Richard Aboulafia: May 2019 Letter

Dear Fellow Divestiture Watchers,

The best way to create a medium-sized aircraft company is to start with a large one. Bombardier has spent the past month (and perhaps the least 14 years) proving that. The formerly mighty Canadian Aero Giant once sprawled over the world, building everything from firefighting water bombers to 130-seat jetliners (and snowmobiles too). But recent and imminent divestitures are reducing it from an aviation powerhouse to a much smaller and leaner player.

How did they get here? Around 14 years ago, Bombardier decided to develop the CSeries jetliner, a remarkable product, now known as the Airbus A220. This Airbus divestiture outcome was predictable (read anything I wrote on the topic, starting with my June 2005 letter). Creating a clean-sheet jetliner in Airbus and Boeing territory was bound to devour all the company’s resources, and more. New management, brought in after things got desperate in 2015, quickly realized that they were running a ship that had set a course for the nearest iceberg. Selling off much of the company is a drastic measure, but it’s hard to see any other course that could have saved Bombardier, and they deserve a lot of credit. But there are big questions:

What will become of the CRJ? The possible sale of Bombardier’s long-running regional jet program to Mitsubishi is the latest news, broken a few days ago by The Air Current. Mitsubishi would find this program incredibly useful – perhaps essential – for product support; they likely planned on relying on Boeing for MRJ aftermarket, before Boeing shacked up with Embraer, turning them into a competitor rather than an ally. Mitsubishi might also find CRJ personnel useful for the MRJ certification process, and production too. But here’s the thing about the CRJ divestiture: this is what economists call a seriously imperfect market. There’s really just one likely buyer, and that buyer knows that it’s the only likely buyer. In that context, it may prove very hard to find a price acceptable to both parties.

How long will the CRJ be built? Assuming a price can be agreed upon, there’s also the chance that MHI keeps it going for a bit longer. There are ~44 CRJs on backlog; those might or might not be it. The MRJ folks are working on a Scope-compliant smaller stablemate to their MRJ90, but until that gets going, and assuming Scope Clauses don’t change, selling the CRJ700/900 would be a potential gap filler.

What will become of Belfast (a.k.a. Shorts)? Earlier this month Bombardier said it was selling its Northern Ireland plant, and other aerostructures facilities. Unlike the CRJ, there are many possible buyers here. I can see at least four possibilities, and the first two have big implications:

  1. Airbus. With resin transfer infusion (RTI), Belfast has an impressive carbonfiber wing and structures technology, developed for the CSeries/A220. If Airbus acquires it, that would give it control of RTI, keep it out of competitors hands, and most of all, perhaps pave the way for an intriguing future: a single aisle product line consisting of the A220-100 and -300, a growth -500, a re-done A320neo, A321neo, and a stretched A322neo, all with RTI wings. Given Boeing’s NMA twin aisle plans, and its 737MAX difficulties, this might be a recipe for long-term Airbus single aisle market dominance.
  2. China. AVIC/COMAC is one rumored bidder. Politics might intervene and prevent this (particularly with the Brexit/Northern Ireland issue looming in the background), and China is not known for paying much for intellectual property, but acquiring RTI would give China a new structures capability – it might not be too late to give the obsolete-out-of-the-box C919 a high-tech wing. And it would fit a pattern with China’s other aero acquisitions, such as FACC and AIM.
  3. A First Tier Aerostructures Company. Spirit could use Belfast to continue its portfolio expansion beyond Boeing and gain additional technologies. GKN would cement its Airbus wing structures position, particularly since it’s working with Airbus on its Wing Of Tomorrow project.
  4. Private Equity. An interim buyer likely to ultimately result in one of the three above buyers. They might lean the unit out a bit, but Bombardier had already been forced to make things about as lean as possible.

What will become of the Dash 8Q? Also a few days ago Longview Capital closed on a $300 million purchase of Bombardier’s turboprop regional transport. Longview owns Viking, but the – 8Q will fall under the resurrected de Havilland Aircraft of Canada Ltd. name, a superb heritage brand. Longview/Viking is mostly known for product support, but they might just decide to make a go of building the Q-400, aided by lower overhead and a new corporate parent that can give it the attention Bombardier couldn’t. It’s even conceivable that the smaller Dash 8Qs (-200/300) are rejuvenated and revived. But it’s also possible that DH simply contents itself with supporting the legacy fleet, and leaves the market to ATR. After all, ATR is backed by two large aero corporations; they might not give ATR all the resources it wants, but they could simply overwhelm DH with new product developments and aggressive financing.

With all these Bombardier units going or gone (on top of snowmobiles, training, the CSeries, and lots of other stuff sold already), the Canadian former giant will soon do just two things: trains and business jets. I don’t know trains, but the company does a great job with bizjets (it’s tied with Gulfstream for the number one market position in the market). With these two businesses, there’s no reason that it can’t stay intact as a medium-sized transportation company.

On the other hand… there might be buyers for either or both businesses, and Bombardier ownership might just take the cash. Fun fact: Canadair, Bombardier’s original business jet core, was owned in 1946-1976 by General Dynamics (and its predecessor companies), the current owner of Gulfstream, Bombardier’s business jet arch-rival. In other words, things change.

And as you enjoy a flight in a comfortable, fuel-efficient A220, contemplate just what a carnivorous monster it was.

Yours, ‘Til A New Canadian Aero Powerhouse Resurrects The Avro Arrow,

Richard Aboulafia