Revelation wrote:

TObound wrote:

Just a reminder, a reduced projection of profits for the A220/CSeries program, doesn't mean it's not going to be profitable long term.

Bombardier is in a tough spot because they took on a lot of the liabilities of ramping up, while signing away a lot of the future profits to Airbus. If they stick it out, they will do quite well. If they sell now, they'll maybe be lucky to recover what they were putting into CSALP. But that's probably about it.

The thread isn't about the long term health of the program, it's about BBD reassessing their participation in the partnership.

Bloomberg ( https://www.bloomberg.com/news/articles ... 0-jet-deal ) suggests the whole company is on the brink due to the fact that the A220 partnership is not playing out the way the BBD projected:

The deal with Airbus was an elegant solution. Though Bombardier received no upfront cash for ceding its controlling stake, it allowed Bombardier to offload the risk and additional costs of developing the A220. But the latest financial plan calls for more cash to support the ramp-up, pushes out the break-even timeline, and generates a lower return over the life of the program, Bombardier said in a statement Thursday.

With few other assets left to sell, Bombardier may struggle to keep everything going. One of its two remaining businesses -- rail equipment and private jets -- may have to go, Karl Moore, an associate professor at McGill University in Montreal, said in an interview with BNN Bloomberg.

“Then you become a pure play of either transportation on the train side, or business jets,” he said. “It’s a big dramatic move for sure but one that might be necessary to solve the cash flow issue. I think that’s the question they’re giving some serious thought to right now.”

BBD finds itself in an uncomfortable position. The elegant solution might not have been elegant enough...

Good find. Airbus gets luckier and the Beaudoin family's incompetence more tragic, by the day. I guess it comes down to which of their assets and investments can generate the cash they need now vs. return in the long run.

Their report shows $2+ billion in cash on hand. And the A220 liability was $350 million per year. I don't get why they'd consider this program the liability.

If I were them, I'd consider getting rid of the transportation division. Long term it's a losing proposition as the Chinese move aggressively into that sector.

Is there any escape clause for Bombardier to take the program back? Does Canada not have the money to loan BBD? I would think it could be a nice payoff in the end.

The CSeries continues to kill Bombardier. They're pleading for mercy now. As mentioned before, it's an awful reality that the more the A220 sells, the more Bombardier can't take the losses. They're tapping out. If they could have survived a few more years until the A220 becomes profitable - assuming it does that is - then maybe this whole Airbus gamble would have paid off. But as at stands, owning just 31% of a loss when you have to pay in so much is still a very bad investment.

So if Bombardier sheds their stake sooner rather than later, the question becomes how much Airbus is willing to eat the expenses that Bombardier was contributing. Of course they have the pockets to survive, but losing a partner effectively paying the bills changes the perspective. The need to turn the program around becomes even more imperative.

Overall BBD is projecting about a 5.2% profit, still in the black but not good considering the risk

Bombardier says it expects consolidated revenue for 2019 to total about $15.8 billion and consolidated adjusted earnings before interest, taxes, depreciation and amortization of about $830 million.

https://www.cbc.ca/news/business/bombar ... -1.5429547

Another good article notes:
https://montrealgazette.com/transportat ... 0a89e9b362

Still, Bombardier revealed it will take a $350-million writedown in its transportation unit in the fourth quarter, resulting in a $230-million loss in the division due to problems with train projects in the UK, Switzerland and Germany. It’s negotiating with customers to reset schedules and resolve late delivery penalties.

A plane I particularly like is the Q400, following that over the years I see the same haphazard management of that program, it could have been a lot more.

Revelation wrote:

It seems without amendment the options only become actionable in 2023.

TObound wrote:

The options for BBD shares aren't active till 2025/2026.

With the provisio:
"except in the event of certain changes in the control of Bombardier, in which case the right is accelerated." Without detailing what those 'certain changes' might be.

TTailedTiger wrote:

Is there any escape clause for Bombardier to take the program back? Does Canada not have the money to loan BBD? I would think it could be a nice payoff in the end.

BBD can force Airbus to take their share or Airbus can unilaterally decide to buy BBD's share. I don't believe there's any contractual option for BBD to buy back Airbus's share.

MSPNWA wrote:

The CSeries continues to kill Bombardier. They're pleading for mercy now. As mentioned before, it's an awful reality that the more the A220 sells, the more Bombardier can't take the losses..

Their main production losses are due to the transport division, not aerospace.

While CSeries continue to roll off the line at a loss, the loss is a pittance in comparison.

Looking at the quarter ending 30th Sept 2019, they took a $10m charge on CSeries - which will have been production losses. During that time they delivered 7 CSeries, so loss per frame is < $1.5m.


EBIT for the aerospace division is consistently around 10%. So to hit that, they need to lower airframe production cost by probably $4m. Which is 15-20% and is still massive - but it isn't the build cost that is bleeding the company - its the lack of positive contribution to the bottom line to offset the interest on loans needed to bring it to market.

BBD are no better off if they were to stop making CSeries. Its fairly neutral with respect to recurring costs - but it needs to start adding to the bottom line rather than doing nothing.

