Bombardier ‘transformation initiative’ goes after costs across the enterprise, supply chain

June 8, 2015, c. Leeham Co. Bombardier suppliers, already squeezed by Airbus and Boeing to cut costs and prices,

Alain Bellemare, CEO of Bombardier.

will soon face a new effort from Bombardier to do the same.

The new chief executive officer, Alain Bellemare, last week announced a “transformation initiative,” of which going to the supply chain is but one part for cut costs across the enterprise.

Bellemare, who was named CEO in February, knows something about cost cutting. He was an executive at Pratt & Whitney, a unit of United Technologies, before coming to BBD, and has been on the giving and receiving end of demands to cut costs.

Bellemare was named with the charge to restructure Bombardier, after billions of dollars in losses, cost over-runs and delays in corporate and commercial aircraft programs, the highest profile of which is the CSeries. The CSeries is the bet-the-company leap into mainline jet aircraft which, at the lower end, compete directly with Airbus and Boeing.

In an interview with Bellemare at the International Air Transport Assn. Annual General Meeting Monday in Miami, Bellemare covered a wide range of subject about how BBD will be remade.


Corporate restructuring

“Bombardier is a $20bn business that has been under pressure from the large programs that are running in parallel. We had the CSeries, the Lear 85 and the Global 7000/8000. That was a lot of demand for our organization at the same time,” Bellemare said.

“The first thing we did was to bring liquidity to bridge these new programs to enter into service. We got $3bn, a billion in equity and $2bn in debt. The second thing was to do some deep dives in the programs. That’s where the largest users of cash is happening. We are focused on program execution on the CSeries and program execution on the 7000/8000. In terms of ‘what’s next,’ that is fundamental.”

(The Lear 85 program was suspended by former CEO Pierre Beaudoin.)

“The next thing was to announce the IPO of the train business.” It creates value of the business and will generate money for Bombardier and “it is already helping us with potential partners in terms of consolidation.” Bombardier will retain a majority share of this business unit.

“The other thing we are doing to help is we are launching a ‘transformation initiative’ to help us improve cash and earnings performance,” Bellemare said. “We are in a very early stage. It will cut across all business units. The name of the game here is to improve our operating performance. That’s how in the long run you make your business stronger.”

Bellemare said few details of the initiative have been announced because it was launched only a few weeks ago, but broadly will include review of all aspects of cost spending, and is “very similar to what I’ve done before while I was at UTC. It will be very similar to what other companies do when they go through major transformation processes.

“You look at all your costs, you look at all your opportunities, you look at cap-ex (capital expenditures). It’s super-comprehensive. You look at the supply chain across the business.”

Airbus and Boeing have famously gone through their periods of cutting supply chain costs. Media reported just last week that Airbus told major supplier GKN to cut costs or face losing business. Boeing’s Partnering for Success’ goal is to shave 10%-25% of supplier costs, depending on the sector, and has prompted howls of protest in some cases and in others, a change of suppliers. Bellemare well knows the latter: UTC first lost 777 landing gear business to a Canadian company, Héroux-Devtek, and later the entire company was placed on Boeing’s “no-fly” list of suppliers until a major cost-cutting agreement was reached.

“We’ve got to be aggressive” in cutting supplier costs, Bellemare said. “We are competing with everyone, so we have got to manage our costs in a responsible way to really create value for our customers and for our shareholders. Having said that, this initiative is targeting not only the supply chain. Clearly we expect our partners and suppliers to be a part of this.

“The partnership with suppliers is very critical, but it goes way beyond that…. We want to go to best practices.”

Price wars

Bombardier has faced difficulties in selling the CSeries because of aggressive pricing in the past by Airbus. Although the market has largely moved beyond the A319, even the re-engined version, favoring instead the larger A320, Airbus COO-Customers John Leahy vowed to beat down Bombardier in 2010 when we said Airbus would not make the same mistake with BBD that Boeing made with Airbus, and ignore the company.

Boeing largely ignores the CSeries, although Boeing won the competition for Monarch Airlines between the CS300 and the 737 MAX 8, a larger aircraft.

