Sweet Home Alabama?

No sooner had we re-launched Navigating 360°, our monthly newsletter of trends and developments shaping the business aviation industry, when we indicated the potential for – and indeed the desirability of – industry consolidation.  With too many players, too many models, and too much production, and a flat-to-down overall demand outlook for new business aircraft in the next 2 years, conditions seem ripe for some mergers & acquisition activity.

It seems in retrospect that, while we may have read the tea leaves correctly, the only flaw in our assessment is that – at least so far – we didn’t get the sector of civil aviation quite right.  At least not yet.

In mid-October, Bombardier – along with its equity partners Investissement Québec – announced an agreement to sell off 50.01% of the flagship C Series (through its C Series Aircraft Limited Partnership – or CSALP) to none other than Airbus SE.   With the flick of a pen, a flash of a Tom Enders smile – and no cash down – Toulouse, France-based Airbus looks to gain a foothold in the 100-150 seat segment with an all-new and efficient small commercial airliner that has confounded sceptics who said that it would never succeed.  Suddenly, with a flick of the pen, rather than “Bombardier: The Evolution of Mobility”, should the company’s tag line read: “The Evolution of Mobile”?

Airbus gains a production foothold in Canada and the rights to add a new C Series assembly line in Mobile, AL.  With current Airbus production at Mobile focused on U.S-based customers, C Series aircraft (or should we say A315s?) built in a U.S. facility could presumably skirt the recently announced and onerous 300% import duties threatened by the U.S. Department of Commerce.  If finalized and approved, and in what could be a win / win / win / win / win / win for Bombardier, Airbus, and the governments of Canada, Quebec, Alabama, and the United Kingdom, a C Series deal could finally put what was always an ambitious program on the path for sustained commercial success.  For patient Bombardier investors, led by the Bombardier and Beaudoin families, a new day is dawning, despite the loss of majority control of a flagship asset. The C Series was always going to be a major drain on Bombardier’s cash and credit lines, a drag on earnings performance that the current leadership under CEO Alain Bellemare and CFO John Di Bert have been keen to resolve.

Next? The Airbus / Bombardier alignment is almost certain to push Boeing and Embraer closer together – a team that is already working together on the KC-390 airlifter and other programs. Bombardier may also seek to combine its CRJ and Q400 commercial aircraft programs with ATR, an Airbus / Alenia joint venture. Such an arrangement would seem to have similar merits, whether in engineering and design, sales & marketing, supply chain procurement, production re-alignment into “centers of excellence”, after-market service and support, and other areas.  One concern with regulators – the overlap of product lines in the 70-seat turboprop segment with the Q400 and ATR72 models – could presumably be addressed either by an asset sale (1-800-Call Viking?), the shutdown of one of the product lines (read: bye-bye Q400), or the development of a long-awaited 90-seater. The question that has confounded many a designer – specifically, does a turboprop really need winglets? – may finally be addressed.

After the CRJ and Q400 projects, Bellemare and Di Bert will certainly be wondering what problem to fix next – they have certainly demonstrated their ability to shoot sacred cows, and then host barbecue dinners.  The Learjet portfolio is certainly on the “To Do” list, although this blip has always been rather insignificant on the corporate radar, given that Learjet represents a very small proportion of Bombardier’s top-line revenues, and even less of net earnings.  Nevertheless, almost half of all in-service Bombardier business aircraft of 4,850+ business jets worldwide are Lears.  With the company doubling down on its business aircraft division, what if anything can be done to either bolster the lower end of the company’s product line, or carve it off without creating or empowering further a competitor?

Rumors of a deal to sell off Learjet to Textron Aviation have been floating around the industry for years, given the obvious Wichita synergies, but this has never made sense to us.  Why send thousands of customers into the hands of a competitor, especially one that is investing heavily in the Challenger space to, well, challenge Bombardier?  This makes no sense.

