Bombardier Inc. (BBD/B)’s plans to build planes in Russia and the sale of $3.4 billion of aircraft will be delayed as Canada joins the U.S. in imposing sanctions against the country after it moved to annex Crimea, Chief Executive Officer Pierre Beaudoin said.
“Right now there’s going to be a delay because of what’s going on,” Beaudoin said yesterday in an interview at Bloomberg’s headquarters in New York.
Bombardier signed a letter of intent in August to sell Russia’s state-owned Rostekhnologii as many as 100 Q400 turboprop aircraft valued at about $3.4 billion, based on list prices. The Montreal-based company also reached a tentative deal to establish a turboprop assembly line in Russia and said it expected to sign definitive agreements in 2014.
Like the U.S. and other allies, Canada has imposed financial sanctions and travel bans on Russian officials. Prime Minister Stephen Harper’s government has also recalled its ambassador to Russia, suspended military cooperation and pledged C$220 million ($196 million) in financial aid to Ukraine.
U.S. President Barack Obama has signed a new executive order authorizing, though not implementing, economic sanctions affecting parts of the Russian economy. They included financial services, energy, metals and mining, defense and engineering.
“Obviously we are going to respect whatever sanctions” are put in place, the CEO said. “That’s a good thing when you have global countries moving in lockstep.”
Estimating the delay for the start of the turboprop assembly is impossible because no one knows “the extent of the potential sanctions or whether this will escalate or not,” Beaudoin said. “We were in negotiations to get this done in 2014. Will it be a one-month delay, a six-month delay, a one-year delay?”
While Russia accounted for about $250 million of Bombardier’s 2013 sales of $18.2 billion, Beaudoin said future revenue could be much larger.
Russia and other former Soviet republics could buy as many as 350 turboprops in the coming years, Guy Hachey, president of Bombardier’s aerospace unit, said yesterday at the company’s investor day in New York.
“For Bombardier, Russia is not that big today, but it’s a very large potential country,” Beaudoin said. “Like many international companies we are going to follow this very closely.”
Bombardier is also wooing Russian airlines to buy its newest and biggest jetliner, the CSeries, which the company predicts will enter service late next year.
Russian leasing company Ilyushin Finance Co. in 2013 agreed to buy at least 32 CSeries jets in an order valued at about $2.56 billion at catalog prices.
“Getting a leasing company in a new market is the first thing that’s important,” Beaudoin said. “Then you talk to airlines, and airlines will typically say, ‘I’ll buy two and lease three.’ That’s why Ilyushin is important.”
Bombardier expects the CSeries will contribute $5 billion to $8 billion a year in new revenue later this decade, Beaudoin told analysts and investors in New York yesterday, reiterating an earlier forecast.
Bombardier’s Class B shares rose 0.7 percent to C$4.20 at 9:31 a.m. in Toronto. The stock has declined 9.5 percent this year through yesterday, trailing the 5.4 percent gain of Canada’s benchmark Standard & Poor’s/TSX Composite Index.
“Russia is going to be a major market for the Q400 and the CSeries,” Chris Murray, an analyst at AltaCorp Capital Inc., said yesterday by telephone from New York. “You don’t want to see it go away.”
Bombardier is studying whether to build a 50-seat version of the Q400 in which half of the space would be devoted to the cargo area, Beaudoin also said. Currently, the turboprop seats 71 to 86 passengers.
“Some customers are saying they’d like half-cargo, half-passengers, and we’re looking at this,” Beaudoin said. “We would have a significant competitive advantage because our competitor can’t do that. We look at our strengths to find new niches for the Q400 with customers that we don’t have today.”
Separately, Beaudoin said Bombardier’s train division would consider buying Finmeccanica SpA (FNC)’s Ansaldo STS and AnsaldoBreda units if it can find a partner to bid on the assets.
Italy’s Finmeccanica is seeking to sell businesses including Ansaldo STS, a rail-signaling company, and AnsaldoBreda, which makes rolling stock, to focus on aerospace and defense.
“Right now our capital is all going to developing airplanes, so I want to make sure from an investor perspective that if -- and it’s a big if -- this comes as an opportunity, we would look at doing it with a financial partner,” Beaudoin said. “I think at one point there will be an opportunity, but it has got to be right.”
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