Here, from the horse's mouth:

https://twitter.com/jonostrower/status/ ... 0737253376

October 2017: "At the end of the day, this is going to be an Airbus program," Rainer Ohler, VP of communications for Airbus Group, said in an interview. "It's going to be a threesome, we take the majority now and over time we take 100% of the program.” https://cnn.it/371YNiT

So that's that. Airbus wants to entire program. If Bombardier sells, Airbus will buy.

PepeTheFrog wrote:

Here, from the horse's mouth:

https://twitter.com/jonostrower/status/ ... 0737253376

October 2017: "At the end of the day, this is going to be an Airbus program," Rainer Ohler, VP of communications for Airbus Group, said in an interview. "It's going to be a threesome, we take the majority now and over time we take 100% of the program.” https://cnn.it/371YNiT

So that's that. Airbus wants to entire program. If Bombardier sells, Airbus will buy.

'course they will. They'd be mad not to.

The A220 will probably be build in some guise till 2040.
Once Airbus are not contributing to BBD's bottom line, rate will likely head toward 20+/month over the long term.
At $2m profit per frame at a rate of 20, that is $7B in build profit - never mind after sales support.

An A220-500 would be so much better in seat-mile costs than A320 or 737-8 that Airbus could easily obtain a $2m profit per frame.

You know, if BBD had been interested in keeping its stake in the bright future of the A220.... It wouldn't have sold the wing making factory of that a220, would it.

The financial statement is crystal clear for those who are listening:
Airbus, please bail us out.

What Airbus could do right now is to buy BBD's shares and then try to persuade Quebec Government to sell their shares by promising more jobs at Mirabel Plant by increasing production rate.

TTailedTiger wrote:

Is there any escape clause for Bombardier to take the program back? Does Canada not have the money to loan BBD? I would think it could be a nice payoff in the end.

The national government of Canada has generally been a little reticent to get into industrial policy. The Kinder Morgan Trans-Mountain pipeline expansion forced their hand (to avoid mutiny in Alberta) but funds for the auto bailout and earlier BBD bailout had large provincial components by Ontario and Quebec, respectively.

If Canada or Quebec gave BBD large, below-market rate loans, Boeing would be back with another trade complaint before the day ended.

ewt340 wrote:

What Airbus could do right now is to buy BBD's shares and then try to persuade Quebec Government to sell their shares by promising more jobs at Mirabel Plant by increasing production rate.

Why would they do that now? BBD is still bound to invest hundreds of million USD into CSALP, without any change in shareholding structure. BBD evaluates the situation, and maybe it makes for sense for BBD to renegotiate, and let go of their CSALP share for little or nothing, just to be relieved of their obligations. Airbus might be asked to graciously accept a gift of those shares, why should they offer to buy them?

Skywatcher wrote:

Why do people always assume that the USA is a cheaper manufacturing location than Canada?
I used to work for a US multinational that owned a Montreal telecom manufacturing company where I was the controller. The efficiency and costs in Montreal were far more lucrative compared to our sister operations in the states at the time. Much of it is exchange rate related. Airbus understands the complexities of global operations well. Currency balancing is critical.
Didn't the brilliant workers in Mobile destroy the first A220-300 on the line with a foam accident? How is that cheaper?

As far as I know, the exact cause of the foam discharge hasn't been revealed. It could be a human error, it could be an equipment error.

Revelation wrote:

TObound wrote:

Just a reminder, a reduced projection of profits for the A220/CSeries program, doesn't mean it's not going to be profitable long term.

Bombardier is in a tough spot because they took on a lot of the liabilities of ramping up, while signing away a lot of the future profits to Airbus. If they stick it out, they will do quite well. If they sell now, they'll maybe be lucky to recover what they were putting into CSALP. But that's probably about it.

The thread isn't about the long term health of the program, it's about BBD reassessing their participation in the partnership.

Agree. Except the long term health of the program does have an impact on the assessment: if you participate in a program that can bring you billions over the next 20 years and don't need the money right now, then why sell your participation for a few millions?

PepeTheFrog wrote:

Here, from the horse's mouth:

https://twitter.com/jonostrower/status/ ... 0737253376

October 2017: "At the end of the day, this is going to be an Airbus program," Rainer Ohler, VP of communications for Airbus Group, said in an interview. "It's going to be a threesome, we take the majority now and over time we take 100% of the program.” https://cnn.it/371YNiT

So that's that. Airbus wants to entire program. If Bombardier sells, Airbus will buy.

I don't think anybody ever doubted Airbus wanted the entire program in the end. The agreement originally signed when Airbus entered CSALP was a clear sign they wanted to owe it in full at some point in time, as it allowed them and only them to decide of their participation.

MSPNWA wrote:

The CSeries continues to kill Bombardier. They're pleading for mercy now. As mentioned before, it's an awful reality that the more the A220 sells, the more Bombardier can't take the losses. They're tapping out. If they could have survived a few more years until the A220 becomes profitable - assuming it does that is - then maybe this whole Airbus gamble would have paid off. But as at stands, owning just 31% of a loss when you have to pay in so much is still a very bad investment.

