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Why Bombardier is sacrificing its Flexjet unit

In an aviation world defined by mammoth, multibillion-dollar contracts, a $185-million (U.S.) deal is not something you would write to your mother about. Even so, Bombardier Inc.'s disposal of its fractional jet ownership division, Flexjet, came as a surprise.

Flexjet was not even for sale when a private investor group knocked at the company's door. Bombardier president Pierre Beaudoin now describes it as peripheral to the company's core businesses of manufacturing planes and trains – but it's not nearly as incongruous as making snowmobiles and Sea-Doos, as it did for decades before selling that business. When former CEO Paul Tellier did a major restructuring of the Montreal-based company in 2003, he didn't get rid of Flexjet.

There's a business case to be made for keeping it. Bombardier can sell its own planes to Flexjet. Also, in difficult times, sharing a plane through fractional ownership might be more attractive to the uber-rich than buying a private jet outright.

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So why sell Flexjet? Richard Aboulafia, vice-president of analysis at consulting firm Teal Group Corp., has an interesting take on the deal. Bombardier might want to reduce the financial risk its affiliate takes on when it buys planes to resell them. But the best reason might be that the extra money will come in handy to sell the C Series, Bombardier's new commercial aircraft for 110 to 160 passengers.

That $185-million doesn't seem like much for a program whose development cost is pegged at $3.4-billion. But if that money helps Bombardier cinch just one more C Series contract, that would be helpful, Mr. Aboulafia argues.

The comment is telling of how dire Bombardier's situation now looks. As of June 30, the manufacturer had only 177 firm orders for this airliner, first launched five years ago. At the Paris Air Show in June, Bombardier didn't unveil one new contract; all it had to offer was the name of a previously-undisclosed buyer.

Bombardier executives have been hinting all along that once the C Series takes off, the orders will start falling from the sky. That first test flight, postponed three times already, could occur any day now. On Friday, Bombardier ran some high speed taxi tests on its runway in Mirabel.

One can only hope so. But having an airplane that exists only on paper has not stopped other manufacturers from landing big orders. WestJet Airlines Ltd. just signed a letter of intent to purchase 65 of Boeing's new 737 MAX jets, a $6.3-billion order at list price. Even before this contract, Boeing had 1,498 firm orders as of Aug. 7 for a plane whose first delivery is scheduled in 2017.

The possibility that the C Series will be a commercial flop is settling in.

The problem is not the plane per se. If the C Series lives up to its promise of a 20-per-cent reduction in fuel burn and a 15-per-cent decrease in operating costs, it will shine. The problem is the formidable competition, which only got stiffer when Embraer SA decided in June to upgrade and expand its regional jet family. Its biggest plane, the E195-E2 for 132 travellers, will land squarely in C Series territory.

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The Brazilian manufacturer's new models are not expected before 2018 at the earliest. But Airbus is quickly coming up with an upgraded version of its smaller A319 that will be offered in 2016, with the same Pratt & Whitney engine that will power the CSeries. With each day that passes, the window Bombardier has to secure new orders for the C Series is closing; airlines usually prefer to order planes from their current suppliers to reduce maintenance and training costs.

Given this, Bombardier needs to market its planes aggressively. Until now, however, Mr. Beaudoin has maintained that Bombardier would abstain from offering the C Series at a deep discount. "I think they underestimated the financial clout they needed to sell the plane," Mr. Aboulafia says. If Bombardier offered a better deal – if the company guaranteed the residual value of the plane after a number of years, for example, or offered to take the planes back with a walk-away clause – that could boost sales, this analyst argues.

It is hard to think the worst. With the C Series, the stakes are sky high for Bombardier and for Quebec's aerospace industry. Failure could be devastating to both. It could damage Bombardier's prospects in commercial aviation the same way that the BlackBerry 10's poor sales are forcing that company into an extreme makeover. Bombardier invested in the C Series instead of upgrading its regional jets, and the gap between Bombardier and Embraer, which now dominates the RJ market, is just getting wider, according to an RBC Dominion Securities analyst.

There is a silver lining, however. Bombardier is the world leader in business aircraft, which accounted for 53 per cent of its aerospace revenues of $8.6-billion (U.S.) in 2012. It is a great business all on its own.

Maybe holding on to Flexjet might not have been such a bad idea after all.

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About the Author
Chief Quebec correspondent

Sophie Cousineau is The Globe and Mail’s chief Quebec correspondent. She has been working as a journalist for more than 20 years, and was La Presse’s business columnist prior to joining the Globe in 2012. Ms. Cousineau earned a master’s degree in journalism from the University of Illinois and a bachelor’s degree in economics and political science from McGill University. More


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