Textron Stands To Gain Much in Bombardier Combo

 - February 6, 2020, 12:42 PM

A potential combination of Bombardier’s Learjet, Challenger, and Global business with Textron Aviation could create a powerful OEM with an estimated share of more than half the business jet production market and installed base. That’s according to analysts reacting to a February 4 Wall Street Journal report that the parent of Textron Aviation is in talks with Bombardier to buy the Canadian airframer’s business jet unit. Mark Masluch of Bombardier and David Sylvestre of Textron told AIN that as a matter of policy neither company will “comment on market rumors.”

The report comes after Bombardier preannounced its 2019 financial results that Jefferies analyst Sheila Kahyaoglu said were “well below” its guidance. In a note to investors, Kahyaoglu added that Bombardier had already entered into agreements to sell its regional jet and commercial turboprop businesses and is considering exiting the C Series joint venture with Airbus as costs mount with the increase in production of the commercial jet, since renamed by Airbus as the A220. Business aviation analyst Rolland Vincent also noted that Bombardier has been trying unsuccessfully to unload its train business. “The business jet division; I think that’s the last thing they want to sell,” Vincent told AIN. “It just seems like it’s that part of the business that has good upside potential. But they have to do something, and I think the train business is more difficult to sell.” Bombardier is also sitting on billions of dollars of debt. “They keep refinancing the debt and it’s costing them a small fortune,” Vincent explained.

Likewise, Citi analyst Jonathan Raviv said in a February 4 investor note that Textron’s stock has “been trading at a significant discount for a while, searching for a positive catalyst to make numbers go up. This [acquisition] could be such a catalyst.”

Potential Line-up Fills All Niches

Moreover, analysts said an acquisition of Bombardier’s business jet division would give Textron and its Textron Aviation unit an unrivaled aircraft product lineup, from the entry-level Cessna Citation M2 to Bombardier’s biggest and longest-range business jet, the Global 7500. “This would establish TXT as the single-largest bizjet maker with an end-to-end portfolio,” Raviv wrote. Kahyaoglu estimated the combination would give Textron a 55 percent share of the business jet market based on estimated 2020 deliveries. “The combined Textron/Bombardier would be a big player, maybe 60 percent of the world’s fleet of business jets would be out of one camp,” added Vincent. “But that wouldn’t be 60 percent of production. There’s a lot of those aircraft that are older. So if nothing else, Bombardier might have to get rid of Learjet to some other player, I don’t know.”

What’s also not clear is whether a proposed combination would raise antitrust concerns by regulators, Vincent said.  

Should a deal between Bombardier and Textron come to fruition and one that includes all of Bombardier’s products, Vincent and Raviv think the production of the Learjet 75 and Learjet 75 Liberty would end. “To the extent that BBD’s Lear portfolio is moribund suggests that it could present a Hawker Beechcraft-esque opportunity for TXT by bringing an installed base for eventual new aircraft sales of TXT’s own small-cabin offering,” Raviv wrote. Added Vincent: “Those couple of thousand Learjet aircraft and operators out there would be like Hawker, well taken care of going forward. And as they look for new aircraft, they’d be welcome to step up into the Citation line. So I think that’s where that one goes.”

The only overlap in products between the two manufacturers is the Challenger line and Citation Longitude, Raviv and Vincent said. “Would a new TXT owner phase out the Challenger line and present the Longitude as the successor?” Raviv wrote. “That could be tough from a customer loyalty and branding perspective, especially in a still-competitive market with other [OEMs].” But Vincent doesn’t think the overlap extends beyond the Challenger 350 and Longitude. “The Challenger 650 is a much bigger aircraft than the Longitude so there’s no overlap,” he said. The question is what Textron would do with the highly popular 350 and its recently certified and newest super-midsize Citation. “It’s a shame in a sense, because Textron has spent a lot of money on the Longitude,” Vincent explained. “I would say you just let them both go for a while and let the customer decide which one is their preferred choice,” adding the 350 is a “big, big-volume player.” But business aviation analyst Brian Foley thinks the overlap extends to the 650 as well. And since the 350 is six years old and the 650 "has undergone so many upgrades over time with engines, avionics, and other improvements ... there's really nowhere left to go," Textron would likely shelve the Challenger program. "It's likely Cessna has a product path for its new Longitude, call it the Longitude+, that could conceivably position itself squarely between the CL350 and CL650, essentially eliminating both models," Foley said in a note.

As for the Globals, they would be an obvious fit and the “crown jewel” of a Bombardier-Textron combination, analysts said. “Globals would be a new market for TXT, especially after abandoning two of its larger-cabin plans [Columbus and Hemispere] in the last 15 years,” Raviv said. 

Overall, Textron stands to gain a lot with a Bombardier business jet combination, not only in terms of a full product line but also a bigger foothold in Europe, additional service facilities and expertise in certifying Part 25 aircraft, Vincent said. 

Vincent and Kahyaoglu also noted that the business jet market could use some consolidation; there are seven business aircraft airframers vying for what has been a finite delivery market for a number of years. Analysts say the combination would help thin the crowded field of business aircraft airframers.

“Given that market deliveries have been stagnant around the 650-unit mark, consolidation has always been a possibility,” Kahyaoglu wrote. Compare that with two OEMs for the large jetliner market (Boeing and Airbus), sharing roughly 1,600 units a year, Vincent said. For business jet OEMs, “that’s less than half the volume and 3.5-times the number of players,” he added. “It’s a very disaggregated market.”

While Foley noted such a deal between Bombardier and Textron makes sense—other business jet OEMs such as Gulfstream Aerospace and Dassault Aviation's Falcon line have competing products with the Global series—it also is tenuous. "Textron's financial performance has been stressed lately, and the outlook going forward isn't looking much better," he said. "It's more likely that Textron waits it out until Bombardier feels more heat from its debt load, or in a worst-case scenario, enters bankruptcy and jettisons much of its debt."