So if Bombardier sheds their stake sooner rather than later, the question becomes how much Airbus is willing to eat the expenses that Bombardier was contributing. Of course they have the pockets to survive, but losing a partner effectively paying the bills changes the perspective. The need to turn the program around becomes even more imperative.

It looks like the flaw in the "elegant solution" was that it required BBD to put in almost $1B over three and a half years while not being able to see a payoff (Airbus buying them out) for seven years. That's fine if they were able to generate the cash from their other businesses, but that didn't play out favorably. Also it seems BBD was calculating they would not even need to put in as much as mandated but the cost of ramping up is exceeding their expectations. Seems like BBD has outsmarted itself yet again.

PepeTheFrog wrote:

Here, from the horse's mouth:

https://twitter.com/jonostrower/status/ ... 0737253376

October 2017: "At the end of the day, this is going to be an Airbus program," Rainer Ohler, VP of communications for Airbus Group, said in an interview. "It's going to be a threesome, we take the majority now and over time we take 100% of the program.” https://cnn.it/371YNiT

So that's that. Airbus wants to entire program. If Bombardier sells, Airbus will buy.

This all kind of reminds me of Boeing's partner Vought failing during the 787 ramp up. The bad news was that it forced Boeing to spend money that it didn't expect to spend on a program that was already over budget. The good news is that gave Boeing a lot more influence over a key part of the program and gave it total control of the CHS site. In the short term it was a challenge to Boeing, in the long term it was a benefit.

WayexTDI wrote:

Agree. Except the long term health of the program does have an impact on the assessment: if you participate in a program that can bring you billions over the next 20 years and don't need the money right now, then why sell your participation for a few millions?

The problem is they do need the money right now. While they have cash on hand they project it isn't enough going forward, and the reason they have cash on hand is they have been borrowing to finance ACLP along with other things. The fact that ACLP is not performing as projected means they are taking a write down on it which reduces the collateral they can offer a financier so their ability to borrow is impacted. All the trend lines are going the wrong direction for BBD.

HaulSudson wrote:

....

The financial statement is crystal clear for those who are listening:
Airbus, please bail us out.

No.

Quebec and Canada, please bail us out.

WayexTDI wrote:

Revelation wrote:

TObound wrote:

Just a reminder, a reduced projection of profits for the A220/CSeries program, doesn't mean it's not going to be profitable long term.

Bombardier is in a tough spot because they took on a lot of the liabilities of ramping up, while signing away a lot of the future profits to Airbus. If they stick it out, they will do quite well. If they sell now, they'll maybe be lucky to recover what they were putting into CSALP. But that's probably about it.

The thread isn't about the long term health of the program, it's about BBD reassessing their participation in the partnership.

Agree. Except the long term health of the program does have an impact on the assessment: if you participate in a program that can bring you billions over the next 20 years and don't need the money right now, then why sell your participation for a few millions?

Because the odds of BBD having any ownership in the C series 20 years (or even 10) from now are slim to none.

Airbus paid a dollar for their first 'share.' How much will BBD agree to pay to unload the rest of their share now?

How much do Quebec and Canada still own of ACLP?

I've read that Investissement Québec owns 19% of the A220 program still, not sure if that is true or not. If BBD could 'give' this whole program, no strings attached, to Airbus I would think they would take it, and it might stand to be a much better program long term if so, but I think the other partners might be an issue still.

Phosphorus wrote:

ewt340 wrote:

What Airbus could do right now is to buy BBD's shares and then try to persuade Quebec Government to sell their shares by promising more jobs at Mirabel Plant by increasing production rate.

Why would they do that now? BBD is still bound to invest hundreds of million USD into CSALP, without any change in shareholding structure. BBD evaluates the situation, and maybe it makes for sense for BBD to renegotiate, and let go of their CSALP share for little or nothing, just to be relieved of their obligations. Airbus might be asked to graciously accept a gift of those shares, why should they offer to buy them?

If Airbus invested beyond those hundreds of millions of BBD to further accelerate the ramp-up - that is likely to increase the value of the program... which would then mean Airbus have to pay BBD more when they buy them out.

Whereas if Airbus buy it off BBD now - they may see a greater program return by investing thei (and the BBD replacement) money earlier.

BBD are on the hook for what, another $300m? At $2m profit a frame, that is 150 frames, so if Airbus investing earlier means that extra number of frames are sold between now and 2026, then they'd be up on buying out BBD now.

texl1649 wrote:

Airbus paid a dollar for their first 'share.' How much will BBD agree to pay to unload the rest of their share now?

How much do Quebec and Canada still own of ACLP?

I've read that Investissement Québec owns 19% of the A220 program still, not sure if that is true or not. If BBD could 'give' this whole program, no strings attached, to Airbus I would think they would take it, and it might stand to be a much better program long term if so, but I think the other partners might be an issue still.

BBD/Quebec already gave away half the program. They are not going to give away the rest no strings attached without some money involved.

Amiga500 wrote:

Phosphorus wrote:

ewt340 wrote:

What Airbus could do right now is to buy BBD's shares and then try to persuade Quebec Government to sell their shares by promising more jobs at Mirabel Plant by increasing production rate.

