Bombardier, Inc Vs Air Canada

Bombardier, Inc recently released its 2015 FY financial statement, and results are not looking good for investors. Before we delve into the calamities facing Bombardier, inc, let us take a quick look at Bombardier and her business.  Bombardier, inc is a manufacturer of airplanes and trains, with the Bombardier aerospace and transportation divisions respectively. Its headquarter is in Quebec Canada, and its Bombardier Aerospace competes with Brazilian rival Embraer for the title of the third largest aircraft after Boeing and Airbus.

Bombardier, Inc Overview

Bombardier, Inc  started from humble beginnings, it was first a manufacturer of snow machines or snow mobiles before growing into the large manufacturer of regional airliners, jets, mass equipment, recreational equipment we know of today. Bombardier is also a provider of financial services. She signed a memorandum of understanding with china’s SPDB financial leasing co. to extend advance payment financing, delivery financing and leasing solutions to Bombardier customers  acquiring Q-Series, CRJ Series and C-Series commercial aircraft, as well as Learjet, Challenger and Global business aircraft. Bombardier Inc was founded by Joseph Armand Bombardier on January 29, 1942.

Now that we have gotten that out of the way, let us look at the performance of bombardier Inc in their 2015 FY financial statement. Revenue for the period was $18.2B (a decline of 10% from the previous year 2014). The decrease in revenue is very mild compared to the significant decrease in EBIT between the two years of comparison. EBIT for 2015 was -$4.8b, down from -0.6 billion of the previous year. Also free cash flow was a negative $1.84b, down by 65% from the $1.11b of the previous year.  Backlogs improved slightly, with $59.2b as the backlog for 2015 (down by 14% from a backlog of $69.1b of 2014).

I know this last part of backlogs might sound confusing to you. You would be wandering and asking yourself what a backlog is. Well a backlog is simply an accumulation of uncompleted work that needs to be treated. An example of a backlog is company’s sales orders waiting to be filled.

The analysis of the EBIT shows that the huge reduction of it is due to impairments taken against both the c series and Learjet programs. This is slightly good news as we can see that the enormous reduction is not due to cash loss but impairments.

Bombardier, Inc recently sold  49.5% of its flagship c series program for $1.0B to the province of Quebec . Bombardier controls 50.1% of the C-series program, but they are considerations by the federal government to give Canada, the Quebec government and bombardier each a one-third stake in the C-series. In February 11,2016, Bombardier closed its previously announced acquisition by Caisse de Depot (CPDQ) of a $1.5Billon convertible share investment representing a 30% stake in Bombardier Transportation’s newly-created holding company, Bombardier Transportation (Investment) UK LTD (“BT Holdco”), which, following the completion of the previously-announced corporate reorganization, owns all of the assets of Bombardier’s Transportation business segment.

During the first quarter of 2015,Bombardier inc closed a 1.1billion Canadian dollar public offering whose net proceeds  were used to supplement working capital and for general corporate purposes. Bombardier Inc is undertaken major restructuring to enhance Business Aircraft’s business model to improve long-term profitability and also to optimize their workforce. On January 13, 2016, Bombardier  announced that they had completed initiatives to increase the number of direct-to-market channels, including termination of third-party sales representative and distribution agreements, and to restructure customer commercial agreements, which resulted in the cancellation in the fourth quarter of fiscal year 2015 of 24 firm orders, valued at approximately $1.75 billion based on 2015 list prices, with an additional cancellation of 30 optional orders. Mainly as a result of these completed initiatives, in the fourth quarter of 2015, Business Aircraft recorded $327 million in special items.

As regards their workforce, Bombardier sought to optimize their workforce with a combination of man power reduction and strategic hiring. The company plans to reduce its workforce by an estimated 7,000 production and non-production employees throughout 2016 and 2017.

Bombardier air recently secured a fairly large order by Air Canada of 40 C series aircraft with the option to purchase more. Making it a possibility of selling up to 75 C-series aircraft; This is the company’s first order in 16 months. Although it is just a letter of intent, it is still progress, and this news sent its shares soaring over 40% in the days after the announcement. It has been revealed that the deal was brokered by the Quebec province who dropped a law suit against Air Canada in exchange for the order.

