World's third-biggest civil aircraft maker may have to sell assets

Aircraft to trains maker Bombardier snapped up some of the most venerable names in aviation history as they fell on hard times. Since 1986, it has bought Canadair, De Havilland, Belfast-based Short Brothers and Learjet at knockdown - and sometimes government-subsidised - prices.

But now it is Bombardier's turn to face hard times. The world's third-biggest civil aircraft maker this month slashed its profit forecast for its fiscal year just ended by about half, and warned of possible heavy write-downs when it unveils its full-year results on April 3rd.

The next day it axed 3,000 jobs, or 10 per cent of its aerospace workforce, on the heels of deep job cuts last year.

The company employs more than 6,000 in the North, and some 1,200 jobs at its Shorts plant in Belfast are expected to go in the latest round of cuts.

Analysts are warning that the Montreal-based company must raise substantial amounts of cash to shore up its balance sheet and stop its debt falling to junk status. Last week ratings agency Standard & Poor's (S&P) cut Bombardier's ratings two notches to just above "junk" level.

It is a tough challenge for Mr Paul Tellier, who took over as chief executive in January after the unceremonious ousting of predecessor Mr Robert Brown.

Once Canada's most senior civil servant, and the man credited with turning Canadian National Railway from a loss-making state enterprise into a North American industry leader, Mr Tellier has a no-nonsense reputation.

"Tellier is a roll-up-the-sleeves kind of a guy, a cost cutter, and very disciplined," says Mr Karl Moore, professor of management at Montreal's McGill University.

Mr Tellier has given few clues about what went wrong in the fourth quarter.

Although the problems are concentrated in the aerospace sector, which accounted for some 45 per cent of revenues in the nine months to the end of October, they may extend beyond it.

"All of our sectors have got their challenges in the difficult economic environment we are facing," said spokeswoman Ms Dominique Dionne.

The high-margin corporate jet business was, until recently, the mainstay of Bombardier's aircraft business, accounting for twice as many deliveries as regional jets.

However, in the wake of the September 11th terrorist attacks, Bombardier appears to have overestimated business jet demand, believing the desire for safe and efficient executive travel would help fuel sales.

Regional jet deliveries rose from 131 to 140 in the first nine months of this year, as airlines continued to buy smaller, more efficient aircraft. But business jet deliveries fell from 111 aircraft to 66.

The company is hoping that the Irish Government will opt for one of its models to replace its aging Gulfstream.

Further bankruptcies in the crisis-stricken US airline industry could have a knock-on effect on regional aircraft deliveries, S&P warned.

"I think the bulk of the fourth-quarter problems relate to business jets," says Mr Cameron Doerksen, aviation analyst at investment bank Dlouhy Merchant.

"But in regional jets too, it's likely margins were not as high as had been hoped for."

Last week, Bombardier cut its full-year free cashflow estimate from 1.3 billion Canadian dollars (€720 million) to C$800 million, leaving a substantial hole in its financing plans.

It has about C$1.5 billion in bank credit lines that mature this year. Gross debt stood at C$5.7 billion at the end of the third quarter, or almost 55 per cent of total capital, according to Fitch Ratings.

The company must push its debt-to-capital ratio to 50 per cent by the end of April, according to agreements with lenders.

Bombardier is widely expected to launch an equity issue, or sell off assets, or a combination of the two, to plug the financing gap. The equity issue could be between C$500 million and C$1 billion, says Mr Doerksen.

Another possibility would be selling all or part of the recreational products division, but that would involve parting with snowmobile manufacturing, the historic core of the company.

"Recreational products is a good business for them and it is back on track," says Mr Robert Fay, analyst at Canaccord Capital.

The Bombardier family, which controls about 60 per cent of the company's voting shares, is believed to be unwilling to sell off the recreational products arm. Other disposals could come from Bombardier Capital, the slimmed-down financing arm.

Bombardier Capital has about C$11 billion of assets under management, but it is a grim climate in which to be selling aircraft leases and other receivables.

Mr Tellier, who is due to reveal more of his hand next month, is working overtime to ensure that Bombardier does not go the way of its defunct predecessors just yet.