Bellemare waves away Leahy’s statement as being five years ago. So does Henri Coupron, the outside consultant helping Bellemare remake Bombardier. Coupron has special insight: he was an executive with Airbus for many years and knows Leahy well.

Price wars, Bellemare says, “are part of the game.” But he downplays the mano-a-mano competition between Bombardier and Airbus and Boeing. It’s an old perception, Bellemare claims.

“If you look at what has happened over the past few years, you can see the market has shifted from 319/320 to 320/321. The market has shifted for Airbus and Boeing. It has migrated upward. This is opening up the 100-150 seat segment, where the CSeries is the best fit,” he says. “There is nothing else like that. There is no other aircraft that can bring so much value to airlines in that class. There are about 300 aircraft a year in [the 100-150 seat] segment. When you look at…Airbus and Boeing, you can see they are not selling much.”

“Cutting aircraft price is not a sustainable way to run your business,” Coupron added. “[Airbus] are creating more pressure on the neo pricing [by cutting CEO pricing]. The CEO price and the NEO price are all inter-connected.”

“The market has shifted a lot” since those days of under-pricing Bombardier, Bellemare said. “Nobody wants to be in business to lose money.”

Leahy made the declaration with the fear of Bombardier moving up to a larger CSeries that would compete directly with the A320. The airplane is commonly called the CS500. Bellemare put to rest that this version could come any time soon.

“Right now there is no plan,” Bellemare said. “Right now the performance of the CS100 is very good and the performance of the CS300 is great. When you come into the market, normally you have some catching up to do. We’re going to hit our target out of the gate. The question our customers are asking us is what are you going to do next? We’ve done some studies as any responsible company would do. Let me be clear, though, I want to be super-clear: right now, especially given where we’ve been at Bombardier, the focus is on delivering the CS100 and delivering the CS300. In time then…we will see what we do.

Q400 and CRJ

Sales of the Q400 and CRJ have languished in recent years. ATR has about 90% of the turbo prop backlog and Embraer overwhelms the CRJ in sales figures. Bellemare is blunt about why.

“Let me go straight to the point on that. We’ve lost focus on our commercial aviation business. The organization was overwhelmed with the CSeries. There was very little thought and attention given to our other platforms,” he said. “The Q400 is the best turbo prop out there. I think sometimes it is too much airplane from a pricing and an operating cost standpoint. The team is looking at right now, what do we do next with the Q400? We’re looking at different options.”

Bellemare said the same reevaluation is occurring with the CRJ. “Embraer did an amazing job with the E-190. They came to the market very well. [But] the CRJ-900 beats the E-190 [on operating costs] any day, every day. We lost our focus on the CRJ.”

Bellemare said Bombardier is “absolutely not” going to shut down the CRJ line (nor the Q400 line).

Customer skyline quality

The customer skyline quality has long come under criticism, are we’re published our assessment in a green-yellow-red chart citing such dicey customers, such a those in Russia, the Middle East, start-ups and others, where the solidity may be in doubt. Bellemare takes the glass-is-half-full approach.

“We have 250 aircraft on order. We have what we need to get the program going. We feel good about where we are. We have companies like Swiss in our skyline,” he said. Swiss comes with the backing of Lufthansa Technik (Swiss is part of the LH Group).

Coupron interjected that the initial order book for the Boeing 787 was a mere 54: 50 from ANA and four from Paramount Airlines, a start-up carrier that failed to proceed.

39 Comments on “Bombardier ‘transformation initiative’ goes after costs across the enterprise, supply chain

  1. Hello Scott,

    How much do you think the CS500 will cost? We are discussing this issue on this blog. Some comentators think that it will only cost 250millions. I personally think that it will cost much more considering R&D and earlier production losses. It seems that BBD still doesn’t know if the CS500 will need a new wing or not.

    • I would think that it is safe to assume that much(if not all) of the R & D work to design the CS500 has been done already. All that is left to do is to build a couple FTVs and certify them. $250 mil seems realistic.

      • You are only talking about building a couple of FTVs and certification cost but you also need to consider other costs such as early production losses. Also, the CS500 MAY need a new wing which will be very expensive.

