Fairchild’s fortunes fading fast as Bombardier bails

 - April 16, 2008, 9:57 AM

Another truss fell from Fairchild Dornier’s tenuous financial footing last month, as potential suitor Bombardier Aerospace declared that it no longer harbored any interest in investing in the foundering 728 and 928 programs. The timing of the decision came as a surprise, given Bombardier president and CEO Robert Brown’s prior indications that the company’s commercial analysis would last until at least late this month. At press time Bombardier officials had yet to explain the reasons behind the abrupt nature of the announcement, saying only that “after five weeks of discussions with customers, suppliers and all related stakeholders, we quickly came to the conclusion that these programs would not produce returns in line with our requirements.”

Released on June 18, the announcement came on the same day representatives for some 400 creditors of Fairchild Dornier’s two U.S. subsidiaries planned to meet at the U.S. Trustees’ Office in Alexandria, Va., in advance of the companies’ Chapter 11 bankruptcy proceedings. On May 20 Fairchild Dornier Corp. and Dornier Aviation North America each consented to a Chapter 7 liquidation petition filed on behalf of 28 former employees and asked to convert their cases to Chapter 11 reorganization.

This most recent setback to Fairchild Dornier’s search for a buyer for its largest project came just two weeks after Brown told reporters at his company’s annual earnings meeting that the technical review of the 728 provided “a basis for doing a commercial analysis” of the program. Such an appraisal, he said, would last until at least this month, and perhaps into August, by which time Bombardier hoped to gain a clearer picture of the level of financial support available from the German and Bavarian governments.

ACA Cancels 328JET Deliveries
The Bombardier decision represented the second serious blow to Fairchild’s chances for survival last month. On June 4 Sterling, Va.-based Atlantic Coast Airlines confirmed its plans to cancel a firm order for thirty-two 328JETs slated to enter service with its United Express network. Despite assurances from its bankruptcy administrator that Fairchild Dornier could produce the remainder of its 32-seat jets, ACA revised its fleet plans to accommodate another 25 fifty-seat jets from Bombardier–the beneficiary of not only the $571 million order but potentially of Fairchild’s withering competitive stature and growing political significance.

Bombardier’s odds of winning government financial incentives appeared to grow shorter as labor discord in Germany threatened to further hinder the country’s economic recovery, particularly during a parliamentary election race in which both candidates for chancellor run on a platform of job retention and economic prestige. In fact, Chancellor Gerhard Schroeder’s conservative challengers, led by Bavarian state governor Edmond Stoiber, accuse Schroeder’s Social Democrats of not doing enough to tackle the unemployment problem, while a strike begun on June 17 by some 9,000 German construction workers added to the turmoil. Meanwhile, postal workers and insurance industry workers prepared to vote on strike actions as well, potentially throwing Germany even deeper into economic unrest.

Labor Costs Still an Issue
Although the economic climate in Germany has undoubtedly added to the weight of Fairchild Dornier’s plight, the desire to retain jobs in Oberpfaffenhofen may prove counterproductive to attracting international investors. The cost of German labor has long represented a source of difficulty and led to Fairchild’s decision in the late 1990s to outsource much of Dornier’s work overseas to cheaper labor markets. As a condition of any financial support, the German government must demand certain guarantees related to the level of work and number of employees that remain at Fairchild’s Oberpfaffenhofen plant in Bavaria. Bombardier undoubtedly considered on those factors in its commercial evaluation. Other considerations surely centered on Bombardier’s ability to extract supplier discounts and customer contract concessions.

“We’ve been trying to figure out whether or not we could take advantage of this situation for our customers,” said Brown during the Bombardier investors meeting. “There is much work to be done and we are still far from a decision.”

Brown also said that Bombardier needed to determine whether or not the 928, a larger version of the 728, could offer a means to effectively thrust the Canadian company into the major airline market. “This is the key,” said Brown, referring to the viability of the stretched version of the 728. Although the 70- to 85-seat 728, now scheduled for first flight in September, occupies a wider market niche than Bombardier’s lighter but more narrowly capable CRJ700 and CRJ900 regional jets, there would likely emerge some market overlap, particularly if regional airlines find the Fairchild product suitable for relatively short-range duty. Occupying a market segment fully distinct from Bombardier’s traditional regional realm, the 928 would have propelled the Canadian company into direct competition with Boeing and Airbus–something it chose not to pursue two years ago  when it shelved its 110-seat BRJ-X proposal.

At the time Bombardier determined that development of an all-new design for the somewhat ambiguous 100-seat market segment would prove too costly. But with one less competitor with which to share the market, Bombardier hoped it could make a better case for spending the $1 billion it would take to certify the 928–if the German government intervened with enough incentives. Meanwhile, the 728–lagging more than a year behind its original certification schedule–will take another $400 million to reach the market.

Although Bombardier originally expressed little interest in the Fairchild jets, it agreed to perform a technical evaluation at the behest of the Bavarian and German governments and 728 launch customer Lufthansa. Fairchild Dornier’s dwindling money supply has only added to the governments’ urgency, as a $90 million guaranteed loan approved by the European Commission in April runs dry this month, by which time the three-month wage guarantee extended by law to the company’s German employees will expire.

In the U.S., former Fairchild employees staked their respective claims against the company during a creditors meeting at the U.S. Trustees Office, after the company’s U.S. subsidiaries requested to convert their Chapter 7 liquidation cases to Chapter 11 reorganization. Filed on behalf of 28 former employees by Leesburg, Va.-based law firm Campbell Miller Zimmerman, the Chapter 7 petition charged that Fairchild Dornier illegally terminated its severance policy. According to the petition, Fairchild Dornier did not notify employees, executive staff or its human-resources representative of the change, which became known only after it fired the employees in early April.

Suspect Support

Many of those former employees worked at the company’s now vacant Herndon, Va.-based sales and support offices. Chosen largely for its close proximity to Atlantic Coast’s headquarters, the office now serves as a symbol of the company’s suspect ability to support its U.S. clients. In fact, one reason ACA chose to cancel the remaining deliveries of 328JETs centered on uncertainties surrounding product support, according to ACA president Tom Moore.

ACA began talking with code-share partner United Airlines about potential replacements for the 32-seat Fairchild jets after the German airframe builder missed its scheduled delivery of the airline’s 34th 328JET in late March, followed a week later by its insolvency filing in Germany. Now flying 62 CRJs as United Express and thirty 328JETs as Delta Connection, ACA holds firm delivery positions for another 59 Bombardier jets, the last of which it expects to join its fleet in April 2004.

Meanwhile, ACA has revised its plans to unload the remainder of its Dulles Airport- based Jetstream 41 turboprops, originally slated for retirement by the end of the year, to coincide with the delivery of the latest order for CRJs starting next April. Finally, the airline plans to remove its two United Express 328JETs from scheduled service and place them at Dulles, where the company now bases a single Fairchild jet dedicated to a private shuttle business serving Washington and New York.