July 24 (Bloomberg) -- Bombardier Inc., struggling with the development of its centerpiece CSeries jetliner, will slash about 1,800 jobs from its aerospace business and split the unit into three in a move to cut costs and improve operations.
The division will be carved up into business aircraft, commercial aircraft and aerostructures units, according to a statement from Bombardier yesterday. Leaders of those segments and the rail operations will report to Chief Executive Officer Pierre Beaudoin. As a result of the reorganization, Guy Hachey, head of the aerospace business, will retire.
Bombardier’s dismissals represent about 4.8 percent of the unit’s workforce as of the end of 2013, said Isabelle Rondeau, a spokeswoman. They follow the elimination of 1,700 positions disclosed in January, after Bombardier announced the fourth postponement for the commercial debut of the CSeries, the Montreal-based company’s biggest-ever model.
“Something’s wrong with the commercial competitiveness of this company,” said Richard Aboulafia, an aerospace analyst with Fairfax, Virginia-based Teal Group. “They need to cut costs to fix that. Whether it will be successful I don’t know. Because of the CSeries, there’s not a lot of margin for error.”
Hachey, 59, joined Bombardier in 2008 after a career in the automobile industry. He oversaw Bombardier’s challenge to the smallest models from Boeing Co. and Airbus Group NV, an effort that soured as delays, rising costs and scant interest from major airlines made the CSeries a tough sell.
“The financial performance and the execution of our aerospace group weren’t consistent with our expectations, and that’s why we made a change,” Rondeau said in a telephone interview. She said it was too early to project the savings from job cuts, which will target functions such as finance, human resources and communications that are unrelated to production.
Bombardier’s widely traded Class B shares fell 1.1 percent to C$3.70 at the close of trading in Toronto.
The moves could yield annual savings of $135 million to $180 million, Fadi Chamoun, an analyst at BMO Capital Markets, said in a note yesterday. The reorganization, which Bombardier said will be in place Jan. 1, has “the potential to reduce bureaucracy, streamline decision making, increase accountability and improve ‘firefighting’ response time within the firm,” said Chamoun, who rates the stock the equivalent of hold.
Bombardier will probably book severance costs and provisions in connection with the cutbacks before the end of the year, Konark Gupta, an analyst at Macquarie Capital Markets in Toronto, said today in a note to clients. He rates the shares outperform.
The company may provide more details about the restructuring when it reports second-quarter earnings July 31, said Benoit Poirier, a Desjardins Capital Markets analyst in Montreal.
“The timing of the announcement creates uncertainties regarding these changes ahead of second-quarter results,” Poirier said today in a note to clients. “Management could be forced to streamline its indirect positions in order to reallocate those resources to production.”
Mike Arcamone will continue to lead the commercial aircraft division while Eric Martel remains head of the business jet unit. An executive will be hired to run the newly created aerostructures and engineering services business “in the next few weeks,” Bombardier said.
“This is a bell-ringer for the management team,” Nicholas Heymann, an analyst at William Blair & Co. in New York, said in a telephone interview. “This is the board speaking to Pierre Beaudoin, saying ‘Your ability to execute is not as strong as it should be.’ They need to stop offering targets that have to be deferred.”
Chief Financial Officer Pierre Alary projected in February that development costs for the CSeries had climbed to $4.4 billion, about $1 billion more than initially estimated for the aircraft intended to be the centerpiece of the company’s aviation sales growth.
With 203 firm CSeries orders through last week, Bombardier is still short of a goal of about 300 by the time the jet is in service, now set to be in 2015’s second half. The CSeries is designed to seat 108 to 160 people, a step up in size from Bombardier’s signature regional jets.
Bombardier replaced its chief salesman for the CSeries, Chet Fuller, at the end of 2013 with Raymond Jones, who had served as a vice president of the company’s business aircraft unit for a decade.
In February, Bombardier lowered its profit targets for 2014, and the 20 percent drop for the Class B shares this year is the second-biggest among Canadian industrial stocks. The CSeries test fleet has been grounded since May after an engine fire.
“It’s exactly the kinds of problems you get with a new program,” said Aboulafia. “Except that the company behind it doesn’t have the deep pockets you associate with a large aerospace company bringing a brand new large jet program to market.”
The aerospace unit hasn’t just had to contend with delays on the CSeries. The Learjet 85, a new business aircraft with a composite fuselage under development since 2007, missed a target to enter service in 2013 and didn’t make its first flight until April. Bombardier hasn’t set a date for the initial delivery.
“They need flawless execution,” William Blair’s Heymann said. “If they fail to execute and introduce new products on a timely basis, not only will the investments they made -- which have been very substantial -- be diminished, but it could ultimately end up with Bombardier being in a situation where they are either marginalized or absorbed by somebody else.”
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