        Currently, there are three engine rating 19/21/24 000lb. A new rating with a thrust of 26-27 000lb will not be a bad idea for a CS500. You also need to think about systems (electric, hydraulic, etc.) and integration.

        • Many have commented on how big the wing is already. I think the wing was designed with the CS500/CS700 in mind. I think the thrust of the current engine is over 25,000lbs now with the software upgrade. I am not sure what you mean about production losses. The CS500 will be built on the existing line. It is merely adding two plugs to add 4 – 6 rows of seats.

          • “Mr. Cromer indicated Bombardier needs to get through testing the first two models to determine if there is an opportunity for a CS500 that might use the same wings”

            http://www.wsj.com/articles/bombardier-weighs-third-cseries-jet-model-1432239757

            So, it was officially admitted that it was not sure if the current wing design is ok for the CS500.

            Obviously, the wing was designed for the CS300 but this doesn’t mean that Bombardier can use the same wing for the CS500.

          • “It is merely adding two plugs to add 4 – 6 rows of seats.”

            You also need to consider systems and as I say before, the CS500 MAY need a new wing which will significantly affect the production cost of the CS500.

            Stretching an aircraft is not that simple and not that cheap otherwise Bombardier would have already launch a CS500.

        • The CS300 has a very low wing loading (118 lb sq/ft) compare to Airbus A321 (155 lb sq/ft). The A320 share the same wing as the A321 with flaps surface different on the latter. If the Bomber were to decide to build the CS500 they could decide to go like Airbus, keep the same wing with very little change, this would make the CS500 with a MTOW of 187000 lb! and more powerful engines in the range of 27-30 k of trust to keep performance, this example is a stretch way too far to say the least. The most powerful GTF engine with a 72 inch diameter is the 23300 lb that powers the CS300. This CS500 would need a 81 inch diameter(ground clearance?) like the ones on the A320neo or Irkut MC-21. If Bombardier does choose to stretch the CS300 with the the same increment(110-135 seats) this would end up at around 160 000 lb for a 185 seat aircraft but range taking a hit, much like the E195-E2 at 2000 nautical mile vs th E190-E2(2800 nm). Many options but which one is the best and will it ever come reality…

          • What you suggest will be relatively expensive, new high-lift devices, new engines, new nacelles, new pylons, new hydraulic systems, etc. I insist on the fact that a strech is not that simple when you consiser system and integration.

          • Correction on the ” If Bombardier does choose to stretch the CS300 with the the same increment(110-135 seats) this would end up at around 160 000 lb for a 160 seats(185 in high density).”

      • Low cost solution at 160 000 lb, stretch the CS300 by 25 seats to 160(high density 185 seats) keeping the same engines and wing (same power to weight ratio as the A319Neo). Range 2000-2400 nautical miles and take off performance well… like the competition 7000-7500 feet. Very light and low cost.

    • @Jacques: Haven’t thought about the CS500 cost.

  2. AB: “Bombardier is a $20bn business that has been under pressure from the large programs that are running in parallel. We had the CSeries, the Lear 85 and the Global 7000/8000. That was a lot of demand for our organization at the same time,” Bellemare said.

    1- The Global 7000/8000 were an absolute necessity in order to remain competitive with Gulfstream as the Globals contribute massively to the balance sheet.

    2- The CSeries was equally necessary, but for different and less obvious reasons. On the commercial side Bombardier is competing with Embraer. The latter has a very strong product with the ERJ and BBD had to respond one way or another. They chose to move upwards where Embraer could not afford to go and where A&B were not interested to go. It was a given for Bombardier to fill the whole created by the demise of Douglas (DC-9).

    3- The Learjet product line was not doing well and BBD decided to launch the Lear 85, hoping it would be a runaway success. That was an unbelievably bad decision because it was made at a time when the limited resources of the company were already engaged in the CSeries and when Gulfstream was already filling its order book with the highly successful G650. Bombardier was late launching the new Globals and much too early on the Lear 85. The latter would have made little difference in BBD’s portfolio but it had a nearly fatal impact on the finances of the company.

    This brings us to the CRJ and Q400.

