Viewing cable 03MONTREAL910, Bombardier Aerospace Focuses on Regional Jet

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UNCLAS SECTION 01 OF 03 MONTREAL 000910 
 
SIPDIS 
 
USDOC FOR 6310/ITA/TD/OFFICE OF AEROSPACE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAIR BEXP ETRD PREL CA
SUBJECT: Bombardier Aerospace Focuses on Regional Jet 
Market; CEO Tellier Focuses on Profitability 
 
REF: (A) Montreal 1093 02, (B) Montreal 1656 02 
 
¶1. This cable contains contributions from Embassy Ottawa. 
 
¶2. SUMMARY: The flagship of Quebec's aerospace industry, 
Bombardier Inc., identifies itself as the number three 
airplane maker after long-haul jet makers Boeing and Airbus. 
But the company is known in the aerospace business as the 
leading maker of corporate jets and regional jets (RJs), two 
plane sectors that Bombardier helped to develop and has 
dominated for the past decade. The company is facing 
increased competition in the RJ market, in the midst of 
airline industry doldrums, and new CEO Paul Tellier's 
efforts to increase company profits and shareholder value. 
 
¶3. At the Paris Air Show in June, Tellier attempted to 
publicly downplay Bombardier's long-time rivalry with 
Brazilian regional jet maker Embraer noting that 
"adversarial relations with your competitors are 
unnecessary" and signaling that neither cut-throat 
discounting nor World Trade Organization proceedings are 
part of his plans to revive Bombardier's fortunes. END 
SUMMARY 
 
 
 
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Bombardier Restructuring 
------------------------------- 
 
¶4. A C$24 billion transportation manufacturing conglomerate, 
Bombardier Inc. has been in a precarious financial position 
in recent years (REF A), with accumulated debt of C$14 
billion, falling profits and a declining stock price. After 
restating its 2001 earnings to just C$36 million from the 
previously reported C$391 million, Bombardier declared a 
C$615 million loss for 2002 in April. President and Chief 
Executive Paul Tellier (REF B) also announced layoffs of up 
to 3,000 employees and efforts to sell some operations, 
including its recreational products division and military 
services operations. Bombardier announced the sale of the 
military division in June, for US$90 million, to L3 
Communications of New York. The company expects to complete 
the sale of its recreational division this summer at which 
point Bombardier will consist primarily of two divisions, 
aerospace and transportation. 
 
¶5. Bombardier Transportation, which accounted for 40 percent 
or C$ 9.4 billion of Bombardier's total revenues for fiscal 
year 2002, is experiencing growth. Most of the 
transportation division's employees -- 80 percent -- work in 
Europe, where the company says it held 50 percent of the 
market in FY 2002. Despite last year's highly publicized 
problems with Acela trains delivered to Amtrak (REF A), 
Bombardier maintained a 28 percent share of the North 
American market in FY 2002. The transportation group last 
year captured 21 percent of the total share of new orders 
worldwide, including a 352-car, C$941 million order from the 
Long Island Rail Road and a 100-car, C$378 million order 
from NJ Transit. This week, Bombardier announced a 298-car, 
C$633 million order from Germany's Deutche-Bahn. 
 
¶6. Bombardier entered the aerospace industry only in 1986, 
with the purchase of Canadair. That acquisition was 
followed by purchases of Short Brothers plc, of Belfast, 
Northern Ireland in 1989, Learjet of Wichita, Kansas in 1990 
and finally, de Havilland in Downsview, Ontario in 1992 - 
all primarily makers of small planes. Bombardier's 
aerospace focus initially had been the corporate jet market. 
Corporate jets (also known as executive or business planes) 
are typically purchased for use by senior executives, high- 
level government officials or wealthy individuals; these 
planes seat from 5 to 40 passengers and have a range of 1500 
to 6000 miles. Deliveries of Bombardier corporate jets, 
which peaked in the fiscal year ended January 31, 2001 at 
203 jets, have sharply dropped off since then; Bombardier 
delivered 162 business aircraft in FY 2002 and the company 
delivered only 77 corporate jets in FY 2003. Not 
surprisingly, would-be U.S. buyers of these planes see them 
as luxury purchases, easily postponed during economic 
downturns. 
 
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Regional Jets 
------------- 
 
¶7. Though Bombardier unveiled three new business plane 
models at the Paris Air Show in June, the company is clearly 
focused on the Regional jet market. Regional jets (RJs) are 
defined as small-body commercial aircraft having 50 to 100- 
passenger seats and an average 2000-mile range. In recent 
years, airlines have been increasing their use of RJs, as an 
alternative to wide-body jets. Some airlines have been able 
to develop new passenger markets by offering service to 
smaller cities through the use of these RJs, which are more 
fuel-efficient and cost-effective than wide-body planes. 
Right now, the regional jet is the only growth sector in the 
commercial airplane manufacturing industry, according to 
Chuck Evans, Director, Airline Industry Analysis and 
Strategy Marketing, at Bombardier Aerospace. Indeed, in 
notes for his June 10 annual meeting speech, Tellier wrote, 
"This aircraft [the RJ] is the cornerstone of the airline 
industry restructuring. The aircraft meets the airlines' 
needs. There are more regional jets flying now than before 
September 1, 2001." 
 
¶8. In 2002, Bombardier's CRJ line of planes accounted for 54 
percent of the total world RJ market and 44 percent of 
Bombardier's total airplane production (56 percent of the 
company's production was corporate jets). The planes in 
Bombardier's CRJ series can seat between 50 and 85 people 
and have a 2000-mile range. Atlanta-based Delta Connection 
is the largest operator of CRJ's with over 273 in operation. 
According to Evans, a major advantage of the CRJ line is 
reduced pilot training time; all models use the same cockpit 
configuration, making it possible for pilots to learn how to 
fly a different CRJ model in just four days, instead of the 
standard 30 days of training required to fly a new airplane 
model. 
 
