Bombardier set a new record for business jet deliveries in its latest financial year, shipping 212 airplanes in the 12 months to January 2007. But the weakness of the U.S. dollar means the Canadian industrial group’s aerospace division, with much of its manufacturing concentrated in Canada and the UK, has some way to go to match industry-best margins.
Those 212 airplanes–71 Learjets, 32 Challenger 604/605s, 55 Challenger 300s, a dozen Challenger 800s and 21 each of the Global Express XRS and Global 5000–brought in $3.9 billion, nearly half the aerospace group’s revenues. The total was nine ahead of the previous record set in 2001, before the delivery graph plummeted to 77 just four years ago.
Bombardier Business Aircraft president Pierre Côté told a media summit in Belfast, UK, earlier this month that order books were even stronger, with last year’s intake of 274 being comfortably ahead of the previous year’s 219. Order backlogs, at 11 months for Learjets, 14 months for Challengers and a full two years for the Global jets, are comfortably ahead of the company’s targets.
But the most remarkable statistic, Côté said, was that fully 60 percent of those came from outside Canada and the U.S. The reason, he suggested, is the comprehensive product portfolio that covers every niche except very light jets. And VLJs, he said, represent only 3 percent by value of the market.
Currency shifts are not helping. “We’ve had to deal with a lot of headwind from a currency perspective,” said Pierre Beaudoin, Bombardier’s president and chief operating officer. “The Canadian dollar has moved by about 40 percent in the last four years and the British pound, with the latest movement up, must be in the 50-percent range.”
That is a major challenge for a manufacturer with 10,000 employees in those markets, and the impact on the bottom line was more than $400 million in constant dollar terms. “But this is not something that we can control as a manufacturer, so we need to compensate by making ourselves competitive in order to become as profitable as the others in the industry,” said Beaudoin.
Bombardier’s diverse current line of business and regional aircraft, backed by aircraft services and the Flexjet and Skyjet operations, has supported overall revenue stability, according to Beaudoin. Revenues overall have risen from $8 billion to $8.2 billion over the last three financial years, with a near doubling in the business jet share from $2 billion to $3.9 billion compensating for stagnation of the revenues from services and other activities and a dramatic reduction in regional aircraft returns from $3.6 billion to $2.1 billion.
The target for the next three years is to increase the margin, from earnings before interest and taxes of 3.9 percent in the financial year ended January 2007 to 8 percent in the year ending January 2010. Beyond that, Beaudoin has an industry-leading figure of 15 percent in his sights.
Côté said his current focus is on bringing the customers’ experience of the company to a higher level. “Now that we are the leader in market share we have a bit
of catching up to do in order to bring Bombardier where it deserves to be, which is number one in service.”
The company is investing heavily to achieve that, he said, locating parts inventory where it needs to be and improving the performance of its service centers. In North America, its PartsExpress service has bought shares in Bombardier’s own Flexjet fractional aircraft ownership program equivalent to one Learjet so that it can call on Flexjet aircraft as a last resort to deliver AOG parts. “We think it’s the ultimate support,” Côté said, “making sure that we are there when everything else doesn’t work.”
Customer response centers in Montreal, Canada, for widebodies and Wichita, Kansas, for narrowbodies have the authority to dispatch the PartsExpress aircraft. “They are staffed round the clock by totally integrated groups who can make decisions when the rest of us are asleep and when it’s most important to make that decision for a quick recovery from an AOG situation,” he explained.
There will also be product innovations. The avionics for the Learjet 60XR, which was launched in November 2005, have been certified, the interior is receiving its finishing touches and deliveries are due to start this spring.
The Challenger 605, launched last year, has been a great success so far, and Bombardier intends to work to make sure its flagship product line–the Global duo of 5000 and Express XRS–remains “the flagship of the industry,” Côté maintained. “We are looking at making enhancements in the front of the aircraft for the pilots and looking at other things we could do eventually to further improve the quiet ride and the exceptional quality that we offer to the principal who sits in the back.”
