Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Bjorn’s Corner: New engine development. Part 4. Propulsive efficiency April 19, 2024
- Boeing unlikely to meet FAA’s 90-day deadline for new safety program April 18, 2024
- Focus on quality not slowing innovation, says GKN April 18, 2024
- Boeing defends 787, 777 against whistleblower charges April 17, 2024
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
Pontifications: Talk about government interference in private industry; book review of United “Flight 232”
- There are many topics on which to comment, n one of which requiring a full Pontification, so today’s column is going to be a bit of a free association.
By Scott Hamilton
August 10, 2015, (c) Leeham Co. Government interference: While right wing Republicans and Tea Party members decry supposed ExIm Bank interference with private industry, there is now a bill in Congress to sell millions of barrels of oil from the USA’s Strategic Oil Reserve in order to raise $15bn.
Unlike the ExIm Bank’s participation in the global capital markets, Congress’s action–if it passes–won’t create jobs. It will compete with jobs and companies trying to sell oil in the global market place. It will help drive prices down.
Once more, the hypocrisy of Congress is glaringly evident.
Bombardier: Pierre Beaudoin should have left Bombardier last February when he relinquished the title of president and CEO to Alain Bellemare instead of assuming the chairman’s title. This is the opinion of a few people with whom I’ve talked just in the last week.
Furthermore, the Beaudoin family needs to step out of the company entirely and give up its voting control (it has 54% of the voting stock) if BBD wants to attract new investors, says one Canadian aerospace analyst who hasn’t written any of this publicly.
“I can’t even see how they’re going to raise money for BT. I can’t imagine European investors would like subordinate shares either. Equity markets won’t be supportive unless the Family gives up control,” this analyst wrote me.
Book review: Flight 232: It was a beautiful day in 1989 when United Airlines Flight 232, a McDonnell Douglas DC-10-10, was at cruise altitude when the No. 2 engine blew up. Shrapnel cut the three hydraulic lines, destroying control except for the Nos. 1 and 3 engines. In a remarkable feat of airmanship, cockpit crew members brought the airplane in for a crash landing at Sioux City (IA). While 110 were killed, 186 survived.
The story is well known. It’s been the subject of several television shows and a made-for-TV movies. Now comes a book entitled simply Flight 232, by Laurence Gonzales, available on-line and in book stores.
Gonzales spent nearly 20 years researching the book. He interviewed the crew, passengers who survived and families of passengers who didn’t. He takes the reader into the cabin before and after the engine exploded and describes what those on board saw and felt during the crash landing, when the plane up-ended, as seen in that famous video we airplane geeks have seen so often.
For me, the most gripping read is what happened in the cockpit after the engine blew right up until landing and as the cockpit was sheared from the fuselage. The cockpit resource management was key to landing the airplane and Capt. Al Haynes’ intuitive use of left and right throttles in the moments immediately after the No. 2 engine exploded saved the airplane from rolling on its back and diving into the ground.
Gonzales weaves the crash investigation in with the stories of passengers, those who survived and those who didn’t. It was unsettling as he walked us through the cabin during the fateful descent and introduced us to passengers who were going to die.
Flight 232 is a gripping read with loads of information not known before.
QUOTE:
“Pierre Beaudoin should have left Bombardier last February when he relinquished the title of president and CEO to Alain Bellemare instead of assuming the chairman’s title. This is the opinion of a few people with whom I’ve talked just in the last week.
END-QUOTE
I don’t know who you were talking to but this is complete and total nonsense. The Beaudoin / Bombardier family have gone from inventing the snowmobile and jet-ski industry (a major accomplishment in itself) to becoming a major player in the Aerospace and Rail sector. Has the family made mistakes along the way? Yes – but obviously their good judgement far outweigh their bad judgement.
BBD stock is depressed right now which is good news for this wealthy family. It means they can buy back more equity in the company that THEY created. The C Series is turning the corner and I would be willing to bet that major orders from major carriers are only weeks or months away. How can it be otherwise? The C Series is the most advanced single isle airliner on the market today. It will offer the BEST passenger experience (with it’s large windows and lower cabin altitude) and to top it off it is the sexiest looking aircraft in it’s segment! We know that BBD will stretch this advanced aircraft so that eventually it will overlap about 75% of Boeing’s and Airbus’s single isle offerings. I don’t know if it will ever come to dominate the single-aisle market but one thing is for sure ….the C Series is going to take a BIG BITE out of Boeing’s and Airbus’s lunch. Bet on it!
Yes, Boeing wasn’t looking to great at the start of the 747, but it paid off over 30 years. Good thing Bombardier built a clean sheet design. Otherwise, headless corporate controlled design might have led to a rehash of the CRJ, which would have been short lived like the A340 or 767 makeover.
Really ? This current project is the second attempt and earlier model was launched in 2004 and then put on hold in 2006. This sort of plane has been on the drawing boards of Canadair for some time.
