The Strategist

How Russian Sanctions Hurt Business: Bombardier

05/14/2015 - 16:22

Aggressive pricing competition and weaker demand in the emerging markets are forcing the Canadian aircraft manufacturer Bombardier to reduce the rate of production of the Global 5000 and 6000 models. This was stated by the company’s executives at a press conference on the results of the first quarter of 2015. In 2013, the manufacturer responded to the growing demand with increase of production rates by 60%, and supply from 50 to 80 in 2014.

Adrian Pingstone
Adrian Pingstone
This adjustment will not affect the pace of deliveries this year, but because of the sagging market of business jets in Russia, China and other developing countries, where buyers favored ultra-range aircrafts, the release of Global 5000 and 6000 will be reduced over the next 12-18 months .

According to experts, Bombardier can also change the schedule of delivery of the first aircraft Global 7000 and 8000. Previously, the company planned to deliver the first certified Global 7000 in 2016 and Global 8000 in 2018. But at a press conference on May 7, CEO Alain Bellemare has not confirmed these dates, saying only that the program has a "very strong order backlog."

However, experts believe that the failure of the commercial CSeries and Learjet 85 freeze could lead to a "domino effect" for the program. Especially because the CSeries delay overlap the program with Global 7000/8000.

The president of Bombardier Business Aircraft Eric Martel did not specify how much production will be reduced, as well as how many people as a result will be dismissed. At the moment the production of high-end business jets has about 4.5 thousand employees. According to Martel, accurate information about the cuts will be delivered in the near future.

In February, Bombardier has suspended the project for the production of Q400 aircraft in Russia. The decision in the Canadian company is explained by the economic situation in the country.

A Russian company Rostech and Bombardier signed a memorandum of intent to establish a joint venture on a parity basis for the production of Q400 aircraft in Russia in August 2013. The plant was planned to be built in Ulyanovsk in 2014, the investment in the project had to make 100 million dollars. In March, Canada acceded to the sanctions against Russia, and cooperation stalled.Eventually, in September 2014, the project was suspended.

In addition, a Russian leasing company Ilyushin Finance is considering the revision of the contract to purchase 39 CSeries aircrafts produced by Bombardier with total of catalog price more than $ 3 billion, and the terms of the option for another ten such vessels.

- We do consider the possibility of revising our participation in this program due to the repeated postponement of the delivery of the aircraft manufacturer, as well as due to the suspension of export financing of Russian companies by the Canadian agency Export Development Canada (EDC), - said the company’s CEO.

Ilyushin Finance in February 2013 placed an order for 32 CSeries aircraft 300 with an option for another ten aircraft. Then Bombardier announced cataloging price per aircraft at $ 80 million. In July 2014 at the Farnborough Air Show in the UK, the company increased the order for another seven cars, with an option for 10 cars remained. Then the deal was not made public because of the threat of sanctions. Thus, the Russian leasing company is one of the largest customers for the launch Bombardier CSeries.

source: bloomberg