The Dogfight for Bombardier's Niche
Business travelers may rue the inconveniences of modern hub-and-spoke air travel, but it has been a bonanza for Canada's Bombardier Aerospace and Brazil's Embraer (ERJ ). In less than a decade, these two upstarts have joined the world's top commercial jet builders, trailing only Boeing Co. (BA ) and Airbus Industrie. Currently, Bombardier ranks No. 3--but No. 4 Embraer is determined to knock its archrival down a notch.
The dogfight between Bombardier and Embraer in many ways mirrors the high-stakes battle between Airbus and Boeing--only the planes are smaller. Instead of shooting it out over the optimal size and speed of jumbo jets, which rule the skies between hub cities, the upstarts are battling for dominance of the short-hop spoke flights that radiate from hubs such as Chicago and Denver to smaller regional airports.
Bombardier pioneered the market for so-called regional jets, starting in 1989. Then best known as a builder of mass-transit rail systems and snowmobiles, the Montreal company bet half its $250 million market capitalization on the development of a 50-passenger jet that could outperform turboprop planes on short routes. Bombardier's first Canadair jet took to the skies in 1992, and the gamble quickly paid off.
Last year, Bombardier Aerospace netted $151 million on sales of $3.25 billion. Profits from its regional and business jets have been climbing 30% or more in recent years, to 87% of parent Bombardier Inc.'s income last year. The good times rolled on into this year. In January and July, the company scored its largest sales to date--two $1.68 billion orders for 75 planes each from Air Wisconsin and Northwest Airlines Corp. (NWAC ) These lift Bombardier's order backlog to 432 planes worth $14.9 billion. So far, 523 Canadair jets are in service, and 160 more planes will hit runways this year.
However, Bombardier's monopoly days are long gone. Its success was bound to attract rivals, and Embraer launched a 44-seater in 1996. Since then, the Brazilians have steadily made up for lost time by offering cheaper planes, says analyst Peter A. Rozenberg, who watches the aviation market for UBS Warburg. For example, Embraer's latest 50-seat model costs about $3 million less than the $21 million for a Canadair. As a result, Embraer has shipped 564 planes and has a backlog of $11.5 billion.
Losing market share, by itself, does not faze Bombardier Aerospace President Michael S. Graff. "Whenever you're the first guy, you can only lose market share," he points out. What does rankle is missing a good chunk of an estimated $7.5 billion in sales over the past five years due to unfair competition from Brazil.
Founded by the Brazilian government in 1969 to produce military planes, Embraer has often won orders by tapping Proex, a government fund set up to stimulate exports by offering cut-rate financing. Because of Proex subsidies, Canada repeatedly hauled Brazil before the World Trade Organization for unfair trade practices--and won. But the subsidies allegedly continue, so Canada's government decided to fight fire with fire and arranged for discount financing to help secure the Air Wisconsin and Northwest deals. That prompted Brazil to complain to the WTO.
SNOOKERED. Both regional jetmakers are so preoccupied with each other that they're in danger of getting snookered by a formidable newcomer, warns Marko Pencak, an analyst with Credit Suisse First Boston. By late 2003, he says, Boeing may launch an 86-seat jet, a scaled-down version of its 100-seat Boeing 717. The timing sounds right: Production of large jetliners will fall 33%, from 813 planes this year to 541 in 2005, predicts consultant Teal Group Corp. Regional jets will take a hit as well, but only half as big. So once orders rebound, Boeing could trumpet itself as a single-source supplier for both hub and spoke airlines.
If Boeing does jump in, Bombardier will have enough momentum to hang on to the No. 2 spot at least, insists Robert E. Brown, CEO of parent Bombardier Inc. Already, he notes, the company has delivered its first 70-seat plane--to Lufthansa in February--and it's now taking orders for a 90-seat design. Still, Brown is hedging his bets and plowing capital into Bombardier's old-line rail business. It's a smart move. Bombardier's smooth flight to profits seems headed for choppier skies.
By Petti Fong in Montreal