Why would they do that now? BBD is still bound to invest hundreds of million USD into CSALP, without any change in shareholding structure. BBD evaluates the situation, and maybe it makes for sense for BBD to renegotiate, and let go of their CSALP share for little or nothing, just to be relieved of their obligations. Airbus might be asked to graciously accept a gift of those shares, why should they offer to buy them?

If Airbus invested beyond those hundreds of millions of BBD to further accelerate the ramp-up - that is likely to increase the value of the program... which would then mean Airbus have to pay BBD more when they buy them out.

Whereas if Airbus buy it off BBD now - they may see a greater program return by investing thei (and the BBD replacement) money earlier.

BBD are on the hook for what, another $300m? At $2m profit a frame, that is 150 frames, so if Airbus investing earlier means that extra number of frames are sold between now and 2026, then they'd be up on buying out BBD now.

My estimate was more like 600m$, but either way. BBD already mentions that they will expect A220 program to be worth less, over its entire lifetime. So, don't be surprised with a write-off from their balance sheet down the line (probably soon), affecting borrowing capacity and other key financial metrics. Now, to even get to that long-term, BBD has to borrow money to keep its commitments financed. It's one thing to sit quietly, waiting for a fat payout. It's another thing, shoveling money you don't have into the program that is worth less than you planned before. Which was less than you planned before that. And that was yet less, than was planned before that, too. How many times did BBD go through lowering of their expectations of A220/CSeries program value, while having to increase their financial commitments? At some point, even billionaires run out of money, if losses mount.

I fully get your logic, A220 is an excellent plane, and its success as a program is supposed to bring the owners a good payday. Surviving to see that payday -- that is a question.
I understand Quebec's shareholding is not going anywhere, as they are under no obligation to put up more money, correct? Not the case for BBD, who are still obliged to pay into the program.

VV wrote:

HaulSudson wrote:

....

The financial statement is crystal clear for those who are listening:
Airbus, please bail us out.

No.

Quebec and Canada, please bail us out.

The federal and provincial governments only care about jobs. Not Bombardier or the Beaudoin family's profits. There will be no bailout this time. The program is stable. The jobs are safe. They'll tell Bombardier to hand over their shares to Airbus and plan to end their presence at Mirabel.

Revelation wrote:

I'm sure Airbus could take advantage of the situation BBD finds itself in to buy out the whole program and fund it at a level that would support aggressive ramp up of production.

It'll be darned interesting to see if they end up doing so.

I think this is the reason up to now the ramp up was relatively slow.

BBD and Airbus had a contract to pump a certain amount of money into the program relatively to their ownership amount. It was not in anyway a good deal for Airbus to put more money in and therefore increase the return for BBD without them also increasing their investment, so it stayed at the agreed level.

Now BBD can not or does not want to provide their share of investment. Airbus could now buy out the program and increase their investment to increase their return without also increasing the one of BBD.

Quebec will be "easily" convinced by pledging to increase output and jobs in Mirabel.

Revelation wrote:

Polot wrote:

BBD/Quebec already gave away half the program. They are not going to give away the rest no strings attached without some money involved.

As above, BBD is tapping out / crying uncle. They can't afford to stay in the game long enough to see a positive return.

IQ's main interest is jobs, they're more than willing to be made whole earlier rather than later if it comes with an agreement on jobs.

The question is what is “uncle”? That is, what happens if BBD fails to deliver on their end?

Crying uncle doesn’t necessarily mean Airbus gets the rest for free, but rather perhaps gets an earlier opportunity to buy the rest at a discount.

texl1649 wrote:

Airbus paid a dollar for their first 'share.' How much will BBD agree to pay to unload the rest of their share now?

How much do Quebec and Canada still own of ACLP?

I've read that Investissement Québec owns 19% of the A220 program still, not sure if that is true or not. If BBD could 'give' this whole program, no strings attached, to Airbus I would think they would take it, and it might stand to be a much better program long term if so, but I think the other partners might be an issue still.

IQ still owns 19%. They've never given up anything. And they most likely won't sell unless given a guarantee on jobs for Quebec. Profit on the shares is not even a major driver.

Well, they can always go back and see if Boeing is interested in buying their shares, imaging both Boeing and Airbus collaborating making an a/c sold under Airbus name with Boeing paying for the production.

Revelation wrote:

Airbus has said they favor a new model once the program becomes economically viable. I think BBD's struggles make the program less financially viable. Why? Because it's becoming evident that Airbus will have to buy BBD out sooner than planned with BBD investing less than planned into the venture while needing to ramp up sooner/faster than planned in order to meet commitments. BBD's own calculations say the program is performing worse than projected and they're needing to take a write off. It suggests that if Airbus needs economic viability to justify an investment they are further rather than closer to making such an investment. Of course that statement could have all been rhetoric. We shall see how it all plays out. My popcorn maker is working overtime.