There are no plans for a very light jet, Côté added, “but it’s something we could do in a time frame that would be faster than any competitor if we decided to do it.”
Bombardier’s aerospace adventure, which has seen it emerge as a leader in the regional and business aircraft fields, started barely 20 years ago with just a single aircraft type, recalled Beaudoin. The last five years, though, have been particularly challenging.
The company reacted initially to the post-9/11 air transport recession with a program of downsizing, stabilization and delivery, as staff numbers fell from 35,000 to 27,000 in 2001-02. The operational focus in that period was on delivering uncompleted business aircraft and restructuring the Flexjet fractional business, while development effort was focused on keeping the Challenger 300 and CRJ700/900 regional aircraft programs on track and launching derivatives of the Global Express and Learjet 45.
A restructuring of business units in 2002-04 “was crucial for us to bring back the voice of the customer to the management table,” Beaudoin said. “We had grown the business very rapidly in a functional organization with a big engineering team, production team and marketing organization. It is very well to grow a business rapidly, but as the business grew, we got further and further from the customer because when you have very large functions you end up talking about the challenges within the function rather than the customer.”
The reorganization switched the focus from functions to products, which was accompanied by an operational switch from program to average cost accounting and deployment of the SAP enterprise management system. Product strategy centered on preparing for the future of the commercial aircraft line with the end of CRJ200 production while concentrating on reliability of the CRJ and Q400 airliners and the Global and Learjet 45 business jets.
Profitability and cultural change–“getting our employees engaged and believing again that this business can grow”–have been the dominant themes since 2004, Beaudoin said. “We have market leadership, but it will mean that we can also lead in terms of profitability and processes and really focus on becoming a world class company,” he added. It also involved investing in both derivative and new products such as the Challenger 605 and CRJ1000.
Market Forecast Predicts Bizav Boom
Bombardier’s latest market forecast reflects orders and deliveries running at record levels and suggests that the business aircraft industry is not only booming but set to stay that way.
It predicts deliveries of 9,950 business jets over the next 10 years in the segments where Bombardier operates, and suggests that the very light jet segment could generate another 6,300 deliveries. Revenues are expected to amount to a mouth-watering $244 billion, and the very light jet segment could generate up to 7 percent of that total.
Michael McAdoo, vice president of strategy and business development, said in Belfast at the beginning of May that in the 12 months since the company released its first forecast, projections for business aircraft deliveries have been revised substantially upward.
Excluding very light jets, last year’s forecast predicted annual deliveries of 895 units worth $19 billion in revenue over the 10-year period 2006-15. The latest calculations suggest that during 2007-16, deliveries will average 995 units and generate revenues of $23 billion. The total of 798 units delivered last year was substantially up on the previous peak of 695 in 2000, and revenues registered an even bigger leap, at $16.1 billion compared with the 2000 figure of $12 billion.
The very light jet market can also take off in terms of units if market drivers remain favorable, though it will still represent a very small proportion of revenues.
Last year’s record orders and deliveries seem to have established a new plateau, McAdoo said, with the next trough coming one year later than previously thought and bottoming out at a level higher than the 2000 peak. Several new aircraft programs are scheduled to enter service in 2007-09, and international markets are expected to sustain continued growth.
Several factors have a bearing on demand, the majority indicating an upward trend and the rest being no worse than neutral. OEM backlogs in the non-VLJ segments average 24 months, and if U.S. economic growth is expected to slow somewhat this year it should remain close to 3 percent for the next 10 years. International markets, meanwhile, have been responsible for a very strong order intake over the last two years and major emerging markets are showing brisk growth in deliveries.
There is no current sign of weakness in the pre-owned market, though a surplus of deliveries could put pressure on this segment in the next few years. The new aircraft due to enter service between now and 2009 include some clean-sheet designs, and the fractional market is expected to remain stable at around 110 to 140 units annually.
Buyer intentions also seem to be positive, McAdoo said, with all recent surveys indicating continued consumer interest in the short term.