MONTREAL — As Bombardier Inc.’s aircraft business gropes its way through the slump in air travel, it would seem the perfect opportunity for its rail division to regain the pre-eminent status it once held at the company — before regional jets stole the limelight, the Montreal Gazette reported.
And it has regained some of that momentum.
This month’s introduction of the high-speed JetTrain powered by airplane gas-turbine engines was the latest in a string of rail-sector announcements and signed contracts for the Montreal transporter.
Revenues for the division more than doubled last year, from $3 billion to $7 billion, almost all of the increase coming from the acquisition of Germany’s train manufacturer, Adtranz. But despite the surge in revenues and income streams – like maintenance, servicing and propulsion – tramways, subway cars and locomotives will never be the engines of growth – or profits – that airplanes have become for the Montreal transporter, say company watchers.
If the company is ever to resume its love affair with stock-market investors, its aerospace division will have to be nursed back to health – vigorous health, to boot.
In the meantime, though, the rail sector has a chance to pick up some of the slack from lagging aircraft sales.
“(Bombardier Transportation) already has,” said Bombardier spokesman Dominique Dionne, pointing to the more-than doubling of sales year over year.
The task now, however, said analyst Cameron Doerksen of Dlouhy Merchant Group, is to bring the division’s profit margin up to snuff.
That, he cautioned, will not be easy. The world rail market is dominated by three players: Bombardier, France’s Alstom SA and Siemens AG of Germany, with smaller players like Spain’s Talgo bringing up the rear.
And that market, unlike Bombardier’s regional-jet business, is mature, with fewer contracts. Bombardier claims 41 per cent of the orders announced between January 2000 and May 2001, when it took over Adtranz, 47 per cent between May 2001 and May 2002, and 51 per cent since last June – a total of $17.2 billion, compared with under $12 billion for Alstom and roughly $10 billion for Siemens.
But each contract is a war that requires undercutting the other guy, resulting in thin profit margins.
“Look at last year for Bombardier Aerospace,” noted Doerksen, “a bad year in relative terms for them: (they posted) just under 10 per cent in EBT (earnings before taxes). That number is a little over 4 per cent for (trains).”
“And aerospace was up around 12 per cent EBT before things went south,” Doerksen noted.
The problem with having global rail-equipment operations, he added, is that it must make products that have a wide array of technical specifications, measurements, standards and norms.
An airplane is an airplane is an airplane: manufacturers make them for world consumption, and must satisfy only two basic regulators, the U.S. Federal Aviation Administration and Europe’s Joint Aviation Authority – and the two have largely similar certification standards.
But even within Europe’s increasingly integrated markets, rail-equipment specs have wide variations.
This means that the single-platform pipeline, from design and engineering to the assembly line, which has been so effective in keeping costs rock-bottom low for Bombardier’s aircraft division, is not possible in transportation.
In fact, many European countries require that a bidder have a manufacturing presence if it’s even to enter a bid on a publicly-funded project, which in turn means manufacturing overcapacity – and higher costs.
But Doerksen said that some of those higher costs could be made up by the increasing number of deals Bombardier Transportation is signing which have an “MRO” component – maintenance, repair and overhaul of rolling stock, which carry a higher profit margins. Pierre Lortie, president of Bombardier Transportation, said in a teleconference call last week that high-speed trains would play a pivotal role in the division’s expansion in North America, a huge and largely untapped market. But analysts warn that will also take time.
Although governments and popular opinion, in the U.S. especially, have started to shift their focus to favour revitalized train networks and mass-transport projects after decades of pampering highways and airports, investors should not expect quick returns to flow from that shift.
After the continent’s first high-speed train – Bombardier and Alstom’s Acela – went into service two years ago along the Washington-New York-Boston corridor, the project now closest to being constructed is probably a decade away and possibly longer, said Alstom executives.
Lortie seemed to agree, noting at the JetTrain launch that the French, for example, began working on their breakthrough train technology in the early 60s. The trains weren’t put into service until 1981 on the busy Paris-Lyon corridor.
In a telephone interview from Paris, the heads of Alstom’s transport division and of its North American subsidiary, who did not want to be named, disputed Bombardier’s market-share figures.
“We just signed a huge deal for regional transport here in France,” said one of the two executives, “and in this market, one contract changes the balance a lot. Orders have tended to fall on our side of the court lately.”
He also pointed out that “we built the propulsion system for Bombardier’s JetTrain” – another source of revenue should Bombardier market the fast train.
But Elvis Picardo of Vancouver’s Global Securities Corp., reiterated that even with the strides made by the transport sector, Bombardier’s growth is dependent on the aerospace group’s return to form.
Said Picardo: “They really need aerospace to turn around and get back to healthy margins.”