The reality is the success of the Embraer has led to the new clean sheet design being ( finally ) launched. AS well delaying the earlier design allowed the current model to use the GTF from Pratt & Whitney- which really isnt ready for prime time with its continuing (small?) problems
Even if you have good ideas , we need a market and an innovative product. In the latter case, one must ask if the technology is available. The GTF was not ready. One can even ask if we were lucky that Pierre Beaudoin knew what was that other French Canadian Louis Chenevert , CEO of UTC, former boss of P & W, to accept to turn this engineering project (GTF) into commercial reality . The E- Jet ? How is it that after a dozen years, Embraer has to return to the drawing board to review everything ?
I have no doubt that the CSeries has a great future in front of it. I’m less sure about Bombardier in its current constitution. A company is bankrupt if it runs out of cash. It’s the same whether it’s the Lehman Brothers or the local mom and pop store. I think there’s a high risk of that happening at Bombardier, unless the management can convince investors with deep pockets to sign up on the strength of the CSeries’ prospects. Bombardier just doesn’t have the resources or cash cows that prop up Airbus and Boeing when things go a bit wrong.
Market Cap of Bombardier is $3.58 bill
Warren Buffett buys Precision Cast Parts, a major supplier to aviation industry for $32 bill.
The difference is due to the poor long term management of the Beaudoins
Laurent Beaudoin is an accountant. How many accountants appears in the aviation history books? How many are able to get out a pocket knife and carve a piece of wood to release a Global Express, a CRJ and CSeries ? Let them also learn aircraft manufacturing business – 25 years in this sector is still young. Precision Cast Parts has been operating for over 60 years ….
“The Family” needs to get out of their own way to permit Bombardier in general, and especially the C Series, to soar into prosperity. We personally hold 30,000 shares (about USD48,000). Maybe we Yanks ought to create an “International Incident” to ‘persuade’ “The Family” to ‘exit stage left’ [LOL]!
Without this capital structure [ multiple voting rights ] , Bombardier could never make bold investments that have made a great business of the aviation sector . Anyway, we must ask why this type of structure is attractive right now in Canada and the United States! Look at the companies that innovate the new technologies with more classes of shares with unequal voting rights as Facebook, Google, Shopify , Stingray , etc. Again, do we give value to a certain ideology of the financial world who thinks that flow and not industrial project ?
Having a lopsided capital structure doesnt make it the way to innovation. Referring to companies that started from nothing is one thing but Bombardier got its aviation assets cheap from those who it did innovate.
Gates Learjet, doesnt have any Bombardier family background ? Nor does De Havilland or Canadair.
You cant have it both ways, the means where one company picked up the pieces from earlier innovators shouldnt mean they themselves are forever glued to the conglomerate they assembled.
There may already be at least one casualty of the opposition of Congress towards the Exim Bank when Boeing lost a large satellite contract from ABS, a customer based in Bermuda, because of uncertainties over export financing.
This financial analyst forget that a Canadian company that declares tax losses can recover all the tax paid on profits in previous years. There is considerable political issues on consolidation of Western companies of railway equipment, if the railways are strategic insfrastructures ( under supervision of the military … ), several governments have interest in having a world-class manufacturer that would not Chinese: we are talking about geostrategy and not only finance here… and what think that this financial analyst about hired Jim Vounassis to revamp business processes in the supply chain and thus respond to the vision of Andre Bellemare to the effect that there is still a lot of margin for Bombardier to reduce costs and thus increase cash flow margins? And then, finally, the imminent launch of the CS500, not he relies on his radar of financial flows coming ?
When Margaret Tatcher decided to privatize Shorts in 1989 there were only two serious bidders. One of them, a joint venture comprising General Electric and Fokker, wanted to acquire Shorts in order to break it up to sell off the best parts. The other bidder was Bombardier who wanted to integrate the company in their development plans. Thanks to a junior minister by the name of John Major (future Prime Minister) BBD won the bet. Just look at Bombardier Belfast today and imagine what would have happened if the UK government had sold it to the other consortium. It would no longer exist today. That would be the fate of Bombardier themselves if corporate raiders took a hold of it. They are the ideal target: undervalue stock and high-value business units. Bombardier would be quickly dismantled and sold piece by piece for huge profits. But as long as the ‘Beaudier’ family will control the company it won’t happen and Bombardier will continue its bold adventure in commercial aviation.
The reason for selling Shorts was so that the UK taxpayer would longer have to pay for keeping the business running.
Under Bombardier nothing has changed as the taxpayer has to pay Bombardier to keep it going.
Happens in Ontario, Quebec, Mexico as well as Northern Ireland. Bombardier has created very little without the help of the taxpayer
I think that the BBD comment is a rare ‘faux-pas’ from Leeham, hope this is a genuine misread and that it will soon be forgotten. 😉
It would be nice than the next Pontification from Leeham should be: Talk about CS500 interference with financial point of view in private discussion with us; public premises to the articulation of a forthcoming book on against the unified views of financial analysts 🙂 !
@Captain: I’m not sure what you have said: CS500 “interference” ?? “Public premises to the articulation of a forthcoming book, etc” ??