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Challenges to Growth in the Regional Jet Market 
--------------------------------------------- -- 
 
¶9. The biggest challenges to growth in the North American 
regional jet market have been airline pilots' collective 
agreements and airplane purchase financing for cash-strapped 
airlines. Union "scope" clauses, which protect higher pay 
scales for pilots who fly long-haul jets, have limited 
carriers' ability to use RJs. But U.S. pilot unions have 
recently made large concessions on airlines' use of RJs, 
making these planes much more financially attractive. The 
financing of airplane purchases, however, through vendor 
discounting, government loans and loan guarantees, and 
private financing, continues to contribute to the overall 
shaky picture of the aerospace industry. Airlines most in 
need of the RJs for restructuring purposes need financing to 
purchase the more efficient planes. Both Bombardier and its 
Brazilian competitor Embraer are rumored to have heavily 
"discounted" the purchase price of their planes in a US$4.3 
billion 170-jet order from US Airways. The order, announced 
in May, was split between the two plane manufacturers. 
 
¶10. The Export Development Bank of Canada (EDC), in its 2003 
report, noted its large loan exposure (33 percent) to the 
aerospace industry (C$9.3 billion). Atlantic Coast Airlines 
and AMR Corp (American Airlines), both Bombardier clients, 
account for 10 percent of the EDC exposure, and both 
companies are reportedly on the brink of bankruptcy. Evans 
said that airlines continue to get purchase financing, but 
was unwilling to say whether the financing for Bombardier 
purchases was primarily offered by the vendor or from 
private or government sources. The Montreal Gazette 
reported (7/5) that Britain's Export Credits Guarantees 
Department plans to provide export credits for two loans 
amounting to more than US$200 million, allowing two Delta 
Air Lines subsidiaries to purchase Bombardier RJs 
(Bombardier's Shorts plant in Northern Ireland qualifies the 
company as a British exporter). The Gazette pointed out 
that Investissement Quebec, the provincial export promotion 
vehicle, has also extended considerable loan guarantees to 
Bombardier customers. 
 
¶11. Analysts believe the present plane financing situation 
is unhealthy for both the aerospace and airline industries; 
however, clearly it is more in Bombardier's interest for 
governments to provide airplane financing than for the 
company to engage in discounting and financing deals on its 
own balance sheet. Tellier has made a concerted effort to 
pay down Bombardier's debt since January 2002, halving the 
company's dividend and raising C$854 million in an April 
sale of stock. 
 
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Rivalry with Embraer 
-------------------- 
 
¶12. Bombardier's chief competitor in the RJ market, Embraer, 
has begun offering the Embraer 190, an RJ which seats 100 
passengers. While the 190 has not yet flown in commercial 
operation, New York-based JetBlue Airlines recently 
purchased 100 of these planes. "The sale of the 100-seaters 
[Embraer] to JetBlue, has made us [Bombardier] think of re- 
opening up development for BRJx," says Chuck Evans. 
Bombardier had been developing the BRJx as its own 100-seat 
RJ but shelved the project last year because of the downturn 
in the U.S. airline market. In Paris, Tellier confirmed 
that Bombardier may relook at the BRJ-X program once the 
company's economic problems are resolved. Europe's Airbus 
A318 and Boeing's B717, while marketed as regional jets, 
have many wide-body characteristics and costs, and have not 
yet acquired a major share of the RJ market. Boeing 
recently announced sale of 10 B717s to Airtran. Reportedly, 
Air Canada is looking at the Boeing 717s, among other RJs, 
to revamp its fleet following its bankruptcy reorganization, 
but most analysts think Bombardier, as a Canadian company, 
would have an advantage over other manufacturers. Air 
Canada already operates 26 Bombardier RJs. 
 
¶13. Embraer and Bombardier's bitter rivalry has led to at 
least five disputes at the World Trade Organization and 
rulings against both the Canadian and Brazilian governments 
for illegal subsidies to the companies. At this year's 
Paris Air Show, however, Tellier made headlines by paying a 
courtesy call on Embraer CEO Mauricio Botelho. Tellier 
later told the press "adversarial relations with your 
competitors are unnecessary." He also made it known that 
for the first time in more than six years, neither company 
is interested in a new WTO complaint against the other. The 
WTO activity in this case concluded in December 2002 when 
the WTO authorized Brazil to take trade countermeasures 
against Canadian goods to the value of C$328 million. 
Previously, in December 2000, the WTO authorized Canada to 
take C$1.2 billion worth of countermeasures against 
Brazilian products. Neither Canada nor Brazil is expected 
to impose the countermeasures, however, representatives of 
the two governments continue to meet to discuss how they 
might repair the damage to the bilateral relationship caused 
by the dispute. 
 
¶14. Comment: Tellier has made some difficult decisions in 
his first six months as CEO at Bombardier. While the 
aerospace division has been criticized for not recognizing 
the potential market for larger, 100-seat RJs, Tellier 
appears willing to sacrifice market share in order to get 
Bombardier's profit margins up, and increase shareholder 
value. While no one believes that Bombardier will give up 
its fierce competition with Embraer, in seeking to lower the 
profile of that competition, Tellier is signaling investors 
that neither cut-throat discounting nor World Trade 
Organization proceedings are part of his plans to revive 
Bombardier's fortunes. 
 
ALLEN