Bombardier Inc. stock got a much-needed 6-per-cent lift Tuesday following news the Montreal transportation giant had sold up to 275 business jets to the NetJets division of Warren Buffett's Berkshire Hathaway Inc. empire.
But although the market welcomed the deal as a positive for Bombardier – whose stock still closed 46 per cent off its 52-week high – observers cautioned investors to be mindful of the potential hazards related to the deal.
"If it sticks it's a very positive order," said Richard Aboulafia, vice-president of analysis with Teal Group, a Washington, D.C.-area aerospace consultancy. "But NetJets has a history of changing tracks. I wouldn't regard anything like this as set in stone."
There's no doubt the contract is a big win for Bombardier, and the continuation of a major breakthrough with NetJets, which operates a fleet of more than 700 planes that are "fractionally" owned by thousands of customers. For years, Bombardier was frozen out of Columbus, Ohio-based NetJets because it operated its own rival fractional ownership program called Flexjet.
That changed last year when Netjets placed a firm order for 50 of Bombardier's elite long-range Global jets, valued at $2.8-billion (U.S.), with an option for 70 more. It was the largest order in the history of private aviation until the latest deal, which includes or a firm order of 75 Challenger 300s and 25 Challenger 605s valued at $2.6-billion, with options for 125 more.
Observers said the deal burnishes Bombardier's reputation and will help it to finance its new aircraft programs, including its C Series airliner. "The 300 is an amazing airplane for operating costs," said Peter Bromby, vice-president of sales with Skyservice Business Aviation, which operates a fleet of 60 private jets, including about 20 Bombardiers. "That's why NetJets will love it. It's strong value for the money."
Analysts believe NetJets secured a volume discount by purchasing so many jets, which could squeeze Bombardier's margins, already a challenge for the company. With the two orders, NetJets will account for roughly 20 per cent of Bombardier's aerospace backlog, now valued in the range of $26-billion.
Asked if NetJets could change its order and walk away from its deposit, NetJets chairman and chief executive Jordan Hansell acknowledged, "That's always possible. It just depends on whatever economic conditions are in place at the time. But we make the order with the expectation we'll take the planes."
Bombardier spokeswoman Danielle Boudreau said the risks "obviously have all been factored in." She noted that NetJets' deliveries will be spread over many years, and that Bombardier's offer of two common families of aircraft offer several benefits, including the ability for NetJets operators to move between jets with ease.