@CBL: Huh? I don’t know what you just said, either.
You are smarter than this, come on 🙂
1) To make a wink to your title ; 2 ) to make a wink to the word ” pontification ” in the sense of expressing a view that a dogmatic perspective ; 3) to refer to the reflection of @CBL to the effect that you gave the floor to a financial analyst whose purpose reflects a very narrow view of the business world , and that choice (doubtful ?) is not in your usual way; 4) if you give us the floor on a very «subjective» topic as the realization or not the CS500 , your audience could advance arguments that ” interfere ” with the financial logic analysts; 5) So, our words could not only rely on the comments of financial analysts (only interested in historical facts, quantitative , etc.); but could reflect expectations that find relevant equivalent in one day when a book will tell this crazy story of CSeries …It is necessary that the pontification serve some purpose !
Scott: You wrote congress when the current idiocy on EI Bank as well as the bizarre oil selling thing is purely a Republican insanity.
@TransWorld Democrats have joined Republicans on the Strategic Oil Reserve sale proposal in both the House and the Senate, hence “Congress.”
Scott: I hate it when I get it wrong, but wrong I am, my apologies.
I am sure the Demos did not start it but its stupidity in its purest form.
“Leeham’s yellow-to-red risk assessment.” I like that. You will find that line in the following article.
http://www.theglobeandmail.com/globe-investor/investment-ideas/be-wary-of-a-value-trap-bombardiers-a-big-question-mark/article25912964/
A very valid pontification – and unlike some here I appreciate the use of a ‘pontification’ on a topic in which speculation exceeds information. And that (as frequently reported by financial reports here in Canada) is precisely the problem. There is uncertainty as the competence of senior, and especially family management (which may be/probably is unfair) and especially on the investment prospects bearing in mind the dual share structure of the company. At various times approaches have been made to divest the company of this structure but of course its perceived reputation as the ‘crown jewel of innovation’ in the very independent Province of Quebec has ended all actions.
What utterly baffles me is that this confusion is largely lacking in the larger and more important (yes I know that at Leeham planes are all important!) part of the business – railway vehicle and signal system construction and support. Its business is doing well, construction sites are carefully sited throughout their market so countering nationalistic trends, and its products are considered to be world-leading from high speed trains in China to workaday suburban trains in London.
There are problems – peculiarly enough most acute in its own country, but the public picture of the two divisions remains unsettlingly different.
“What utterly baffles me is that this confusion is largely lacking in the larger and more important part of the business – railway vehicle and signal system construction and support.”
What baffles me is that you would say that Transportation is more important than Aerospace; which is clearly not the case. They are about equivalent, and if anything the Aerospace division contributes slightly more to the balance sheet. And the C Series alone has the potential in the coming years to exceed the total turnaround of the Transportation division. The aerospace division remains ahead of the Transportation division despite the fact that its two flagship products, the C Series and Global 7000/8000, have not yet started to generate any revenue. Bombardier may actually get rid of the Transportation division altogether because the estimated value of that division happens to be more or less equivalent to Bombardier’s total indebtedness. Many observers would say that they would be foolish to do so, and they would probably be right. But in my opinion BBD has no other alternatives at the moment. Imagine how much stronger they would become if they emerged debt free practically overnight, with all the cash they need to go ahead with the development of various products that are presently on hold due to the lack of funds. And to help them go through bad cycles in aerospace later on they could always develop another sector with a different business cycle, like Transportation is doing for them today.
Because quite simply – the rail transportation element is considered to be more stable, because its products in ALL ranges have a well-established history of both innovation and reliability and because it is an established competitor in all product lines. While the C series is a superb product it presently lacks the credibility which is characteristic of the rail products.
I am not for a moment critiquing in this respect or minimizing the importance of the Bombardier aviation element – just reiterating that it cannot be judged or evaluated in isolation.
“… it cannot be judged or evaluated in isolation.”
I would tend to agree with you on that point David. But that is precisely the reason why it would be extremely dangerous to open the stock to outside investors that could take control of the company. The first thing they would want to do is to ‘create value’. So naturally they would start to sell off piece by piece the various elements of the Aerospace division: Engineering Services, Commercial Aircraft and Business Aircraft. And probably in that particular order. So in a relatively short period of time there would be nothing left of the Aerospace division. And the corporate raiders would be laughing all the way to the bank. The only reason this has never happened is because the ‘Beaudier’ family controls the company.
The crew was incredibly smart and cool, fortuitously there was an extra pilot in the flight deck to help manipulate controls.
ATC had to get up to speed on the situation, to recognize that the airplane would be lucky to reach the airport surface, never mind a particular runway.
Unfortunately the airplane’s flight path included a long-period attitude oscillation that was at a bad point when they arrived at a runway, so the airplane broke up.
What the crew proved possible has been included in training, probably saved the crew of an A300 freighter that was hit by a missile taking off from Baghdad – they brought the airplane back and survived.
Many people in the industry work hard to maintain and improve safety, unlike some managers.