Bombardier Inc. says it is slowing production of its large-cabin Global business jets to bring it more in line with slumping global demand. But the market for business jets, while not robust, appears to be on a slow recovery path, according to some observers.
Bombardier said on Thursday it is chopping 1,750 jobs – up to 1,000 in Montreal and 480 in Toronto – as it ratchets down on Global 5000/6000 production because of weak demand in Latin America, Russia and China due to "current economic conditions and geopolitical issues."
About 4,500 employees work on the Global 5000/6000 programs. Bombardier Business Aircraft president Eric Martel said there are no plans to slow output of the Global 7000/8000 aircraft being developed, which will be made in Toronto.
"We have seen an industrywide softness in demand recently in certain international markets and are taking steps to adjust our production accordingly," Mr. Martel said.
However, some observers don't agree that weak demand is industrywide.
"I would believe that [demand is soft] if everyone else were saying the same thing, but everyone else is not saying the same thing," Richard Aboulafia of aerospace consultancy Teal Group said.
The two principal rivals to Bombardier's Global 5000/6000 business jets – Gulfstream Aerospace Corp. and Dassault Aviation SA – have not announced any plans to cut back on production, Mr. Aboulafia said.
Preoccupied with the huge runup in development costs for the new C Series commercial jetliner, Bombardier was bringing in cash by moving as much Global 5000/6000 product as it could, saturating the market with it by underpricing, he said.
"They were playing a dangerous game of pushing metal out the door to bring in cash, one of the few levers they could pull to bring in cash," Mr. Aboulafia said. "It's a good way to glut your market."
BMO Capital Markets analyst Fadi Chamoun said in a research note Thursday: "We believe that Bombardier has been more aggressive selling large cabin aircraft in the market over the past several years at less than optimal pricing decisions. In our view, this reduction in the production rate also attempts to restore profitability through improved pricing/marketing decision."
He pointed out, however, that "the demand environment for the Global aircraft appears to have softened, as noted by the company and some of its competitors on the [first-quarter] conference calls."
Bombardier Business Aircraft spokesman Mark Masluch dismissed suggestions the company has been aggressively pricing its Global aircraft and said soft demand in emerging markets is the driver behind the decision to cut back on production.
"We feel this [slump] is a market trend. It's short term," he added.
According to one media report, business-jet sales in Russia have taken a hit because the oil oligarchs are not buying luxury items at the same rate as they used to in light of the global slump in the price of oil. Sanctions imposed on Russia over the crisis in Ukraine have compounded the slump, it said.
But Vladimir Tikhomirov, chief economist at BCS Financial Group, the largest equities broker on the Moscow stock exchange, said the very wealthiest in Russia do not appear to have eased back on luxury spending.
"Most rich Russians have their wealth stored in a wide variety of assets and my guess is that they did not suffer that much." He notes that most of the decline in luxury-car sales has been in the mid-priced segment but that the luxury end "did not suffer at all."
Desjardins Capital Markets analyst Benoit Poirier said in a note that Bombardier's announcement of the Global production cutbacks is "positive as it reflects the new management's proactive initiatives toward making the hard decisions to turn their story around. However, we expect investors to remain skeptical as the layoffs reflect the current weakness in the bizjet segment."
The slowdown in Global output is the latest move in a major effort to turn around Bombardier under recently appointed chief executive Alain Bellemare; former CEO Pierre Beaudoin is now executive chairman of the company over which his family has majority control.
The production slowdown could represent cost savings of $135-million a year, Mr. Poirier said.