Canada's $372-million support package for Bombardier Inc. should help bolster the company's finances in the near term as it ramps up deliveries of new products, analysts said. But the real question is whether it sets the stage for further public backing on future projects.
"It's a good first step," Louis Hébert, a corporate strategy specialist at Montreal's HEC business school, said. "But this isn't over. Product life cycles in this industry are long and this is only a beginning. The question is sales. For how long can Bombardier support all of its activities? I think this amount of money sends a signal that the federal government wants to get on board."
Bombardier chief executive officer Alain Bellemare is gaining ground in a five-year turnaround effort at the Montreal-based plane and train maker, and the stock's tripling in value over the past year suggests a growing number of investors want to join him for the ride. Pretax margins in three of the company's four business segments have topped 6 per cent for three consecutive quarters. Management in December reaffirmed previous goals of breaking even on a free cash-flow basis by 2018, while boosting revenues to $25-billion (U.S.).
For subscribers: With Ottawa's aid, Bombardier's short-term future gets a lift
The shares gained 2 per cent to $2.60 (Canadian) in Toronto trading on Tuesday.
Among Bombardier's immediate challenges is increasing production of its flagship C Series airliner, which entered service last year after a lengthy delay and cost overruns. The plane is sold out through 2020, after orders from Delta Air Lines and Air Canada, and is exceeding performance expectations, according to customers. Another major order would further solidify the aircraft's status on the market.
Another hurdle is getting the Global 7000 luxury jet into service. The all-new aircraft, Bombardier's biggest-ever corporate jet, completed its maiden test flight last November.
But the company's stated aim of delivering the plane to its first customer by the second-half of 2018 is aggressive, Rolland Vincent said, a former Bombardier executive who now runs his own consultancy in Plano, Tex.
"I think they're more delayed than they're letting on," Mr. Vincent said, adding his view is based on his own analysis of the situation.
"[Late 2018] is possible. Is it probable? I would say no based on their track record. They've only got one airplane in the air right now and four more to build just to get through the flight test program," Mr. Vincent said.
Bombardier remains on track for an entry-into-service for the Global 7000 in the second-half of 2018, company spokesman Simon Letendre said Wednesday. Larger-cabin corporate jets have traditionally been Bombardier's most-profitable aircraft.
Any delay will put pressure on the company's cash flow, Mr. Vincent said. Federal funds will help alleviate that pressure until the company can ramp up production to more fulsome volumes, he said. Bombardier receives deposits from customers but it doesn't get paid most of what it is owed on its aircraft until the planes get delivered to customers, he said.
The company had access to $4.5-billion in available liquidity as of September, 2016.
The Canadian government on Tuesday committed $372-million in interest-free repayable funding for Bombardier, welcome support that nevertheless fell far short of the original $1-billion requested. The money will be disbursed over four years. Repayments are structured as a royalty program, with Ottawa receiving funds based on plane deliveries. One-third of the funds will be directed at the C Series while the remainder will support the Global 7000 program, Bombardier officials said.
At a time when some of its market segments are soft, the support will provide Bombardier with additional financial flexibility to weather any unforeseen events, Mr. Bellemare said Tuesday. He said Ottawa's backing also gives the company confidence that the federal government will continue to support the aerospace industry as the company starts to think about an aircraft beyond the Global 7000.
"While the loan is well below the company's initial ask of $1-billion, we believe it should start some discussions around the company's next development initiative," AltaCorp analyst Chris Murray said. He said the next plane program is likely to be a larger version of the C Series that seats 150 to 180 passengers, a product that would increase Bombardier's addressable market despite putting it more squarely in the cross-hairs of giants Boeing Co. and Airbus Group SE.
"We see this funding as positive for liquidity and non-dilutive to shareholders" because it will boost free cash flow and lower future debt refinancing needs, Konark Gupta, an analyst with Macquarie Capital Markets in Toronto, said. Although the free cash-flow impact might not be overly significant (at about $70-million annually on average) given its capital expenditures top $1-billion a year, "every bit counts," he said.
Bombardier signed a memorandum of understanding with Quebec in October, 2015, under which the province agreed to invest $1-billion for a 49.5-per-cent stake in a joint venture for the C Series. The intervention came at a critical time, reassuring investors anxious about the company's cash situation and comforting prospective customers that the manufacturer would be there to build and support its aircraft.
Quebec called on the federal government to match the investment and Bombardier approached Ottawa shortly after with a formal request. For Quebec, it was an easy decision to protect a strategic company that represents 2 per cent of its economic output. For Ottawa, the rationale was arguably more complex.
The assistance "secured over 4,000 jobs in Canada," federal Minister of Innovation, Science and Economic Development Navdeep Bains said. Still, there was a feeling in some quarters of Quebec that the government could have done more given Bombardier's role as a global export champion.
"I think the federal government was cheap here," Michel Nadeau said, executive director of Quebec's Institute for Governance of Private and Public Organizations. "This is really a minimum level of support they've pledged."