(The following column by Konrad Yakabuski appeared on the Globe and Mail website on June 2.)
TORONTO — It was a sad sight to watch Bombardier’s long-suffering shareholders suffer through Paul Tellier’s uninspiring address at yesterday’s annual meeting in Montreal.
After all, these are the same people who keep looking for signs of a return to the day before yesterday, when their shares broke through $26, and instead all they keep getting is The Day After Tomorrow.
Unfortunately, Mr. Tellier gave no sign yesterday that this is about to change soon.
Which leads, like it or not, to this possibility: If a CEO of Mr. Tellier’s talent cannot get a grasp on the situation, maybe no one person can.
In other words, perhaps Bombardier is a workout too big for one.
Perhaps the cultures of the aerospace and rail units are too divergent, their problems too large to reconcile within the bosom of a single state-subsidized company, to paraphrase Lord Durham.
From that follows the inevitable question: Would a bisected Bombardier have a need for Mr. Tellier?
The latter was clearly in no mood to hear this yesterday, dismissing outright the notion that the company could, should or would be split up.
He pleaded for shareholders’ patience, but offered nothing in return but the dubious consolation that his three-year program for restoring Bombardier from gory to glory is “unfolding as we had planned.”
“We knew the share price would not go up overnight. I repeat: We knew,” hammered the ailing transportation giant’s chief executive officer, who is about half-way through his three-year plan. “We knew there would be obstacles along the way.”
If that is true, why couldn’t he have warned us earlier? It would have saved us the shrieks we’ve let out as each new “obstacle” sprang up on our roller-coaster ride through Bombardier’s house of horrors.
As if the 6,600 job cuts and $777-million in restructuring charges announced at the train division in March weren’t enough of a shock, we learned last week that $200-million (U.S.) in “contract adjustments” at the rail unit drove Bombardier to a disastrous first-quarter loss of $174-million.
As if 5,000 job cuts at the aerospace division since late 2001 weren’t enough, we learned last week that 500 more jobs will go this summer at Bombardier’s Canadair division in Montreal as production of the company’s 50-seat regional jet is ratcheted down to 100 this year from 120 in the 2004 fiscal year that ended Jan. 31.
As for fiscal 2006, the clarification came yesterday. Mr. Tellier expects next year to produce between 75 and 80 50-seaters, considered the most profitable plane in Bombardier’s fleet as its development costs were recouped long ago.
Fiscal 2006 is when Mr. Tellier is supposed to, by his own timetable, move Bombardier into phase three of his revival plan: stable profitability. How he expects to achieve that when Bombardier is making ever fewer of its most profitable regional jets, he didn’t exactly say.
In fact, Mr. Tellier left far too much unsaid yesterday to merit much longer the benefit of the doubt he has enjoyed from shareholders, analysts and the media since taking the helm at Bombardier in January, 2003. At the very least, there are still far too many signs that a turnaround is much farther away than fiscal 2006 — such as the continued duress of the airlines that are supposed to buy Bombardier’s planes, the aerospace division’s dwindling order book and lack of new product, the uncertain fate of the massive downsizing under way at the rail division, to name a few — to inspire confidence.
What might do that, on the other hand, is splitting Bombardier into two separate companies, each headed by a CEO steeped in the aerospace and rail industries, respectively, who can focus exclusively on the problems of each unit. An argument might even be made for sectioning aerospace into two — regional aircraft and executive planes.
Mr. Tellier might be ideally suited to run the rail division. Having spent his entire career before the 1995 privatization of Canadian National Railway in the public sector, he is certainly attuned to mindset of the functionaries who buy mass transit systems. And having made his reputation at CN as the CEO who could squeeze cost efficiencies out of the last spike, he’d no doubt be useful in the low-margin train-making business.
Aerospace is another matter. The primary strike against Mr. Tellier here is his newness to the sector. The scale of an aircraft program dwarfs even the biggest of transit systems. If Bombardier is serious about developing a new plane, Gary Scott, the ex-Boeing executive hired to study that possibility, would be a more logical bet to head the division.
There is no prevailing logic to the idea of keeping Bombardier’s rail and aerospace units together, there being little or no synergies between the two divisions. No other player in either of those industries has successfully combined such core functions under one roof. Bombardier, as a transportation conglomerate, is the product of one man’s vision, that of Laurent Beaudoin, the accountant who married into the Bombardier family and built it up from a modest Ski-Doo manufacturer into a global rail and aerospace heavyweight.
As a growth story, Bombardier offered a compelling case for going the conglomerate route. As a workout situation, it does not. The only obstacle to that realization, it seems, is the Bombardier family’s reluctance — understandable, in a way — to cede control over its legacy.
All things considered, the problems at the rail division are less daunting than those at the aerospace unit. So long as governments and para-public transit authorities continue to account for the overwhelming bulk of purchases, there is no reason to believe Bombardier’s rail unit cannot once again become a stable moneymaker, delivering dependable, albeit unspectacular, margins. Provided, of course, that a dedicated CEO is appointed to keep the focus on costs.
The fate of the commercial aviation unit is far more uncertain. This is a wickedly cyclical business whose fortunes are tied to an industry — the airlines — whose structure defies economic logic. Predictions here make Super 7 look like a sure thing in comparison.
The one constant in the airplane business, however, is the need to be years ahead of the market in anticipating trends. Innovation is the key to success in any industry, but there are some industries, such as this one, where it’s more important than others. A pipeline without new products constantly flowing through it is a conduit that, before long, goes dry. The minds that feed the pipeline eventually head for greener pastures elsewhere.
Bombardier has no new products in its pipeline. Mr. Tellier promises a decision by early 2005 on whether to develop a jet in the 100-seat-plus category. Everyone, it seems, knows that it needs such a plane if it is to remain a relevant player in civil aviation. The only reason for the delay, then, is likely an inability to come up with the $1.5-billion to $2-billion (Canadian) it will cost to develop such an aircraft. Read: Ottawa won’t bite.
Mr. Tellier said yesterday that Bombardier would likely provide up to 35 per cent of the development costs. It would count on partners — suppliers and governments — to come up with the rest.
What about Boeing?
If it is doubtful the Bombardier family has considered splitting the company in two, it is even more doubtful that it has given much credence to the idea of a strategic partnership between a newly liberated aerospace division and Boeing. But among the possible solutions to Bombardier’s woes, it is hardly the most far-fetched.
Boeing has a 125-seat jet, the 717, unveiled in 1999. But it is really just an updated version of the DC-9, a plane that was introduced in 1965. Market acceptance of the 717 has been cool and Boeing’s commitment to the plane is in doubt. Yet, it needs a product to compete with the similarly-sized Airbus 319. Boeing’s own estimates forecast demand of 3,000 planes in the 100-seat market between now and 2020.
It sounds like a golden opportunity for North America’s two aerospace leaders, Boeing and Bombardier, to put their fuselages together for the good of both companies’ shareholders and employees.
Then, maybe then, the day after tomorrow would be worth looking forward to.