Photo credit: Smithsonian Institution

The Learjet brand, once magically iconic, has much life left in it.  The Learjet franchise’s assets – including the brand, talent, facilities, equipment, type certificates, production certificates, tooling, inventory, spares, service agreements, customer contracts and relationships, supplier contracts and relationships, and other valuables – should be worth more than the current valuation.  Despite an early spurt of product development to develop the Learjet 45 soon after the company’s acquisition in the early-to-mid- 1990s, and a string of Wichita facilities improvements and new construction, Bombardier has continually struggled to integrate “Lear”, build profitability, and earn an adequate return on its investment. Today, the Learjet fleet is steadily aging, with 43% of in-service aircraft now 30 years or older, and mostly in the hands of their ultimate owners.  This represents a sky-darkening – or more likely, hangar-filling –  1,000+ jets.

Bombardier’s attempts to “fix” Learjet, whether through multi-site development programs like the original Learjet 45 or the bold but poorly conceived and executed Learjet 85, have not yielded the hoped-for results, despite best efforts and intentions on the part of dedicated individuals and talented, experienced leadership over the years.

 

So….What’s Next? 

With new and assertive competition in the light jet arena and an ever-aging fleet, the Learjet “problem” for Bombardier is not going away.  Although not nearly as bright in management’s radar as the higher profile C Series and Global 7000 programs, “fixing Lear” is certainly a priority of Bombardier CEO Bellemare and Bombardier Business Aircraft President David Coleal, perhaps sooner than later.  Despite an avowed interest and plan to expand after-market sales and service across the Bombardier fleet of almost 5,000 business jets, many of the firm’s light jet customers (especially those who are out of warranty and/or who purchased a pre-owned Learjet through a broker / dealer) have migrated away from Bombardier’s service centers.  Not surprisingly, Learjet’s brand equity has slipped, and now lags below that of the direct competition and other brands in the Bombardier family, according to our on-going JETNET iQ quarterly surveys of business aircraft owners / operators.

Successful brands, like children, personal reputations, and organic gardens, are nurtured slowly over time.  The trust inherent in a brand – like an unspoken but universally understood promise – can be damaged quickly and sometimes even permanently, often through neglect or distraction on other things deemed more important.  But what could be more important than a customer, or – in the case of Learjet – thousands of customers?  Time will tell if an investor, perhaps speaking Mandarin, French, or Spanish, will be drawn to the negotiating table to explore strategic options for Learjet.  Options – whether a partnership, an acquisition, an organic “doubling down”, or other solutions from the creative leadership at the top of Bombardier – will present themselves.  There is much life – and much value – in this brand.

 

Buy locally?

The impending change in ownership of the C Series program reminds us of the difficulties of definitions.  Seemingly simple terms like “buy local” – a trend that seems all the rage these days – are notoriously difficult to define.  This is particularly the case in the aerospace industry where an aircraft’s major components, systems, assemblies, and even individual parts are globally sourced.  Is a Canadian-designed jet – assembled in Alabama with more than 50% of its value-added components provided by U.S. suppliers, with U.K. designed and built wings, U.S. designed and built engines and avionics – a Canadian aircraft, an American aircraft, or a world aircraft?  How do we “draw the lines”?  Why do we draw the lines?  Why are we so quick to draw the lines? The answers are unclear.

 

At the end of the day, we might ask whether any of this energy is serving the customer’s interest.  It is a sad day when the customer – the ultimate reason most of us have a job – is not front-and-center in our decision-making. Brands ultimately exist to provide something valuable to customers, but this can be easily forgotten, especially in an industry that is so technology-centric and quarterly earnings-focused.

Organizations that “get it” realize that, whether in designing and building new aircraft, or establishing or re-inventing brands, the best way to ensure success is to anticipate evolving customer needs and use this to inform future endeavors.  With the C Series, it appears that Bombardier leadership was prescient in identifying an unserved need as Boeing and Airbus migrated upwards in their duopoly battles above 150 seats. Still to be determined: Does Bombardier re-focus its attention on regional aircraft (where it has a strong market position) and seek to extract greater margins from its investments, exit, or do nothing?  In business aviation, Bombardier is locked in an epic battle with Gulfstream and Dassault at the top of the market, focused on large cabin, long range, and high-speed designs.  Still to be determined: Can Learjet contribute to Bombardier’s competitiveness, or is it a lingering distraction and resource drain from core activities?  Invest, divest, or do nothing?  These are questions that the company’s leadership is facing.  With escalating competition, customers ultimately stand to benefit from what emerges. ✈︎