I don't see it like that at all. Sure Airbus would have to spend more. But they will now get 81% of the profits. Possibly 100% if they can convince IQ to sell early too. At 80% of the profit, the calculus changes very much. A 225 looks far more attractive, because it would boost yield on every 220 slot sold. And since they control the production rates, they can set production and deals to use those slots to steal share from Boeing and/or boost yield on the 320NEO line by getting customers to upgauge/upgrade to 321N/XLR.

A buy of shares at this point, would mean picking up BBD's cost obligations for 2020-2021. That's $350M, plus whatever they want to pay for their shares. They would also pay far less for the shares now than they would in 2026 when the program is at rate 15 or higher and is profitable. This is absolutely a huge opportunity for Airbus. When all is said and done, they might have spent $1-2B to get a new type developed and manufacturing facilities built. Bombardier will have gifted them about $4-5B worth of development, when all is said and done.

par13del wrote:

Well, they can always go back and see if Boeing is interested in buying their shares, imaging both Boeing and Airbus collaborating making an a/c sold under Airbus name with Boeing paying for the production.

If Airbus has an option to buy those shares, at some pre-agreed date, for BBD to sell those shares to any third party would be a delayed suicide. Because when Airbus exercises their options, BBD will have to come up with shares. What happens then is generally called a "short squeeze" in the markets. As CSALP shares are not traded, this could become a case of "infinity squeeze"-squared. Something like the legendary VW-Porsche squeeze, but on steroids: https://ftalphaville.ft.com/2018/10/31/ ... the-world/

Polot wrote:

Revelation wrote:

Polot wrote:

BBD/Quebec already gave away half the program. They are not going to give away the rest no strings attached without some money involved.

As above, BBD is tapping out / crying uncle. They can't afford to stay in the game long enough to see a positive return.

IQ's main interest is jobs, they're more than willing to be made whole earlier rather than later if it comes with an agreement on jobs.

The question is what is “uncle”? That is, what happens if BBD fails to deliver on their end?

Crying uncle doesn’t necessarily mean Airbus gets the rest for free, but rather perhaps gets an earlier opportunity to buy the rest at a discount.

Worst case scenario would be it goes to court and the court orders Bombardier to pay up. More likely is that Bombardier starts surrendering shares in lieu of cash. Airbus may be in a position to get those shares for a pittance. I could see something like $500M for the shares and a cancellation of Bombardier's cash obligations.

MoreMiles wrote:

Airbus already has controlling interest in the A220 program. They own 50.01%. BBD owns 31% with final 19% held by Investissement Québec. Currently with BBD suffering, BBD is looking at looking at options to sell their 31%.

I had also read that Airbus is looking at a new A350 line. Currently Mobile, Alabama and Mirabel, PQ are being considered.

For it to go to PQ will likely require Airbus increasing their share of the Airbus Private Limited. (A220) program

Airbus will buy, at the right price.

Airbus cancelled the ramp on the A350 from 10 to 13) month in current facilities. I am hearing nothing about expanding A350 production at this time, much less wild speculation on Mobile.

What I am hearing, and more on topic, is more Mobile A220 production and A321 production capacity.

I think the A220 is great concept. Bombardier trying to develop 3 projects at once was just too much.

Lightsaber

par13del wrote:

Well, they can always go back and see if Boeing is interested in buying their shares, imaging both Boeing and Airbus collaborating making an a/c sold under Airbus name with Boeing paying for the production.

I know you're being facetious....

Generally, however, limited partnerships like this have rules/veto rights on how a partner exists the deal. They can't just sell their shares to whomever they want.

TObound wrote:

texl1649 wrote:

Airbus paid a dollar for their first 'share.' How much will BBD agree to pay to unload the rest of their share now?

How much do Quebec and Canada still own of ACLP?

I've read that Investissement Québec owns 19% of the A220 program still, not sure if that is true or not. If BBD could 'give' this whole program, no strings attached, to Airbus I would think they would take it, and it might stand to be a much better program long term if so, but I think the other partners might be an issue still.

IQ still owns 19%. They've never given up anything. And they most likely won't sell unless given a guarantee on jobs for Quebec. Profit on the shares is not even a major driver.

I agree IQ is looking for jobs. That Airbus could guarantee.

I happen to agree an A220-500 is far more likely if Airbus owns 80%+.

Lightsaber

The 225 massively improves yield across their narrowbody portfolio.

Massively? Perhaps this is out ahead of events?

We should not ignore:

A) The relatively low selling prices BBD had to provide to get the big early orders (DL, B6, etc) means low revenue per frame

B) The fact that these prices do not capture the value of these great CASM results

C) The fact the A320 largely reused paid-for facilities and in-place employees so has a much cheaper ramp up cost profile

D) Under optimistic projections A320 still will be made in 6x-8x greater volume so costs to build will be cheaper by volume alone

E) BBD itself is showing ramp up costs are greater than anticipated revenues and are impacting projected profitability

The enterprise must still work through the ramp up exercise and work through all the low revenue early sales to get to the point of still being a substantially smaller enterprise than the A320 is yet still has to support two FALs and a supply chain spread across EU, Asia, Africa, China, US and Canada.

Airbus can chose to change many of these things, but changing most will mean increasing the cost base thus moving out the goal posts, and Airbus has said it does not want to increase investment till the enterprise is economically viable.

