Bombardier Seeks Margin Boost in Business Jets as Jobs Cut

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Bombardier Inc. is cutting about 1,750 jobs as it slows production of its biggest business jets, a move that may eventually help boost margins in the manufacturer’s most profitable unit.

Output of Global 5000 and 6000 models probably will fall as much as 30 percent, BMO Capital Markets estimated Thursday after Bombardier announced the pullback without giving details. That implies a drop to as few as 55 planes in 2015 from 80 last year, according to Fadi Chamoun, a BMO analyst.

“While this will have a negative impact on earnings and cash flow in the next 12 to 18 months, we believe the implications are positive over the medium term, as more disciplined pricing and steadier production should help improve profitability,” Chamoun said.

Amid waning demand for business aircraft, the dismissals extend the turnaround effort led by Chief Executive Officer Alain Bellemare, who joined Bombardier in February after its first annual loss since 2005. Bellemare has reorganized his senior leadership team, sold debt and new stock, and is studying options for the train business that include an initial public offering.

Bombardier’s Class B shares rose 4.7 percent to C$2.68 at the close in Toronto, the biggest gain in the Standard & Poor’s/TSX Industrials Sector Index. The move pared Bombardier’s loss for the year to 35 percent.

Business aircraft have traditionally been Bombardier’s most profitable divisions. Earnings before financing expense, financing income and taxes at the unit will probably amount to 7 percent of revenue this year, the company said in February.

Aggressive Selling

“Bombardier has been more aggressive selling large-cabin aircraft in the market over the past several years at less than optimal pricing,” Chamoun said. “In our view, this reduction in the production rate also attempts to restore profitability through improved pricing/marketing decisions.”

Economic and geopolitical turmoil in Latin America, China and Russia have damped business-jet orders across the industry, Bombardier said in a statement Thursday. Large-cabin models such as the Globals carry such high price tags -- the 6000 lists for $62.3 million -- that they have a narrow base of customers.

“A lot of the oligarchs made their money with oil, and right now oil prices are being challenged,” Eric Martel, president of Bombardier Business Aircraft, said Wednesday of Russian jet buyers. “Also, taking money out of the country right now is challenging. All of this put together results in the slowdown we can see now.”

Bombardier ended 2014 with orders equivalent to 17 months of production for all its Global models, according to the company’s annual report. That’s short of its goal of a backlog representing 24 to 30 months of output. Bombardier booked 19 orders for business jets in the first quarter, less than half the 46 that the company recorded in the same period a year earlier.

Delivery Target

Bombardier is sticking to its target of delivering 210 business jets in 2015, Mark Masluch, a spokesman, said.

While the cuts amount to about 5 percent of Bombardier’s aerospace workforce of 34,100 people at the end of 2014, the company announced the elimination of 1,000 positions in January when it suspended work on another corporate plane, the LearJet 85.

Bombardier may save as much as $150 million from the cutbacks starting in the second quarter of 2016, Konark Gupta, an analyst at Macquarie Capital Markets in Toronto, said in a note to clients. Gupta rates the stock underperform while BMO Capital Markets’ Chamoun rates it market perform.

Bombardier announced its intention to trim production of the jets last week as it reported first-quarter results. The job cuts will affect as many as 1,000 employees in the Montreal region, 480 in Toronto and 280 in Belfast, Northern Ireland.

(An earlier version of this story was corrected to show the percentage of job cuts in the aerospace workforce, not the total company.)