BUSINESS

Bombardier delays CSeries first flight and cuts 1,200 railway jobs

11/07/2012 06:40 EST | Updated 01/07/2013 05:12 EST
MONTREAL - Bombardier is giving no guarantees that the six-month delay in the first flight of its new CSeries aircraft announced Wednesday is the final extension to the most complex new program development in the company's history.

"Things are coming together at a good rate and the team is very, very focused on getting it done so I feel very confident, but there is no guarantee," CEO Pierre Beaudoin said during a conference call.

The company, which is gearing up to build the next-generation CSeries commercial jets, said it now expects the plane to have its first flight before the end of next June.

Beaudoin said the CSeries program is making "good progress" but needs more time to address delivery challenges faced by some suppliers. Over the last few months it developed a harmonized supplier schedule that will ensure that parts arrive for assembly in the correct order.

He wouldn't single out a specific supplier or part of the aircraft that was causing headaches, adding that the rear fuselage provided by its Chinese supplier is performing well. But analysts believe software related to its "fly-by-wire" flight control system could be one culprit.

Entry into service for the smaller aircraft model has been pushed back to June 2014. Delivery of the larger model remains unchanged for the end of 2014 because it has common parts with the CS100.

"The future of Bombardier is bright and the next year will be exciting as we start seeing our products in development come to life," Beaudoin said.

The Montreal-based railway and aerospace manufacturer also announced Wednesday that 1,200 railway employees will be cut across its global network next year as it reduces costs to improve its "competitiveness and cost structure."

The closure of its plant in Aachen, Germany, will affect 350 direct employees while the remaining 800 positions slated for elimination will be spread across facilities that employ 36,000 workers. Contract workers will first be affected followed by regular employees. Bombardier expects to take a charge up of to US$150 million in the fourth quarter.

"The transportation team is putting the plan together and I can't tell you exactly where the job cuts will be, but it will be throughout the transportation organization, including North America," Beaudoin said.

The announcements came in Bombardier's (TSX:BBD.B) third-quarter financial results, reported in U.S. dollars. Net income in the three months ended Sept. 30 rose to $212 million but its revenues came in lighter than analysts had expected as weakness at its rail equipment division continued.

Revenue slipped to $4.3 billion, down about $300 million from the third quarter of 2011. Most of the decline was from Bombardier Transportation while revenue at Bombardier Aerospace fell slightly.

The company's net income was equal to 12 cents per share and compares with $192 million or 11 cents per share a year earlier.

Bombardier had been expected to earn 11 cents per share in adjusted profits on US$4.67 billion of revenues in the third quarter, according to analysts polled by Thomson Reuters.

The weak results prompted several analysts to lower their target prices for Bombardier shares.

Walter Spracklin of RBC Capital Markets cut his 12-month target 20 per cent to $4, while Cameron Doerksen of National Bank Financial trimmed 25 cents off his target to $4.

"Although we can see the potential for long-term upside from the current share price, we believe that the stock will remain depressed for the next two to three quarters," Doerksen wrote in a report.

Spracklin said his change was prompted by significantly reduced transportation revenue and margins, lower aerospace margins and Bombardier's expectations of using $800 million in free cash flow for the year.

He said the six-month delay in the CSeries test flight was widely anticipated.

"The key question will be whether the project's delay will indeed be limited to six months. It is our view that the shares are reflecting a 12-month-plus delay," he wrote in a report.

Doerksen added that he believes the new schedule seems achievable, but the market will remain highly skeptical until the plane flies. Other manufacturers have faced sustained delays in the development of new aircraft. Boeing also initially delayed its 787 program by six months in 2007. But the plane was more than two years late with massive cost overruns.

"We don't think the CSeries faces nearly the same issues that the 787 did — CSeries is a more conventional design, has had a longer development timeline and Bombardier has had better control on its suppliers — but the risk of further delays will remain until entry-into-service."

Doerksen said the delay exceeds the three-month extension predicted by most analysts given the company's recent progress reports.

"Presumably, Bombardier has built some buffer into this new timeline as a second delay would be a more serious blow to credibility."

He said a late delivery won't likely lead to cancellations but will delay new orders until the program has more certainty.

Bombardier said additional costs caused by the delay have been built into its business plan. But Doerksen said he's not convinced even though it has $3.5 billion of liquidity.

On the Toronto Stock Exchange, Bombardier's shares dropped 16 cents, or 4.43 per cent to C$3.45 in Wednesday trading.