IMO It's a vicious cycle in action and will take decisive action to break. It can be broken but IMO the "massive" advantages will take a lot of time, effort and investment to unlock.

TObound wrote:

Revelation wrote:

Airbus has said they favor a new model once the program becomes economically viable. I think BBD's struggles make the program less financially viable. Why? Because it's becoming evident that Airbus will have to buy BBD out sooner than planned with BBD investing less than planned into the venture while needing to ramp up sooner/faster than planned in order to meet commitments. BBD's own calculations say the program is performing worse than projected and they're needing to take a write off. It suggests that if Airbus needs economic viability to justify an investment they are further rather than closer to making such an investment. Of course that statement could have all been rhetoric. We shall see how it all plays out. My popcorn maker is working overtime.

I don't see it like that at all. Sure Airbus would have to spend more. But they will now get 81% of the profits. Possibly 100% if they can convince IQ to sell early too. At 80% of the profit, the calculus changes very much. A 225 looks far more attractive, because it would boost yield on every 220 slot sold. And since they control the production rates, they can set production and deals to use those slots to steal share from Boeing and/or boost yield on the 320NEO line by getting customers to upgauge/upgrade to 321N/XLR.

A buy of shares at this point, would mean picking up BBD's cost obligations for 2020-2021. That's $350M, plus whatever they want to pay for their shares. They would also pay far less for the shares now than they would in 2026 when the program is at rate 15 or higher and is profitable. This is absolutely a huge opportunity for Airbus. When all is said and done, they might have spent $1-2B to get a new type developed and manufacturing facilities built. Bombardier will have gifted them about $4-5B worth of development, when all is said and done.

You keep saying there's a pot of gold at the end of the A220 rainbow. If that were true BBD wouldn't need a write-down of its investment - which it has warned it will make with 4Q19 earnings released next month. If you don't understand finance, don't make arguments based in finance. This can't simultaneously be a dog for BBD and a huge opportunity for Airbus in the medium term.

MIflyer12 wrote:

You keep saying there's a pot of gold at the end of the A220 rainbow. If that were true BBD wouldn't need a write-down of its investment - which it has warned it will make with 4Q19 earnings released next month. If you don't understand finance, don't make arguments based in finance. This can't simultaneously be a dog for BBD and a huge opportunity for Airbus in the medium term.

Currently Airbus make 50% of (any) profit made on an A220.

BBD stand to make ~30%.

Airbus buying out BBD would make ~80% of the profit of an airframe.

BBD are on the hook at the moment for ramp up costs. It looks like any borrowing necessary to produce the cash for those costs will come with high interest rates [despite their free cash, much of this is tied up in commitments over the next few quarters]. Yet BBD would only see at most 30% of any return.

An Airbus buy out now and Airbus could invest the same amount as BBD, at a far lower interest rate (if not from free cash) and they would then have more than double the return (30% >> 80%). It would also mean Airbus pay BBD less in 2026 when the program is stable.

An Airbus buy out now and Airbus could invest far more than BBD are capable of = Faster ramp = reduced build cost earlier = more profit per frame = more sales due to free production slots = freedom to build A225 which then enables A321 production slots to free up for Airbus customers and enables further attacks on the 737-8's marketshare.


If you don't understand finance...

Revelation wrote:

The 225 massively improves yield across their narrowbody portfolio.

Massively? Perhaps this is out ahead of events?

I see it as an inevitability. When you've got a product with good numbers and are in a situation that you can leverage it, that's some incredible good fortune. If every second 220 slot at rate 20 becomes a 225, and they can get 225 buyers to also up sales and conversions to the 321N and XLR such that even 10% of the 320N orders are converted to 321N and XLR, I'd consider that huge.

Revelation wrote:

A) The relatively low selling prices BBD had to provide to get the big early orders (DL, B6, etc) means low revenue per frame

B) The fact that these prices do not capture the value of these great CASM results

All this is true for every new program. And fortunately for Airbus, reflected in the price they paid to get half the program: $1. Again, when all is said and done, and they've acquired BBD shares and ramped up to rate 15, they'll have spent maybe $2 billion for a brand new type with a potential sales run of 20 years still left. That is a fantastic deal and should create more room for Airbus to invest and more willingness.

Revelation wrote:

C) The fact the A320 largely reused paid-for facilities and in-place employees so has a much cheaper ramp up cost profile

D) Under optimistic projections A320 still will be made in 6x-8x greater volume so costs to build will be cheaper by volume alone

First, the marginal cost reduction that Airbus gets for ramping on the A320 will be far less than the marginal cost reduction that the 220 ramp is driving. Next, the A320 model specifically is a commodity aircraft, regularly shopped against the Max 8 and even modelled against an upguage with the 321N. That limits margins. Lastly, Airbus controls sales here. They can ramp 220 to 20 frames if they wanted to and keep the 320N at 65 frames, and tie 225 sales to 321N sales. The 225 gives them more leverage.

