Business

Bombardier warns of lean year ahead despite cash infusion from Quebec, Caisse

Bombardier has warned of another challenging year in 2016 before the transformation it has launched, including cost-cutting efforts and shifts in production to low-cost centres, deliver a financial turnaround by 2020.

Quebec government and province's big pension fund manager recently put money into Montreal company

Quebec is providing $1 billion US for a 49.5 per cent stake in Bombardier's CSeries aircraft. (Christinne Muschi/Reuters)

Bombardier has warned of another challenging year in 2016 before the transformation it has launched, including cost-cutting efforts and shifts in production to low-cost centres, deliver a financial turnaround by 2020.

"Despite short-term challenges, the potential for Bombardier is great and we are turning the business around," CEO Alain Bellemare said Tuesday while unveiling the Montreal-based transportation giant's five-year strategic plan

Armed with $2.5 billion US in public funding from the Quebec government and the province's pension manager, Bombardier expects to have sufficient cash — about $6.5 billion US — to deliver its CSeries commercial jet and complete development of its new Global 7000 business jet. Both programs will bolster the company's overall revenues.

Year of transition

While 2016 will be a year of "transition," the focus will shift to growing earnings and generating better free cash flow.

"We have great fundamentals and significant runway for improvement," Bellemare told institutional analysts during a 4 1/2-hour meeting webcast from New York City.

Bombardier expects overall revenues will grow five to six per cent annually to exceed $25 billion US by 2020, with earning margins more than doubling to between seven and eight per cent.

The company expects to realize hundreds of millions in cost savings by taking advantage of its large size to centralize procurement, reduce the number of suppliers and transfer work on more complex aerospace projects to operations in Mexico and Morocco.

"This plan is achievable and it doesn't depend on short-term orders," said chief financial officer John Di Bert.

Commercial aircraft president Fred Cromer said the company remains convinced that the CSeries aircraft will become popular with customers and attract new orders because the industry's first new narrowbody aircraft in 30 years delivers on its promise of low operating costs, long range and low noise.

The CSeries has attracted just 243 firm orders to date, but there are very few delivery slots available in the initial years as it ramps up production to more than 100 planes a year in 2020, he said.

More CSeries orders required

Cromer said more orders are required but that Bombardier is being very selective about the airlines it courts.

"We're looking at airlines that would really put a seal of approval on the program and energize this vis-a-vis other customers' perception in the marketplace."

Although Cromer didn't identify any by name, big airlines like United and American are looking to place large orders for new aircraft.

Cromer said Quebec's $1-billion contribution for a 49.5 per cent stake in the CSeries is reassuring potential customers who may have been concerned about Bombardier's financial ability to bring the jetliner to market.

"I think the airline community realizes that this program is coming and these planes will make it to market, especially now that we have a strong partner in Quebec," he added.

The federal government is also considering a request for an undisclosed contribution.

Lutz Bertling, president of Bombardier's train-building Transportation division, said the division will gain efficiencies by working with fewer but larger suppliers and increasing the standardization of its offering, as well as the dwindling over time of low-margin legacy projects.

Bertling said the division is more selective on the projects in which it bids but believes it can beat Chinese rival, CRRC Corp., if the lifecyle cost of a project is considered by the buyer rather than just the initial sticker price.

Karl Moore, professor at McGill University's Desautels Faculty of Management, said Bellemare has demonstrated that he's assembled a team of seasoned veterans who have developed a credible plan to propel the company forward now that public funding has eliminated worries about its survival.

"We've gotten through some of the darker times," he said in an interview. "It's still tightening the belt time and reducing costs but we can see that the CSeries will start producing significant revenues starting the second half of next year and that's great news."

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