Bombardier Inc. is selling its Q400 turboprop business to West Coast plane maker Viking Air and slashing 5,000 jobs as Canada’s biggest aerospace manufacturer unloads non-core assets and speeds toward a future tied to luxury jets and trains.
Montreal-based Bombardier announced the deal Thursday in tandem with third-quarter earnings, part of a series of measures that also include the sale of its private aircraft flight-training operation to CAE Inc. Net proceeds from the two transactions are expected to be about US$900-million, Bombardier said.
The moves, as well as the third-quarter performance, triggered significant concern among Bombardier stakeholders as they take stock of a company in rapid transition. In Quebec, where taxpayers bailed out the company’s C Series program with a US$1-billion investment in 2016, the Parti Québécois called the layoffs “a catastrophe.” The province will absorb about half the new job cuts, affecting 2,500 workers.
Meanwhile, investors pushed the stock down 24 per cent to $2.41 on the Toronto Stock Exchange in Thursday trading as worry grows over the company’s cash-flow forecasts. The bonds also dropped.
“[What we’re seeing today] raises questions about management’s credibility and ability to complete a successful turnaround,” said Cai von Rumohr, an analyst with Cowen equity research.
Bombardier chief executive Alain Bellemare’s leadership is again being tested. He pulled Bombardier back from the brink of bankruptcy in 2015 as the company nearly failed under the weight of heavy investments to bring two all-new aircraft to market. Over two years, he has already slashed costs, laid off 14,500 employees and struck a deal to sell a majority stake in the company’s marquee C Series airliner program to Airbus SE. Now, just past the halfway mark in his turnaround plan, he continues to streamline the business and dump assets he says the firm can do without.
“We are sharpening our focus on the biggest growth opportunities in our business segments,” Mr. Bellemare said. Bombardier’s rail, luxury aircraft and aero-structures units all have strong market share and strong backlogs, he said, meaning that’s where the company will invest its money.
Bombardier also announced a companywide restructuring effort Thursday, which includes “flattening management” and reorganizing its central aerospace engineering team. It expects to save US$250-million with the moves by the time they’re all implemented in 2021.
The agreement with Viking marks the second significant divestiture for Bombardier this year after the sale of a controlling stake in the C Series program to Airbus in July. Bombardier concluded it could not go it alone against the industry’s narrow-body jet makers and that Airbus’s vast resources could make the C Series more successful.
Mr. Bellemare said as recently as May that the company was committed to its two remaining commercial airliner programs, the Q400 and the Canadair CRJ regional jet. It is currently exploring strategic options for the money-losing CRJ. “We’re not thinking about exiting” those businesses, he said at the time. “We’re thinking about growing.”
Viking parent company Longview Aviation Capital Corp. is making the Q400 acquisition. The deal also includes rights to the de Havilland trademark.
The Q400, while considered by many to be technologically superior, is outsold globally by rival turboprop maker ATR. Bombardier had been exploring ways to lower production costs to increase profitability, but concluded that selling was a better course of action.
Bombardier said it achieved its best quarterly performance in years in the three months ended Sept. 30, tallying a profit of US$149-million, or 4 cents a share, on revenue of US$3.6-billion. Earnings before interest and taxes, not including special items, rose 48 per cent to US$271-million.
But it’s the free-cash-flow situation that drew all the attention and concern. The company reported free-cash-flow usage of US$370-million in the quarter. Updated guidance for free cash flow for 2018 is now about US$600-million worse than previously estimated. Bombardier says it will only be able to reach its target of breaking even on a cash-flow basis this year by including the proceeds from selling its Downsview property in central Toronto.
The company’s outlook for breaking even in cash next year, plus or minus US$250-million, includes one-time items and suggests things will not improve significantly, said Nick Heymann, an analyst with William Blair in New York. “The concern is that you’re starting to sell assets, like the land in Toronto, to fill holes,” Mr. Heymann said. “You don’t want to be selling assets to plug holes. You want to sell assets to accelerate the deleveraging of the balance sheet.”
The problem centres on Bombardier’s train business, where working capital is running higher than expected on about half a dozen contracts, and deliveries are not happening as quickly as predicted. The company is currently in an intense phase of rail product shipments and plans to get 20 per cent more trains in the hands of customers this year than last.
Other analysts seem willing to give Bombardier more leeway on the matter. BMO Capital Markets played down worries of any lasting problems. “[This seems] mostly a result of timing issues,” analyst Fadi Chamoun said. Cameron Doerksen of National Bank Financial agreed, saying: “We see the sell-off in the stock both today and in the prior months as irrational. There are no liquidity concerns and the risk profile has improved dramatically since late 2017.”
Bombardier will end the year with US$3-billion cash on hand, not including today’s asset sales, finance chief John Di Bert said. Next year, the company will reap early sales from the first new Global 7500 private jets scheduled for shipment. The aircraft is the biggest luxury plane Bombardier has ever built.
Bombardier today employs about 70,000 people worldwide, about the same number as when Mr. Bellemare launched his turnaround plan in November, 2015. There have been layoffs over that period, but the company has hired as well. The job cuts announced today, including 500 in Ontario, represent about 7 per cent of the company’s global work force.