Bombardier Struggles Despite Aviation Industry Rebound

Maker of CSeries aircraft likely faces slow recovery while other Canadian aerospace companies begin to prosper as result of rebound in commercial aviation.

MONTREAL (CP) -- Bombardier likely faces a slow recovery while other Canadian aerospace companies begin to prosper as a result of the rebound in commercial aviation, industry analysts said Wednesday.

"There's at least another year, year-and-a-half of sluggishness in the business jet market, regionals got at least another sluggish year and then probably no real growth after that," Richard Aboulafia of the Teal Group said in an interview.

The Montreal-based manufacturer's new CSeries aircraft promises to move it into a new market segment. But an expected response by Boeing and Airbus to introduce new, more fuel-efficient engines on their popular 737 and A320s could cut into CSeries territory.

Bombardier believes it can capture half of the 110- to 149-seat market over the next 20 years.

However, Aboulafia is concerned the manufacturer risks losing its dominance in the business jet market as it diverts valuable development resources to the CSeries.

"The sort of nightmare scenario is where they stumble on CSeries development and execution and find themselves in an orders desert because of the A320 and 737 re-engine announcement," he said from Washington, D.C.

The business jet market has stabilized after last year's 24 percent drop in business. Regional jet sales fell by six percent.

Bombardier recently acknowledged it faces several quarters of financial challenges as deliveries of business and commercial aircraft are expected to decrease by 15 and 20 percent respectively.

On Wednesday, Bombardier announced that Pluna Lineas Aereas Uruguayas S.A. has signed a follow-on firm order for three CRJ900 NextGen regional jets and has taken options on an additional six CRJ900 NextGen aircraft.

Based on the list price, the value of the firm order was US$120 million.

Cameron Doerksen of Versant Partners said there has been no indication yet of production rate increases for business and regional jets. In fact, Bombardier said it plans to reduce commercial aircraft production in 2010 because of soft demand.

Among the positive signs for Bombardier is growing international air passenger traffic. Traffic by the world's airlines was up 9.5 percent in February on a capacity increase of just 1.9 percent. That was the sixth consecutive monthly increase in terms of year-over-year comparison and the biggest monthly increase yet.

"If the airline industry generally is getting more healthy as it appears it is, that would be positive for Bombardier's airline customers," he said in an interview.

While Bombardier faces a lag in benefiting from improved passenger traffic, CAE Inc. gets an immediate jolt as demand increases for pilot training.

Doerksen raised his target price for the Montreal-based flight simulator and training company Wednesday to $12.50 from $10.

"We believe the market will be willing to pay a premium multiple for stocks such as CAE that are positioned to benefit from the aerospace up-cycle," he wrote in a report.

Even though the stock has performed well over the last 12 months, he said there remains "material upside potential" especially for medium- to longer-term investors.

Announced production rate increases by Airbus and Boeing, along with strengthening passenger and freight traffic are signals that the commercial aerospace industry rebound is accelerating, Doerksen added.

Canadian companies such as landing gear maker Heroux-Devtek and Magellan Aerospace Corp. also have strong relationships with the world's two largest aircraft manufacturers.

Like CAE, Heroux has been cushioned by its growing military segment from any hits to civil aviation. Doerksen said the military outlook remains strong.

Meanwhile, American and Canadian aerospace companies attending a U.S. government sponsored trade mission in Montreal on Wednesday said they don't foresee a dramatic pickup until 2011.

"We have time right now (to develop relationships with suppliers) because it's very slow and when the market will restart in 2011 we will be ready," said Anne-Marie Bertrand, supply chain director for small landing gear company Mecaer America.

The Laval-based company responded to the market decline by cutting its Quebec workforce by 15 to 20 percent over the past 18 months.

CAE shares closed at $9.92 Wednesday, down eight cents in trading on the Toronto Stock Exchange. Over the past year, the company's shares have gained more than 25 percent.

Bombardier shares, which has gained 49 percent in the past 12 months, lost one cent to $5.39 on Wednesday.

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