Bombardier: Regaining altitude

Late on a Thursday in January 2015, Alain Bellemare was sitting in his office at United Technologies in Hartford, plotting his next move. Then 53 years old, he had been passed over for CEO, and the company had just announced that afternoon he was quitting his job as head of the conglomerate’s aerospace division when he got a call from his fellow Montreal native and long-time friend Pierre Beaudoin, the CEO of Bombardier.

Beaudoin said he was facing a crisis. His father, Laurent, had transformed the Canadian company from a regional snowmobile maker into a rail giant and, more recently, an aerospace terrier nipping at the heels of Boeing and Airbus, making their family a multibillion fortune in the process. But Pierre had reached too far with the CSeries aircraft, the first plane Bombardier was developing entirely in-house, aimed at a market niche somewhere between a regional jet and a Boeing 737. Bombardier was getting set to disappoint investors with a $1.6 billion quarterly loss. Perhaps Bellemare could help?  

Bellemare said no, but on a Friday a few weeks later he flew to Montreal to meet Beaudoin for what he thought would be a quick visit. With the earnings report looming, Beaudoin pressed Belle­mare to become Bombardier’s CEO, asking him to stick around to meet the board. By Monday, “I needed to find someplace to clean my shirt,” Bellemare says with a chuckle. His wife sent clothes from their home in Connecticut. He literally wouldn’t return to his house for another two years, when the elder of his two sons graduated high school.

In a blitz of salesmanship in his first 10 months, Bellemare found the cash to keep the company going by selling new shares, bonds and assets, raising a total of $5.6 billion, including $1 billion in bailout funds from the Quebec government (Bombardier is one of the province’s largest high-wage employers). He ended the CSeries’ financial drain by simply giving away a majority stake in the programme to Airbus, the competitor that had done the most to smother it. Over the past three years, Bellemare has set Bombardier on the path to one of the most remarkable industrial turnarounds in recent years. And he’s done it without bowing to heavy pressure to end the dual-stock structure that allows the Bombardier-Beaudoin family to control the company with just a 12.3 percent stake.

Having stabilised Bombardier, Belle­mare faces the hard task of ­reigniting growth. Revenues fell from $20 ­billion in 2014 to $16.2 billion in 2017, but the company is no longer haemorrhaging: After 10 straight quarterly losses, it turned a slim profit in the last two. “Belle­mare is doing amazing things,” says Richard Aboulafia, a Teal Group analyst. “They stopped the bleeding. Now they have to restore circulation.”

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Joseph-Armand Bombardier was a French-Canadian mechanic who had been tinkering for almost a decade in his small shop in rural Quebec, trying to build a snowmobile, when, in 1934, his resolve was stiffened by tragedy: Unable to get to the hospital in a snowstorm, his two-year-old son died from appendicitis. By 1942, Bombardier had incorporated his “snow car” company, which made large, multi-passenger vehicles that served as ambulances, school buses and mail vans.

But it was Bombardier’s son-in-law, Laurent Beaudoin, an accountant from small-town Quebec, who built the company into a Canadian icon and the family into the closest thing Quebec had to royalty. His MO: Acquiring struggling companies and securing generous government subsidies.   

Laurent took over the company in 1966 at age 27 following Bombardier’s death. After the snowmobile business cratered during the 1973 oil crisis, he jumped into rail equipment, winning a bid to build trains for the Metro in Montreal, followed in 1982 by a $660 million contract ($1.8 billion today) for New York subway cars—almost double the company’s annual revenue at the time. A series of European acquisitions took Bombardier to the forefront of the rail-equipment market by the early 2000s.

Next: Aerospace. Laurent purchased Canadair from the Canadian government in 1986 for $120 million after ­Ottawa wrote off more than $2 billion in development costs for its ­Challenger business jet. Combined with Learjet, which had been acquired in 1990 from its bankrupt parent, Bombardier rode a business-jet boom in the late ’90s, passing Gulfstream to top the sales charts.

Bombardier stretched the Challenger into the 50-seat CRJ, the world’s first regional jet. It was a winner: With jet fuel cheap in the ’90s, US airlines snapped up hundreds of CRJs to replace propeller-driven planes on short-haul routes to smaller cities.

Then came the big gamble: Bombardier’s first entirely new plane, the CSeries. The idea was born of confidence in the early 2000s after its twin aerospace successes and from the fear that the regional jet market was in decline, as oil prices climbed and airline consolidation shrank route networks. Pierre, Laurent’s son and heir apparent, believed there was a hole in the market for a fuel-efficient plane sized somewhere between regional jets and Airbus’ and Boeing’s smallest planes, the A320 and the 737. In 2008, after Pierre became CEO, the board gave him the green light.

Through 2020, Bombardier expects overall sales to rise 25 percent, with the business-jet division accounting for three quarters of the growth

But Beaudoin underestimated the ferocity with which Airbus and Boeing would respond. The giants moved to erode the CSeries’ efficiency advantage, developing versions of the A320 and the 737 with new engines. When airlines considered buying the CSeries, Airbus and Boeing countered with cut-rate offers on larger aircraft. Beaudoin wouldn’t discount, believing the CSeries should command a premium.

