(The Financial Post published the following report by Sean Silcoff on its website on August 28.)
MONTREAL — From Paul Tellier’s glassy eyes yesterday morning, you could tell the chief executive of Bombardier Inc. hadn’t slept much recently.
But true to form, the former top civil servant and ex-boss at Canadian National Railway Co. left the impression he had everything firmly under control, now that his seven-month campaign to bring the fallen transportation giant back from the financial brink had come off without a hitch.
“Every single [element] is falling in place, as promised,” he said at a press conference. “We’re just plainly doing what we said [we would] do.”
Since unveiling his action plan to recapitalize the company in early April, Mr. Tellier has checked off almost every item on his to-do list, staving off further downgrades of Bombardier’s credit rating while rewarding opportunistic investors with a 100% return since late March.
But if Mr. Tellier has made the salvation of Bombardier’s financial health look a bit too easy, there’s little doubt the future holds greater uncertainty for the captain of Canada’s largest industrial manufacturing company.
That was underscored by the muted reception to Mr. Tellier’s news the company raised about $500-million more than expected in his recapitalization effort, including the sale of its recreational products division for $1.2-billion.
“To have too much cash is a very nice problem to have,” he said. But the company has no shortage of uses for that cash, and every one is rather pressing. It could reduce its $2.65-billion unfunded pension liability, bring down more of its gaping $9.2-billion debt, or put a nice downpayment on the development of a regional jet to battle Empresa Brasileira de Aeronautica SA (Embraer) in the fight for orders.
The last option has become the most pressing in recent months, as Embraer has won rave reviews for its new line of 70- to 110-seat commercial airliners from aviation journals and airline bosses.
Bombardier, which pioneered the 50-seat regional jet market in the 1990s, was first to market with 70- and 90-seat jets by simply stretching its 50-seater, a move that saved time and money and allowed it to get more than 100 of the larger RJs into service before Embraer received certification for its planes.
But with regulatory approvals for the Brazilian jets just weeks away, it has become increasingly apparent the turtle approach may have won Embraer the race for the bigger segment of the RJ market, which is expected to take off as deliveries of 50-seaters decline. Embraer’s design features wider seats, fuselage and cabin and runs on a state-of-the-art electronic system.
“Bombardier badly needs another aircraft, a larger one,” said Jacques Kavafian, an analyst with Octagon Capital.
Bob Fay, an analyst with Canaccord Capital, said, “I think [the Embraer planes] have the potential to take well over 50% of the market. There’s going to be pressure on Bombardier to start thinking of a large aircraft.”
The problem is that takes a lot of time and money — on the order of five years and $1-billion in development costs. All Bombardier has to show is a preliminary study on a new 100-seater it shelved a few years back, in favour of the stretch approach.
Mr. Tellier faces other issues. He’s battling to improve margins, but with the airline industry still in the doldrums, the company’s next growth period isn’t yet a twinkle in his eye. “I think they’ll be stuck for a couple of years,” said National Bank Financial analyst Steve Laciak.
Plane buyers have found the list of possible financial backers has dwindled from more than 50 to the Canadian, Quebec and potentially Ontario governments, and barely anyone else. Financing “is probably the most serious challenge facing the airline industry,” Mr. Tellier said. The company’s airplane backlog is losing altitude, quickly.
At least Mr. Tellier won’t have to go looking for a new executive to run the aerospace division: Pierre Beaudoin has chosen to stay put, rather than jump to head the recreational products business — a job he once held — at the divested firm. “This has been his own decision,” said his father, Bombardier chairman Laurent Beaudoin. “And that’s the role he wants to play going forward.”