Revelation wrote:

E) BBD itself is showing ramp up costs are greater than anticipated revenues and are impacting projected profitability

The question here is one of relative impact and desired return. For Bombardier to spend $350M and only 30% profit, is very different from Airbus spending the same $350M on ramping as part of a deal that buys them another 30% share of a product they can leverage to boost yield across their narrowbody portfolio. The business dynamics are different for each company. Not to mention the different level of tolerance for cash burn. $350M is far more difficult for Bombardier to fund than Airbus.

Revelation wrote:

The enterprise must still work through the ramp up exercise and work through all the low revenue early sales to get to the point of still being a substantially smaller enterprise than the A320 is yet still has to support two FALs and a supply chain spread across EU, Asia, Africa, China, US and Canada.

We are basically talking about about the next 3 years of production. After that, Airbus will start seeing profitability. The supply chain being spread out is a strange complaint. It's not like Airbus doesn't have that on other programs. Is there any modern airliner with a highly concentrated supply chain?

Revelation wrote:

Airbus can chose to change many of these things, but changing most will mean increasing the cost base thus moving out the goal posts, and Airbus has said it does not want to increase investment till the enterprise is economically viable.

They said that when they owned 50% of the program and they had one plant producing 30 aircraft a year. Would it be the same logic, once they have two plants producing over 100 aircraft per year and 80% share in the program?

I think you'll see their calculus change awfully quick if they get BBD's shares. And even faster if IQ's shares are thrown in.

Revelation wrote:

IMO It's a vicious cycle in action and will take decisive action to break. It can be broken but IMO the "massive" advantages will take a lot of time, effort and investment to unlock.

It's still far less effort than any other new program they would have launched. And beyond what their competitor can really afford at the moment.

Amiga500 wrote:

An Airbus buy out now and Airbus could invest far more than BBD are capable of = Faster ramp = reduced build cost earlier = more profit per frame = more sales due to free production slots = freedom to build A225 which then enables A321 production slots to free up for Airbus customers and enables further attacks on the 737-8's marketshare.

The quick ROI for Airbus is an important consideration. At most the cost to Airbus is $5 billion to buy out partners, increase production, and develop the A225.

Airbus has no problem with that quantity and allows them to position the A220 profitably in the commodity part of the market.

I agree with your simplified profit logic. Airbus must skew to the higher profit market. Not to mention the A225 will certainly generate more profit than the smaller aircraft.

Boeing and Embraer are years away from reacting, time to strike. Bombardier will try to negotiate, but the have an incredibly weak hand due to over- investment in three separate product lines.

Lightsaber

The conspiracy theories on this topic are hillarious. Does anybody really think that Airbus did enter into a contract without owning the whole A220 series in the end?

Another billion from Quebec would help.

lightsaber wrote:

Amiga500 wrote:

An Airbus buy out now and Airbus could invest far more than BBD are capable of = Faster ramp = reduced build cost earlier = more profit per frame = more sales due to free production slots = freedom to build A225 which then enables A321 production slots to free up for Airbus customers and enables further attacks on the 737-8's marketshare.

The quick ROI for Airbus is an important consideration. At most the cost to Airbus is $5 billion to buy out partners, increase production, and develop the A225.

Airbus has no problem with that quantity and allows them to position the A220 profitably in the commodity part of the market.

I agree with your simplified profit logic. Airbus must skew to the higher profit market. Not to mention the A225 will certainly generate more profit than the smaller aircraft.

Boeing and Embraer are years away from reacting, time to strike. Bombardier will try to negotiate, but the have an incredibly weak hand due to over- investment in three separate product lines.

Lightsaber

Agreed. This is an absolutely incredible opportunity for Airbus. The A220 is the gift that keeps on giving. Stuffed stockings for Airbus. Lumps of coal for BBD and Boeing.

I don't think it'll cost them $5 billion. I can see them getting the whole program and ramping for under $3 billion. And even less if Bombardier is desperate enough.

If BBD is about to sell its shares at fire sale prices, IQ may as well buy them out at those fire sale prices.

IQ is fully aware of the future value of those shares, and has the financial capacity to wait for the latter buy-out by Airbus. (Obviously IQ borrowing costs are much lower than BBD's).

The current Québec gouvernment has suficient "political capital" to get it approved without risking losing too much of its popularity.

ExMilitaryEng wrote:

If BBD is about to sell its shares at fire sale prices, IQ may as well buy them out at those fire sale prices.

IQ is fully aware of the future value of those shares, and has the financial capacity to wait for the latter buy-out by Airbus. (Obviously IQ borrowing costs are much lower than BBD's).

The current Québec gouvernment has suficient "political capital" to get it approved without risking losing too much of its popularity.

Buy out BBD's share, and accept liability for IQ's investment obligations? And yes, Airbus continues to retain purchase options (and BBD is at the other end of this option contract), so IQ has to build in an obligation to resell the share back to BBD.

Airbus financial engineers could build "on steroids" investment case, where BBD has to invest all that's required. And have the A220 program at its lowest value point at the moment Airbus's option becomes exercisable. If BBD is on the receiving end of this shakedown -- it's bad for BBD shareholders. If IQ is taken for a ride in this fashion, instead -- political fallout will be worse.