    AB: “Let me go straight to the point on that. We’ve lost focus on our commercial aviation business. The organization was overwhelmed with the CSeries.

    That is avery good point. Some of the money and energy that were wasted on the Lear 85 could have been put to better use on developing the CRJ and Q400.

    Leeham: Boeing largely ignores the CSeries.

    Frankly I had not paid attention to this. Perhaps they were (are) too busy with more urgent and bigger issues.

    Leeham: John Leahy vowed to beat down Bombardier in 2010. Bellemare waves away Leahy’s statement as being five years ago. He downplays the mano-a-mano competition between Bombardier and Airbus and Boeing. It’s an old perception, Bellemare claims.

    It might be an old perception but that does not make it any less real.

    Leeham: “Cutting aircraft price is not a sustainable way to run your business,” Coupron added.

    Airbus can afford this, Bombardier cannot. Neither Boeing for that matter.

    Leeham: The airplane is commonly called the CS500. Bellemare put to rest that this version could come any time soon. “Right now there is no plan,” Bellemare said. We’ve done some studies as any responsible company would do. Let me be clear, though…

    No one believes that, starting with Alain Bellemare himself. That statement was made to put John Leahy to sleep. But JL is not so easily fooled.

    Leeham: The customer skyline quality has long come under criticism.
    AB: “We have 250 aircraft on order. We have what we need to get the program going. We feel good about where we are.

    Actually I know very few people who feel good about that. Swiss is great but Bombardier needs at least two more high profile customers to give credibility and momentum to the programme.

    Speaking of credibility, nothing beats hard data. Next week we should find out what the performances of the CS100 and CS300 truly are. When the CSeries was launched at Farnborough in 2008 we were promised at least 15% better economics than the competition. But the latter has done considerable catch-up in recent years and thanks to the delays BBD gave it plenty of time to do so. This means that the performances had better be much better than anticipated if the CSeries is to remain in the running. If we are to believe the rumours they are. The question is by how much.

    Better performances than anticipated on the CS100/300 could have a positive impact on the development of the CS500. The latter would then be able to use the same wing and systems. It would save time and money. And those are the two commodities that BBD needs most right now.

    • Its going to get harder and harder for Airbus to block competition from every one entering the market with a better product, like the Cseries, the only way is by predatory pricing which doesn’t make Mr Leahy look good, specially when bragging about it. If a competitor is using such tactics, then I agree Bombardier needs to launch the CS500, the sooner the better.

      • Airbus can afford to reduce price. The development cost of the A320NEO is only about 1.5 billions and it is possible to expect 5000-6000 orders, if not more, before the introduction of a clean sheet successor. Moreover, the production rate is significantly higher for Airbus and the production losses will not be high since the A320CEO is already very profitable.

        Bombardier can’t afford a pricing war with either Boeing or Airbus. 5.4 billions development cost means 5.4 millions profit per aircraft to beak-even with 1000 units without considering early production losses. With production losses, the figure is probably around 7-8 millions per airframe. This is considerable considering the market value of the CS100/CS300 of about 30/35 millions.

      • I still think that Bombardier needs to cut cost before launching another program. BBD simply can’t afford it. The CSeries is consuming a lot of cash and will consume a lot of cash for one or two more years. The Global 7000/8000 is consuming a lot of cash and will consume a lot of cash for two or three more years.

        Because the CSeries is a new airframe with new technologies, it will be very expensive to produce at the beginning especially at low production rate. The current backlog can’t justify a production rate of 10 or 20 units/month.

  3. @ Trooper

    “The CS500 will be built on the existing line.”

    Initially yes, because the order book is not vey big right now. But if the CS500 were to become very successful it would have to move to its own line. But for the moment there is no dedicated assembly hall for any variant of the CSeries. Like I said earlier the order book is thin and Bombardier is trying to save as much cash as possible right now. So only one quater (1/4) of what has been planned has already been built.