Air Canada overview

Bombardier Inc and Air Canada have something in common. This is that they are both in the process of transformation; but like Bombardier inc, Air Canada has been extremely successful with its transformation. Air Canada’s transformation process is centered on four priorities which are international expansion, cost reduction and revenue growth, customer engagement and culture change.

Now let us look at why Air Canada’s shares should be preferred to Bombardier Inc.

Both air Canada and bombardier adopted a turnaround strategy during periods of crisis, but one has been very successful with the strategy thus far, while the other has not been so lucky. Bombardier Inc turn around strategy is characterized by high risk. Bombardier Inc turnaround strategy is centered on searching for airlines willing to buy its jets; most especially its line of C-series. This is a very faulty and risky strategy. The high risk in this strategy stems from the fact that there is high competition in Bombardier’s niche with bigger and well known adversaries such as the Boeing and the Airbus. Apart from that, Boeing and Airbus have come out with competing brands of the C-series of Bombardier. They are the 737 MAX aircraft and A320Neo respectively.

With this strategy, bombardier’s survival is based on its ability to book more firm orders for its Cseries aircraft in a highly competitive market. With the quite evident crisis, airlines would be hesitant in ordering from Bombardier. This is because they need a financially stable aircraft manufacturer such as Boeing or Airbus that can stand the test of time and produce after sales services to aircrafts they purchase. Bombardier’s future is quite bleak, and airlines would be weary of purchasing capital intensive aircrafts with high risk of not getting after sales services in case of bankruptcy by Bombardier Inc.

Air Canada is Canada’s largest full-service airline and the largest provider of scheduled passenger services in the Canadian market, the Canada-U.S. transborder market and in the international market to and from Canada. Air Canada serves over 38 million passengers annually and provides direct passenger service to more than 190 destinations on five continents. Air Canada is a founding member of Star Alliance™, the world’s most comprehensive air transportation network Air Canada was established in 1937, and has its corporate headquarters in Montreal, Quebec.

Air Canada some years ago were on the brink of bankruptcy, their future was uncertain, but they were able to weather the storm, and lift themselves up from a very tight situation. In 2003, Air Canada went to bankruptcy court, and some few years later almost went bankrupt again. They were internal crisis and external factors contributing to this unfavorable condition Air Canada found themselves in. The internal crisis was that they were intense labor struggles at that time, and the company had about $4 billion pension shortfall. The external factor that contributed to it was the rising cost of fuel.

During this period, Air Canada stocks fell into penny stock territory, and investors made huge losses. Ever since then, air Canada has risen tremendously out of the pit they were sliding into. They were able to eliminate the pension shortfall, with a current estimated $1.2 Billion estimated pension surplus. Air Canada had an annual growth rate of 4% in revenue from 2011 to 2015, while having a decrease in the cost of revenue within the same period. Air Canada was able to grow their net income from a -250 Million Canadian dollars in 2011 to a + 308 million Canadian dollars in 2015. Air Canada also has a Return on Assets of 2.55 a significant increase from -2.53 of 2011.

Air Canada’s current strategy is centered on reducing its CASM (costs per available seat mile) by 21% by 2018 from 2012 levels. Air Canada has some other cost reduction plans in place, they include: Ordering more of the Boeing 787 which affords them a 31% savings in maintenance and fuel compared to Boeing 767; Amended and extended capacity purchase agreement with Jazz, with an estimated $550 million in financial value over next six years and expanded capacity purchase agreements with Sky Regional and Air Georgian.

Air Canada is currently undervalued at 7.52 CAD compared with its peers, and reaching these targets could close the valuation gap. This therefore makes Air Canada a more tempting buy than Bombardier, Inc.

Recommended Readings

Marc Cosentino., Case In Point: Complete Case Interview Preparation, 8th Edition

Micheal Shearn., The Investment Checklist: The Art of In-Depth Research