So Phospherus, your are pretending that Airbus could force an investment plan on "steroids" that would speed up BBD share divestment at fire sale prices - that IQ would not touch either due to "on steroids" later req'd investments.

Interesting concept, but thats more of the Boeing's predator type of mentality than Airbus's, isn't it? I'm not sure Airbus would want to destroy the "lune de miel" that it currently enjoys with local authorities.

I still beleive BBD's share won't be sold at fire sale prices but somewhat closer to fair market value (whatever that means) due to the fact IQ can make a counter offer - if the price is ridiculous.

(FWIW, despite its dire financial state, BBD still managed to get a better price for the Belfast installations than what most analysts predicted)

lightsaber wrote:

For it to go to PQ will likely require Airbus increasing their share of the Airbus Private Limited. (A220) program
Airbus will buy, at the right price.

Airbus cancelled the ramp on the A350 from 10 to 13) month in current facilities. I am hearing nothing about expanding A350 production at this time, much less wild speculation on Mobile.

What I am hearing, and more on topic, is more Mobile A220 production and A321 production capacity.

I think the A220 is great concept. Bombardier trying to develop 3 projects at once was just too much.

Lightsaber

It was just Rumor: Airbus Planning More Assembly Lines In North America - Simple Flying.
https://simpleflying.com/airbus-us-assembly-lines/

ExMilitaryEng wrote:

I still beleive BBD's share won't be sold at fire sale prices but somewhat closer to fair market value (whatever that means) due to the fact IQ can make a counter offer - if the price are ridiculous.

Would such a purchase be consistent with IQ's mandates?

Whatever BBD does would need to consider shareholder value.

It's not a given that Airbus can get the shares a fire sale price.

BBD will have a fiduciary responsibility to explore all offers, BBD has funded a lot of the ramp up since the deal closed, Airbus's participation and the deep order book mean the value of the enterprise is greater than $1.

Revelation wrote:

ExMilitaryEng wrote:

I still beleive BBD's share won't be sold at fire sale prices but somewhat closer to fair market value (whatever that means) due to the fact IQ can make a counter offer - if the price are ridiculous.

Would such a purchase be consistent with IQ's mandates?

Whatever BBD does would need to consider shareholder value.

It's not a given that Airbus can get the shares a fire sale price.

BBD will have a fiduciary responsibility to explore all offers, BBD has funded a lot of the ramp up since the deal closed, Airbus's participation and the deep order book mean the value of the enterprise is greater than $1.

One of the financial institutions here in Canada is stating that Bombardier should fetch a price between $2 and $4.
https://apple.news/A2xh3dgZURdeseqb67HMeIg

Agree with you Revelation. BBD will have a fiduciary responsibility to explore all offers. (From Airbus, IQ or whoever else). And it has shown not too long ago that it still has the capacity to do so - when it successfully sold Belfast.

About IQ mandates, it's a good question. It's a mix of promoting job creating local investments - while still obtaining an acceptable $ return. Past investments has shown that they have a lot of latitude in interpreting that mandate. Like indirectly helping BBD to keep creating job instead of going belly up could fit. The biggest factor will be how it will be accepted by Quebec taxpayers... Personnaly they would get my vote if the price paid is right.

ExMilitaryEng wrote:

So Phospherus, your are pretending that Airbus could force an investment plan on "steroids" that would speed up BBD share divestment at fire sale prices - that IQ would not touch either due to "on steroids" later req'd investments.

Interesting concept, but thats more of the Boeing's predator type of mentality than Airbus's, isn't it? I'm not sure Airbus would want to destroy the "lune de miel" that it currently enjoys with local authorities.

I still beleive BBD's share won't be sold at fire sale prices but somewhat closer to fair market value (whatever that means) due to the fact IQ can make a counter offer - if the price is ridiculous.

(FWIW, despite its dire financial state, BBD still managed to get a better price for the Belfast installations than what most analysts predicted)

The fact that it is not Airbus' custom to behave this way, is not a reason for somebody, granted with fiduciary responsibility for taxpayers' money, to simply exclude such an option from their financial modeling. Especially if such an investment plan is both fully legitimate, and is actually in line with IQ's mandate of maximizing employment.

To limit a forecast to a narrow set of "favourable" (for you) scenarios (actually, insisting on "Goldilocks" as the only acceptable outcome), and sign it off as perfectly fine, "what could possibly go wrong", is an abrogation of responsibility. Borderline dereliction of duty. To quote (an insufficiently well-known) disaster movie: "It's hope as a tactic".

Eventually, if IQ wants more employment, BBD (or IQ, if they buy BBD out) will have to sustain more investment. And yes, the moment when Airbus' options become exercisable, could be a nadir in CSALP value, even without special mischievous plan from Airbus'.

And yes, Airbus' option will not become forfeit, if BBD offloads their share to IQ. Unless Airbus' forfeits it voluntarily (why?). BBD will remain on the hook to hand over those shares, once the option is called.

I agree with you that there are a zillion possible scenarios. And indeed BBD, IQ and Airbus must be assessing them.

I picked on the fire sale scenario as it was brought up a few times on the thread.