Bombardier bailout likely still needed despite Delta deal

With Bombardier's deal to sell its new CSeries jets to Delta Air Lines, one might think that the aerospace manufacturer no longer needs the billion dollars it is seeking from the federal government.

The Montreal-based company announced on Thursday that it had received an order from Delta for 75 CS100 aircraft with options for an additional 50 — a deal, at list prices, potentially worth $5.6 billion.

• Delta buying 75 Bombardier CSeries jets, with options for 50 more
• Bombardier deal with Delta renews Quebec calls for Ottawa bailout 
• ANALYSIS | Is Bombardier a no-brainer investment for Ottawa or a house of cards?

It also comes as the Liberal government considers a request from Bombardier for $1 billion in funding, the same amount the Quebec government has already pledged.

But the Delta deal doesn't necessarily mean Bombardier, which is about two years behind schedule on the CSeries and at least $2 billion US over budget, will be rescinding its request to Ottawa any time soon.

"They will not get [the Delta deal money] today, tomorrow, or in three years or five years," said Konark Gupta, an equity research analyst at Macquarie Group. "They will get it over many years as they deliver the plane. So that money is scattered over the long term."

'Come as a bullet'

"And the federal money, if that comes, that will probably come as a bullet. It will come in one or two days," he said. "Let's say they need $1 billion. The Delta order doesn't necessarily satisfy that $1 billion need right away."

He said it's also important to note that the real value of the Delta deal will be less than what it's being purported to be worth, and will also include discounts on commercial orders.

Bombardier needs a certain amount of cash on hand every year, Gupta said. For example, the investment by Caisse de dépôt et placement du Québec, the province's largest pension fund manager, requires Bombardier to have $1.25 billion cash on the balance sheet at any time. 

"They have a certain minimum requirement on the cash side so if they do not get the federal funding, do they breach any of those [obligations]?  And that's tough to say."

Karl Moore, associate professor at McGill University's Desautels Faculty of Management, said that Bombardier's need from Ottawa has "probably slightly diminished by the order."

'A cash flow issue'

However, he said, there's a gap between when the company is spending money to build the plane and when the revenue comes in.

"So there's a cash flow issue they have," Moore said.

"The orders are great but they have to make the planes before they get paid," he said. "So that's where the gap is and that's where they need the money to help fulfil the cash flow issue."

Tyler Chamberlin, an associate professor at University of Ottawa's Telfer School of Management, said while a deal is certainly better than no deal, it will not end all Bombardier's problems. Bombardier reported on Thursday a first-quarter loss of $161 million US. And earlier this year, it announced it would be cutting 7,000 jobs over the next two years as the company faces declining revenues. Meanwhile, officials of Toronto's public transit system have expressed frustration that its order for more than 200 streetcars has encountered numerous delays.

Chamberlin said it's still unclear how much Bombardier will make off these planes as the company may have been incentivized to make sure this deal was going to be done and that Delta received a good price.

"What's even harder is to figure out how much these things cost per [plane], because it's not only that they're expensive to build, but development that has gone into them is enormous and has been over budget," he said.

"When you work through what it's actually going to cost to build the planes and then to work through what they've spent in developing the planes, it's not necessarily clear this is the end of the rainbow and that they will be in perfect shape."

Ian Lee, an assistant professor at Carleton University's Sprott School of Business, said that each additional contract to new or repeat buyers will reduce the need for the federal government to invest.

"Instead, the [federal economic development] minister could issue a government statement saying they stand behind Bombardier now and in the future — instead of actually investing the billion," he said.

Instead, what Bombardier needs is solid assurances to aviation markets that it will be in business for the next 20 to 30 years.

"When a company is buying a large, long-term asset, that is very complex and specialized, you need to know the company will exist in the long run — to service the asset and continue to make spare parts for the asset," he said. "Loan guarantees or equity injections from Quebec and the government of Canada provide that assurance.

"However, a strong record of continued sales in the market also provide the assurance," he said.

Not desperate for cash

The company itself, while still seeking federal government funding, has seemed to downplay any notion that they are desperate for a cash infusion.

In March, Rob Dewar, vice-president of the CSeries aircraft program, said that they had secured all the funding required to "ramp up the CSeries program and also for the rest of aerospace.

"Really, the federal funding would just be an extra endorsement for the program," he told the Financial Post. "That's really just an extra bonus that would be helpful but is very clearly not required."

On Wednesday, CEO Alain Bellemare simply said he "would welcome the participation of the federal government to add financial flexibility to what we're doing in terms of the CSeries, but also our ability to keep investing in aerospace in the future, right here in Canada."