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Bombardier’s $3.4-billion Russian gambit

A Bombardier Q400 NextGen turboprop.

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Bombardier Inc. is moving aggressively to boost its presence in Russia with preliminary deals to sell 100 Q400 NexGen turboprop aircraft, valued at $3.4-billion (U.S.), that would be assembled in the country.

For Montreal-based Bombardier, winning trust and making inroads in a high-potential country such as Russia is essential in a tough global aerospace market with growing competition. Bombardier is particularly feeling the heat in Russia from turboprop rival ATR, which sells models that are priced lower than the $34-million Q400.

At the same time, however, making commitments to production lines abroad in order to clinch sales is raising tensions at home.

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All Q400s are currently assembled at Bombardier's sprawling facility in Downsview, north Toronto. Union officials vow they will fight any attempt to shift work out of Downsview and are closely monitoring the agreements signed with Russian industrial and defence conglomerate Rostec for 50 Q400s for Rostec's leasing unit, Avia Capital Services, and another 50 for Russian leasing firm Ilyushin Finance Co.

The agreements include the creation of a joint venture to manage final assembly of the Q400s in Russia. Bombardier said in a news release Wednesday that a Q400 assembly line in Russia is a "key commercial requirement" in the preliminary agreements.

"Developing local roots in strategic markets is at the core of Bombardier's strategic framework and we have identified Russia as being key to our growth and sustainability," said Mike Arcamone, president of Bombardier Commercial Aircraft.

"We recognize this as a landmark opportunity for the Q400 NextGen aircraft program. This aircraft is ideally suited for airlines operating within the geographically diverse Russian Federation and the neighbouring regions where, together with Rostec, we are forecasting a 144-per-cent growth in demand for 60-to-99 seat turboprops over the next five years," said Mr. Arcamone.

Union officials were to meet with Bombardier Aerospace officials to discuss the issue and get more details about the Russian agreeemnts.

"I'm going to ask some blunt questions," said Marv Gray, chairman of the Bombardier unit of Canadian Auto Workers local 112. "This is going a little faster than we thought."

"If there's a threat, we're going to do all we can to ensure job security. This is our bread and butter," Mr. Gray said.

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Bombardier Aerospace spokeswoman Marianella Delabarrera said establishing an assembly line in Russia should not have any impact on production at Downsview, which remains "the primary home" for Q400 work.

Asked if the company can provide job guarantees at Downsview, she said: "Those are part of the discussions that take place with our unions."

If an assembly line to produce aircraft for Russian customers is put in place, it would be "incremental" to Bombardier's current Q400 NextGen manufacturing operations in the Toronto area, the company said in a news release Wednesday.

According to Desjardins Securities analyst Benoit Poirier, Bombardier currently has a backlog of 36 Q400 planes, representing about 13 months of work, below the company's target range of 18 to 21 months. Bombardier's Ms. Delabarrera characterized production at the facility as "steady," though it's running below capacity.

The Q400 NexGen has 70 to 80 seats, is suited to short-haul flights, and Bombardier describes it as quiet and fuel efficient.

"With the potential establishment of a joint venture and a final assembly line in the region, we see Bombardier establishing the Q400 as the market leader in the truboprop segment in Russia," RBC Dominion Securities analyst Walter Spracklin said in a research note.

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"We understand that there is no need for union approval for these agreements and if finalized, would open up access to the Russian market for Bombardier, which we note is a relatively large and important market for the Q400," BMO Nesbitt Burns analyst Fadi Chamoun said in a note.

The agreements with Rostec and Ilyushin were signed at the 2013 International Aviation and Space Salon at Moscow's Zhukovsky Airport.

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About the Author
Quebec Business Correspondent

Bertrand has been covering Quebec business and finance since 2000. Before joining The Globe and Mail in 2000, he was the Toronto-based national business correspondent for Southam News. He has a B.A. from McGill University and a Bachelor of Applied Arts from Ryerson. More

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