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