By Bjorn Fehrm

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Introduction

May 2, 2016, © Leeham Co: Bombardier announced a game-changing order from Delta Air Lines for its C Series program last week. In the midst of the celebration and well wishing came the news that this order, one to Air Canada and seven firmed up options to airBaltic, would result in a charge of $500m next quarter.

Figure 1. C Series in the livery from Delta Air Lines. Source: Bombardier.

One analyst wrote in the wake of the Delta deal that “I understand that to get Delta and Air Canada you need to give attractive pricing, but that it would cost Bombardier $500m is a bit stiff.”

The comment shows that at least this analyst had no idea about the realities of aircraft programs financials. The announced onerous loss is nothing special; it is business as usual.

Summary

• Bombardier's accounting is according to International Financial Reporting Standards (IFRS) rules. These say that one must announce the results of a contract on the company’s financials at the time of contract closure.
• Consequently, BBD informed in the 1Q2016 report that: "In conjunction with the closing of these firm purchase agreements, we expect to record an onerous contract provision of approximately $500 million as a special item in the second quarter of 2016."
• Note that it says "provision" and not loss. Further, the provision will have no effect on 2016 profits or cash flow. This is a non-cash charge.
• In fact, the $500m provision is nothing special; it's part of business as usual. We explain why.