    My current understanding is that the new CSeries building that has been recently inaugurated is only a pre-assembly hall. If I said one quarter it is because they have planned for two lines, each one with a separate pre-assembly and movable line. So that makes it 2 X 2 = 4. Right now only half of the first assembly line has been built. To be complete a movable line would have to be added to the pre-assembly hall, in a separate building. So for the time being the CS100 and CS300 are fully assembled in the brand new pre-assembly hall. The current production pace justifies this.

    One full line is necessary to build ten aircraft a month and two full lines will be required to build the maximum that is presently anticipated: 20 aircraft a month. The latter represents 220 aircraft a year and Bellemare recently mentioned to Aviation Week that there was a market for 300 CSeries a year. Personally I have always been very optimistic about the CSeries but AB beats me.

    As far as I can see in the future, and if everything works as planned, the CS100 and CS300 will probably be built on the same line while the CS500 will be built on a separate line. But it will have to be launched first…

    • The bad new is that it seems that Bombardier stopped talking about a production rate of 20 units/month since a few years. In several public declarations, the announced production rate is 10 units/month.

      The current backlog is relatively tinny and there are several weak orders.

      PS: I don’t think that Bombardier stops aircraft production for one month/year like Airbus so 20 units/month is 240 units/year.

      • “I don’t think that Bombardier stops aircraft production for one month/year like Airbus so 20 units/month is 240 units/year.”

        They have a two-week Stand-Down in the summer plus another two weeks at Christmas.

          • John Ostrower at Flight Global, along with Addison Schonland at Air Insight and Scott Hamilton at Leeham News, were among the first ones to make the CSeries better known to the rest of the world. I sure miss the time when John had a blog on FG.

            That being said, I agree with you as to the rate of production. Gary Scott was indeed aiming for one aircraft per day at a maximum production rate. That is five aircraft a week and 240 a year (5 X 48 = 240) or 22/month.

      • “The bad new is that it seems that Bombardier stopped talking about a production rate of 20 units/month since a few years.”

        They stopped talking about a rate of 20/month when Gary Scott left the company a few years ago (2011). Gary had previously been at Boeing as Vice President/General Manager on the 737 programme and he could see that the CSeries had a similar potential.

        • I am sure the plans can change once they announce the CS500 with an 100 plane launch order.

          • Please don’t tell anyone, but I secretly believe this could be the case. 🙂

    • This a much better strategy than the previous management that hinted at massive orders that never appeared. On the other hand they are hinting at increased performance which will lead to orders so there is that.

      http://www.flightglobal.com/news/articles/iata-bombardier-to-unveil-improved-cseries-performance-413239/

      Bombardier plans to announce improved performance specifications for the CSeries family at the Paris air show, in a move that could boost sales for the airframer that has recently gone through a management shake-up.

      “We will be updating our performance of the aircraft at the airshow,” says Fred Cromer, president of Bombardier Commercial Aircraft, who stepped into his role in April. “We are updating the brochure [of the CSeries].”

      “We will be confirming or adjusting the performance of the airplane as well as what we’ve learnt in terms of fuel burn which will affect the range.”

      Cromer says he does not want to “steal the thunder” of what the airframer plans to announce at Paris, but adds that Bombardier is “very encouraged” by what it has seen in the CSeries flight test programme to update the brochure.

      The improved performance metrics will apply to both the CS100 and CS300, says Cromer.

      Cromer hopes that the improved performance and having the CSeries on display at the show will draw more sales. “The confidence level that we have… combined with those two milestones [certification and entry into service] coming up creates a lot of momentum and enthusiasm. We have to continue to push that.”

    • I don’t think that a CS400 will be a good ideal, the strech is not large enough to worth the investment.

      • I was going to say the same thing; 150 seats is only 15 seats more than what the CS300 is already offering in the sigle-class configuration. Definitely not worth the trouble and expense.

        There is a 25 seat difference between the CS100 and CS300, and we expect another 25 or 30 for the CS500. The CS300 represents a 22% (25/110) improvement over the CS100. To retain the same ratio over the CS300, the CS500 would need to offer 165 seats (30/135). That would make it very competitive with the A320 and 737. The present battle between two players (A&B) could turn into a battle between three players (ABB) when Bombardier will officially launch the CS500, perhaps later this year.

