a near perfect morning. The clouds that had brought rain just hours before had cleared, and a bright sun warmed the 3,000 Bombardier Inc. employees, suppliers and clients who huddled together in the bleachers erected beside the Mirabel runway.
The C Series appeared at the end of the tarmac and took off so silently that spectators who were unaware of its arrival in the absence of an official countdown were taken by surprise. Bombardier’s commercial jet has been nine years in the making – it even goes back 15 years when you consider its earlier incarnation, code-named BRJ-X.
The plane had been killed, revived, renamed, put on hold for two years and then relaunched in 2008. And there it was flying in front of everyone, a tangible proof that Bombardier has broken out of the regional market and risen to the aerospace’s big leagues.
It was nearly perfect, really. And then Bombardier executives fumbled over an accounting question, blurting out stupefying and contradictory answers. The incident tainted the maiden-flight hype like a mustard stain on a white wedding dress. But Bombardier’s wavering on the C Series’s numbers is more than an anecdote. It raises a real question of transparency. It all happened after Captain Chuck Ellis landed the first prototype test vehicle, at the press conference hosted by Bombardier Aerospace executives. A sharp colleague inquired about a RBC Dominion Securities research report that evoked the ongoing “uncertainty as to the magnitude of cost overruns.” Analyst Walter Spracklin calculated that with the C Series’s nine-month delays and the problems encountered by its Chinese fuselage supplier, the program’s costs were “trending toward a development cost of $3.9-billion [U.S.]”
Turns out Mr. Spracklin was bang on. When asked, the head of commercial aircraft, Mike Arcamone, even pointed out that development costs stood at precisely $3.94-billion. “Our target has always been to stay below $4-billion,” he said.
Problem is, that was news to every reporter and analyst who had been asking for an update on the C Series’s costs, and even to the press officer who corrected Mr. Arcamone in public by stating he had “misspoken.”
Ever since Bombardier revised its initial budget of $3.2-billion, it has been sticking to its $3.4-billion figure religiously.
Pity the press relations staffer who was ordered to return to the reporters, to tell another story. Yes, the C Series’s costs had ballooned to $3.9-billion, but not because of higher tooling costs, as Mr. Arcamone alluded to during the press conference, but because Bombardier changed its accounting practices. The $500-million difference, Bombardier now says, can be entirely explained by how interest expenses are accounted for. Bombardier changed from the Canadian to the international accounting standards of the IFRS in June, 2011.
But good luck finding that out in Bombardier’s financial statements, which Michel Magnan, holder of the Lawrence Bloomberg Chair in Accountancy at Concordia University, describes as “some of the most complex in Canada.” Changes to the C Series’s costs are not to be found in the financial presentation on the impact of switching to IFRS on the aerospace division; it only alluded to changes in the way R&D and tooling were accounted for. The presentation does indicate, however, that interest payments will be capitalized if they are tied to a specific asset. But nowhere does it say what this entails for the C Series, Mr. Magnan noted.
To be clear, no one is claiming that Bombardier is deliberately blurring its accounting. But for the past two years, there have been countless queries on the costs of developing the C Series by reporters and analysts – questions all the more persistent since the maiden flight was postponed three times. Whether the accounting of interests payments alone explains the half-billion difference looks questionable, given the explanations given by Mr. Arcamone on Monday. But in any event, Bombardier should have come clean.
That the C Series would encounter cost overruns is not surprising; in fact, the bigger surprise would have been that Bombardier had stayed on budget, given the aerospace industry’s poor track record. Also, cost overruns don’t alter the C Series’s commercial prospects from a technical standpoint. Those depend on Bombardier’s ability to convince airlines that the C Series is a better investment in the long run than Airbus’s and Boeing’s discounted planes, given the significant savings in operating costs.
But additional expenses of that order will have an impact on the C Series’s profitability and on its shareholders. Shares have been hovering around $5 (Canadian) for the past 10 years, and have only rarely flown higher. Given the lift Bombardier now hopes from the C Series, investors have a right to know what the real price tag for the C Series is.