Updated on January 21, 2014 at 5:16 PM with additional quotes from sources and comment from Walter Spracklin
Bombardier’s decision to lay off 1,700 workers from its Aerospace division is a “prudent” option for the Canadian transport company at the present time, say analysts.
News of the impending job cuts came in the form of an internal memo released to employees on Tuesday, which stated that the decision to terminate positions was due to product delays, as well as a “tough market” and the company’s need to conserve cash.
Bombardier’s upcoming CSeries line was already delayed when the company announced last week that its CS100 commuter jets won’t be entering service until the second half of 2015. At least one other CS model will be delayed, as well as Bombardier’s Learjet 85 business jet.
Analysts are noting, though, that while product delays are having a degree of impact on Bombardier’s balance sheets, the decision to cut jobs is more about financial foresight than a sign of dire times ahead.
“It’s probably one of the prudent things for management to do at this juncture,” said Raymond James equity analyst Steve Hansen.
Around 1,100 of the Bombardier Aerospace terminations will take place in Canada, while the remaining 600 layoffs will affect employees in the U.S. Of the Canadian layoffs, about 80% will be in Montreal. Cormark Securities estimates that the layoffs account for about 5% of Bombardier’s aerospace workforce.
Bombardier is likely trying to weather the impending delays by trimming costs at the outset, rather than continuing with the same level of spending as it works to get products like CSeries off the ground. As noted by Cormark Securities transportation research analyst David Newman, the cuts aren’t all related to the actual manufacturing of Bombardier products, but also engineering, sales and support as well. The changes point more towards the creation of a “leaner cost structure” in getting Bombardier aerospace products ready for their eventual debut.
In a research note, Newman added that “sluggish small-cabin business jet sales” followed the release of Bombardier’s previous Learjet models, the 70 and 75, and have led the company to “trim its resources.”
With the extra delays added to the CSeries and Learjet 85 projects, Bombardier needed “to improve margins and find cost savings somewhere,” said Newman. Eliminating 1,700 positions likely followed from that line of thinking.
‘“Overall, the company is trying to prudently manage their cash and their liquidity position, while they have the pressure of two major aerospace programs on the go that are both going to see material delays,” says Scott Rattee, an equity analyst with Stonecap Securities.
“They’ve only got so much capital, and they really do have to preserve that.”
While Bombardier may eventually come out ahead after the CSeries and new Learjet 85 are out on the market, the company’s balance sheet risk has increased in recent days following the announcement of more delays. RBC analyst Walter Spracklin, who recently downgraded his Bombardier price target from $6.00 CAD to $4.00, wrote in a note Tuesday that the job cuts are “symptomatic of the balance sheet pressure” the company is currently experiencing. While delays are common in the aerospace industry, the “magnitude” of the pressure is “heightened” for Bombardier due to the company’s investment in the CSeries program, wrote Spracklin.
Hansen and Rattee also recently downgraded Bombardier as well.
It’s unclear as to what exactly is plaguing the CSeries project, specifically. Software has been suggested as one culprit, but “the reality is at this juncture that it’s all speculation,” said Hansen.
The lack of clarity regarding the delays has also led to a murky view of what the future holds for Bombardier’s financial performance.
As Rattee noted, “Unfortunately, there’s still a fair bit of uncertainty regarding the stock at this juncture.”
With files from Canadian Press