        • The CS300 seats 135 in one class standard but can also seat 150 in a one class dense configuration and also will be certified for a 160 extra capacity configuration. They have already conducted the evacuation trials using the optional second evacuation door and extra thin seats.

          • Yes, but I am not sure that is what Southwest would want.

  4. Leeham: Boeing largely ignores the CSeries, although Boeing won the competition for Monarch Airlines between the CS300 and the 737 MAX 8, a larger aircraft.

    Scott, could we say the same thing for Air Canada? The latter appeared to be highly interested in acquiring the CSeries until Boeing jumped in and made AC an offer they couldn’t refuse. At least that is the way I perceived the developments at the time.

  5. A transformation initiative ? From a purely strategic point of view , would it not be more decisive for Bombardier to occupy another niche market for 240 seats ( MOM) ? That is of interest to a CS1000 now ? Like Boeing, to replace the 757/767 ? Alain Bellemare could know if P & W is able to provide the engine discussed in the article below:

    http://www.flightglobal.com/news/articles/analysis-how-will-boeing-fill-a-757-sized-hole-412719/

    Imagine for a second the head of Leary trying to stop blowing his trumpet and the 321neoLR to realize that he is taken shears …

    And yes. Bombardier should also think about what CS1000 along its highly anticipated CS500 . It would be their baptism to tame the large aircraft segment …

  6. So how many seats should the CS500 be? Should the match the A320 or add 10-15 extra seats. I think they should add. Why go head to head with Airbus when you can offer 10-15 extra seats at a lower trip cost the then 320? Also I suspect they can increase thrust with the current engine to make the CS500 work, after all they want to keep as much commonality as possible. Airbus had to provision for the A321, that is why the A319 has such a massive engine on it. A CS500 will have a MTOW close to the A319, so 2 24K engine will probably do a nice job.

    • The most important consideration here is the wing. Ideally Bombardier would want to use the same wing on the CS500 as the one for the CS100/300. That limits the number of seats. Twenty more seats sounds reasonable. Twenty five is perhaps a little ambitious and could compromise the range. Anything more than 20 or 25 seats would probably necessitate to develop a new wing that can take more weight and more fuel

      Alain Bellemare mentioned recently that they were looking at a new variant that could take a maximum of 180 seats. That is 20 seats more than the CS300 high density option. If we extrapolate this to the standard two-class configuration it means the 130 seats for the CS300 + 20 additional seats for the CS500 = 150 seats. Or in a single-class configuration, the 135 seats of the CS300 + 20 more seats for the CS500 = 155 seats. Beyond that we are talking about the CS700/900 variants. But we are not there yet.

      Some people say that if Bombardier is able to use the same wing it would cost approximately $250million to develop the CS500. Others say it would cost as much as $1 billion. When Bombardier formally launches it we will find out how much it is going to cost. But there is no question that the CS500 is a necessity if Bombardier wants to breach the current duopoly.

      • From Aviation Week:

        Dole also said that airlines have voiced an interest in a further stretch, preliminarily dubbed the CS500. If launched, the aircraft would likely accommodate an additional 20-30 passengers depending on layout. According to industry sources, jigs and tools in the final assembly line are already large enough for a further stretch. But Dole said that “we are very focused right now on the CS100 and CS300.” On the other hand “we are always thinking about opportunities to develop the family, and airlines more and more expect a family of aircraft.”

        • This means we can potentially add another ten seats to all my numbers. This would put the CS500 dangerously close to the A320/737. I can only imagine the psychological impact of a CS500 offered as a 160 seat aircraft in a standard two-class configuration. No wonder Airbus spent so much effort (and money) to block the CSeries.

          • I like the fact that the jigs and tools in the final assembly line are already large enough for the CS500. I suspect BBD is just waiting for a launch customer before doing the formal launch announcement.

          • I read somewhere that they were actually waiting to have an accumulated order book of at least 100 aircraft from one or more customers before committing to the CS500. As the new numbers demonstrate clearly, there is no question that the CS500 was designed into the CS300. As for the rigs being ready to accept a stretch that is is quite interesting. When we add all this together it means Bombardier will soon be ready to make an entry into the major leagues.

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