Amid slow sales and technical snafus, the launch date slipped from 2013 to 2015. Development costs soared from an initial estimate of $3.4 billion to $6 billion. Meanwhile, Bombardier’s business-jet division was burning billions in designing two other new planes: The Learjet 85 and the Global 7000. The train division had fallen badly behind on railcar projects in New York, Toronto and Switzerland.

With cash running short and investor discontent rising, Bombardier needed to tap the capital markets. Beaudoin wasn’t the man to make it rain. Exit Beau­doin; enter Bellemare.

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Bellemare had a reputation as a savvy, deeply networked operator after his 18 years at United Technologies. Gravelly-voiced and high-energy, he can alternately charm and crack the whip. Going in, he hadn’t appreciated how deep the problems were in all the company’s divisions, besides the CSeries. “There was basically pressure everywhere,” he says, claiming that he slept only three hours a day for his first nine months on the job.

On his first day, Bellemare hit the road to raise money. By the end of 2015 he had raised that $5.6 billion—enough, he thought, to get the company through the next year, maybe two. Investors thought otherwise: The share price sank 70 percent, from 2.69 Canadian dollars the day before his appointment to 77 cents in February 2016.

A big chunk of the cash came from the sale of a 30 percent stake in the rail unit, Bombardier Transportation, which accounts for almost half of Bombardier’s revenue, to the Quebec pension fund for $1.5 billion (the fund wrangled a sweet guaranteed annual return of at least 9.5 percent from the cash-starved company).

In parallel to the fundraising, Belle­mare tightened operations and slashed costs. Rail was a prime target: It was a collection of unintegrated businesses cobbled together through acquisitions around the world. With the new rail chief, Laurent Troger, Bellemare quickly fired 7,700 people, slashed the number of suppliers from 10,000 to 4,500 and ended production of duplicate products in different countries. Sensing that the business-jet market was softening, he cut production from about 200 planes in 2015 to 138 in 2017. The Learjet 85 was canceled at a loss of $2.6 billion, and the Global 7000 was delayed until late 2018.

The biggest headache remained the CSeries: It had finally entered service in 2016 but simply wasn’t selling. Belle­mare moved to end the nightmare. After a failed overture to Boeing, Bombardier explored a partnership with state-owned Chinese companies (it had made fitful efforts to collaborate with Comac going back to 2012), but the Canadian government reportedly pushed the company to negotiate with Airbus, worried about potential job and technology losses to China. In October 2017 Bellemare clinched a deal with the European giant, which agreed to take a 50.01 percent stake in the CSeries programme in return for covering the majority of ongoing costs. No money changed hands. (The province of Quebec retains 16 percent, Bombardier the remaining 34 percent.)

The deal finally staunched the cash drain. “We’re starting to think about what’s next,” Bellemare says. “How can we start deploying capital in a disciplined, strategic way.”

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The path forward for Bombardier remains narrow, with Bellemare facing a long-term debt load of $9 billion. The top priority: Improve cash flow to start reducing that debt. Given the rich terms of the Quebec pension fund’s investment in the rail unit, buying the stake back is also high on his target list.

Bombardier has roughly $800 million a year budgeted to invest in R&D through 2020, well short of what’s needed to develop a large new aircraft. But Bellemare has shown he can make good use of limited funds. Amid the company’s worst struggles, he green-lit a programme to prepare for a future after the CSeries. In May, Bombardier surprised the industry by unveiling new models of two of its highly profitable large executive jets, the Global 5500 and 6500, with new Rolls-Royce Pearl engines. The company had kept them secret—a rare feat in a world where plane spotters lurk at every airport.

The two planes will come to market next year after Bombardier’s new flagship business jet, the long-delayed Global 7000—renamed the 7500—a $73 million, 19-passenger plane with an industry-leading range of 7,700 miles. The timing is good, with the business-aviation market showing life for the first time since the Great Recession. Through 2020, Bombardier expects overall sales to rise 25 percent to $20 billion, with the business-jet division accounting for three quarters of the growth.

Every other part of the company is the subject of M&A rumours. Some parts, like its regional jets and turboprops, are likely to have trouble attracting buyers. The Northern Ireland division, where Bombardier makes the innovative composite wing for the CSeries (now rebranded as the Airbus A220), could attract more interest. An obvious buyer: Airbus itself. With the companies’ partnership, “de facto we are going to become a major supplier to Airbus, but the opportunities to keep growing even further are significant,” Bellemare says. “From the cockpit to wings to fuselage, we have capabilities Airbus can benefit from.”

Bellemare has been looking for deals for the rail unit, where the competitive skies have darkened. China has combined state companies into a new giant, CRRC, and it’s looking abroad as that country’s building boom slows. Siemens turned down an overture from Bombardier in 2017 to merge their rail businesses and is trying to clinch a marriage with Alstom to create a European champion. “We can’t just watch the game and not be active,” says Bellemare.

One thing is certain: Bombardier no longer looks headed for an emergency landing. “We don’t run away from issues and problems,” Bellemare says. “We run towards them.”