Bombardier will fight, but there may not be a path to survival: ‘They’re not going to be around‘
Growing up in Sherbrooke, Que., Ross Healy remembers Bombardier Inc. evoking a sense of pride within him.
Living only a 36-minute drive east of Valcourt, where Joseph-Armand Bombardier founded the company that would become synonymous with Quebec ingenuity, Healy, chairman of Strategic Analysis Corp., said he coveted one of the company’s snowmobiles. Everyone in Quebec in the mid-1960s, did, and he spent hours riding his through backwood trails with his friends.
“We were all really, really proud of this company and proud to say I’m a Quebecer and they’re Quebecers,” Healy said.
The one problem with Bombardier’s prized invention is that it was easy to replicate. Rival manufacturers did just that in the 1970s and threatened to squeeze Bombardier out of its own market. But in another stroke of innovation, one that would rescue the business and turn it into a global brand, the company shifted to rail and subway manufacturing.
Fifty years later, Bombardier finds itself up against another wall, but this time it’s no longer considered an innovator, its reputation is in tatters and the pride that it generated within Quebecers such as Healy has dissipated. More damning, however, is that there may be no pathway to survival.
“They’ve been going through a slow-motion death for the past 20 years,” said York University economics professor Fred Lazar. “Five years from now, they’re not going to be around.”
Last week, the mass-transit maker’s future was once again called into doubt after it posted a profit warning and announced it was reassessing its partnership with Airbus SE on the A220 jet. Concerned with its $9-billion debt, analysts suggested Bombardier would have to consider selling one of its two remaining divisions, or perhaps even the entire company altogether.
The business jet division is the healthier of the two, but doesn’t have much of a future, Lazar said. As most plane makers are squeezing in more seats and developing alternative fuel engines, Bombardier is stuck in the past and doing neither.
The rail division, meanwhile, is the source of much of the company’s debt and has been on the market for years, but there have been no takers. Reports this week suggested Bombardier has opened talks with Alstom SA to discuss a merger, although antitrust concerns have stopped similar transactions in the past.
Relief has traditionally come in the form of government bailouts — $372.5 million from the Justin Trudeau government and $1 billion from Quebec in 2017 and 2015, respectively — but even that may not be an option, given that Quebec Premier François Legault has called those past subsidies a “mistake.”
Saving the company is all about optics now, Lazar said, and the Bombardier-Beaudoin family, which holds more than 50 per cent of the company with an iron grip, should know that the best way for them to save face is to sell the company.
“If the company had a different name, if it didn’t have a family name, you probably would’ve (already) seen a sale,” Lazar said.
Critics have laid much of the blame for Bombardier’s current state on the shoulders of the family that has owned and operated it for three generations. They have presided over management using subsidies to give itself 50-per-cent raises, while disintegrating the balance sheet and business relationships and putting a halt to innovation.
The family will have to realize that trying to salvage its reputation wouldn’t be about losing whatever value is left in the company, Lazar said. And Bombardier still has some value, despite its many recent troubles.
Ownership may have to accept a lowball offer for the rail division. Lazar said they could likely still demand and receive a premium for aviation. Cutting their losses now would be better than the alternative that’s staring them down: bankruptcy.
Lazar doesn’t know if it will actually ever come to that. Quebec and the Caisse de dépôt et placement du Québec might step in and orchestrate a deal that sees the pension manager buy one of the divisions as a last resort. With that help, the company may even be able to ensure its business jet plant and headquarters stay in Quebec, saving hundreds of jobs.
Much of Bombardier’s current woes could’ve have been avoided, Healy said, if the family had agreed to sell some of their shares in 2018 when the stock reached a seven-year high of $5.41. The company could easily have raised more than $1 billion in equity, he said. When that didn’t happen, he knew the company was finished, and he sold his shares.
“They never seemed to get it,” Healy said. “When your stock is soaring, it’s not a pat on the back. The market isn’t congratulating you and saying, ‘Aren’t you the biggest smartass in the world.’ It’s fundamentally asking you to please take my money and do more of what you’re doing.”
Healy didn’t mince words when asked which Bombardier division he would pick to sell: “Well, they screwed up both, haven’t they?” Still, he suggested selling aviation because it’s the riskier business heading into the future.
Well, they screwed up both, haven’t they?
Ross Healy, chairman, Strategic Analysis Corp.
Deborah de Lange, Ryerson University professor of global management studies, is a bit more optimistic that the family can save the faltering company.
Bombardier’s central problem is that it has always always paid a heavy price for its mistakes, she said. If it fails to deliver trains or streetcars to its customers on time, it has to throw in dozens of additional vehicles or pay millions of dollars in service compensation. And when it sees its balance sheet constricting, the answer has always been to cut costs through layoffs or asset sales.
It could have avoided these issues, de Lange said, if it had decided to fix its problems with additional investment.
She called on the Bombardier-Beaudoin family to resist selling either one of the company’s divisions and use its own fortune to buy back all outstanding shares and take the company private.
“What it needs to do is retrench and focus on making its existing contracts successful … and take itself out of the public eye,” de Lange said.
The family may not have the necessary cash to do so, as a 2017 Canadian Business ranking of wealthy Canadians placed the family’s fortune at only $2.87 billion. The family has about $379 million in Bombardier, which has a market cap of $2.99 billion between its Class A and Class B shares. It also has a 26 per cent stake in BRP Inc., which is worth about $1.55 billion. But it might not want to buy back the shares if it doesn’t see a way to salvation.
As a private company, de Lange said, Bombardier would be able to quietly sort out its issues without the same level of public scrutiny it receives now. For example, it has faced massive public criticism for consistently failing to deliver subways and streetcars on time in Toronto, New York and London.
New York’s Metropolitan Transportation Authority was recently forced to pull 300 subways cars, each one built by Bombardier, due to problems with the doors. Bombardier missed the delivery target dates established in the contract and gave the MTA an additional 18 cars as a result. According to the MTA, none of them worked.
“Bombardier sold us lemons.” New York City comptroller Scott Stringer said in an audit.
“It’s gruelling. You have to stay on their case, you have to hold their hands, you have to cajole them,” former MTA subways chief Andy Byford said in 2019. “Short of actually building the damn things, we’re doing everything else that we possibly can do.”
In London, Bombardier’s tardiness in delivering electric trains on time resulted in Transport for London offering one month’s worth of free rides. Bombardier fronted the bill.
After signing a $1.25-billion contract in 2009 with the Toronto Transit Commission to build 204 streetcars, Bombardier didn’t have even 20 completed by the end of 2015. The final streetcar Bombardier owed the TTC was delivered just this week.
“We have, quite frankly, a horrible, horrible relationship with them,” said Toronto councillor and TTC Board member Denzil Minnan-Wong. “They weren’t meeting deadlines, they weren’t returning phone calls, they were lying to us, making promises they couldn’t keep and seemingly not wanting to respond and address issues with one of their best customers.”
On Wednesday, the TTC proposed spending $140 million on 80 new streetcars. Minnan-Wong posted a letter dated the same day from Bombardier Transportation president Elliot Sander saying that the company “stands ready with all our employees at our Thunder Bay plant to produce them.”
Despite its issues with Bombardier, the TTC wouldn’t rule out allowing it to bid for the new contract.
Minnan-Wong thinks working with Bombardier again could be problematic. He’s aware of the company’s financial distress and the calls for it to be sold. Should its rail division be sold after the TTC signs a contract, “how do we know we’re going to get our streetcars,” he asks.
“I think about Lucy putting down the football and Charlie Brown being convinced she’s not going to pull it away again,” he said. “The definition of insanity is doing the same thing and expecting a different outcome.”