Bombardier Flies Solo

When Bombardier launched the C-Series in 2008, the manufacturer said that it was a “game changer”. It was being modest. The aircraft – now called the A220 – has actually changed the whole sport of making aircraft.
 
As well as reshaping Bombardier, the C-Series led to the launch of the Airbus A320neo and the Boeing 737 MAX; a trade war between the US and Canada; which then encouraged Airbus to buy the programme; which encouraged Boeing to buy the majority of Embraer Commercial Aircraft.
 
This week, Bombardier announced that it has agreed to sell its rail division to Alstom – having already disposed of its commercial aircraft businesses. If the rail deal is approved, Bombardier will soon be dedicated to business jets and also have more than $6.5bn in cash, which will help it to pay off some of its $9.3bn in debt (much of which is leftover from the C-Series). This is a huge change for the Canadian company. For many years aviation and rail have been roughly similar in terms of sales – even if the rail division seemed to be as good at hitting earnings guidance as British trains are at running on time.
 
The sale is great news for Canadian equity analysts, as Bombardier will be a much simpler company to analyse. But both Bombardier and Embraer (from next month), will soon be much more exposed to the business aviation cycle. In 2018, Executive Jets accounted for 22.3% of Embraer’s sales, the second business division after commercial aircraft at 46.5%.
 
This makes Embraer and Bombardier very different to their competitors. Dassault has Rafale jets, space and other businesses. In 2018, Gulfstream accounted for 23% of General Dynamic’s sales and an impressive 33% of profits. Textron Aviation made up 36% of Textron’s turnover and 35% of its profits in the same year, followed by Bell (23% of sales and 35% of profit). HondaJet is not yet a rounding error for the car manufacturer.
 
This is despite Cirrus and Pilatus proving that focussing on one business can be a good thing. But the general consensus is that being part of a conglomerate helps business jet manufacturers during the tough times. This theory only works when the other divisions are strong (commercial aviation has hurt Bombardier business jet division) and there really is diversity – the Global Financial Crisis hit Cessna, Textron Finance, Bell and the golf equipment at the same time. Defence is probably a better hedge for business aviation. General Dynamics has been a fantastic parent for Gulfstream. Chrysler was not. One other difference is that manufacturers have now diversified by focussing on the aftermarket.
 
Bombardier’s and Embraer’s management teams are relishing the chance to pilot their companies. Selling rail and commercial aviation puts Bombardier’s business jets back on track.