Bombardier says Russian turmoil affecting business aircraft but not Q400 talks

MONTREAL – Bombardier says a Russian economy weakened by Western sanctions is having an effect on business aircraft sales, but has not undermined negotiations to establish a turboprop manufacturing facility or threatened a large CSeries order from a Russian leasing company.

“So far everything is still going, maybe except for business aircraft,” CEO Pierre Beaudoin said Thursday during a conference call to discuss second-quarter financial results.

“The market is weak in Russia right now and you can imagine that if the economy slows down it has an effect, but I think it’s a situation that we need to follow very closely.”

Bombardier reported that its overall revenues increased about nine per cent adjusting for currency to US$4.9 billion, but its net income decreased 14 per cent due to softness at its railway division.

The Montreal train and plane maker, which keeps it books in U.S. dollars, earned $155 million or eight cents per share for the three months ended June 30. That compared to $180 million, or 10 cents per share, for the same quarter in 2013.

Excluding items, adjusted net income was $192 million, or 10 cents per share, compared with $158 million, or nine cents per share, year-over-year.

Analysts expected nine cents in adjusted earnings per share on $4.73 billion in revenues, according to data compiled by Thomson Reuters.

Beaudoin said negotiations continue with Rostec about setting up a Q400 assembly plant in Russia, with both sides motivated to find a solution.

“Of course when and if we get to an agreement we will have to consider the overall environment and the sanctions at that time,” he said. “Today I don’t see that as a restriction but it’s a situation that evolves.”

Beaudoin added that Russian leasing company Ilyushin Finance’s firm order for 32 CS300 and options for 10 more aircraft is not compromised by the political situation in Russia since the larger CSeries plane isn’t scheduled to enter into service until later in 2016.

Meanwhile, the aerospace manufacturer said it hopes to make up some lost flight hours caused by a two-month grounding of the commercial jet after flight tests resume “within weeks.” The test program requires 2,400 flight test hours, but Bombardier hopes to get credit for some of its ground testing.

New engines have been installed on one flight test aircraft and Bombardier is reviewing a solution provided by Pratt & Whitney to resolve the engine mishap.

“We still feel confident that we’re within the window that we gave you (for entry into service), which is the second half of 2015,” he told analysts.

Beaudoin said customers have expressed confidence in the performance of the 110- to 160-seat CSeries plane despite being disappointed by the engine problem.

Bombardier has used the lull in flight testing to install component and software updates and will fly in “normal mode” using its fly-by-wire computer system when flights resume.

The aerospace division had revenues of $2.5 billion as it delivered 62 aircraft and received 48 net orders. That compared with compared with $2.3 billion in revenues for the same period last year when it delivered 47 planes and received 82 net orders.

The German-based transportation division had US$2.4 billion of revenues, compared with $2.2 billion a year earlier, or up 6.3 per cent excluding currency impacts. It is continuing its restructuring, which involves reduction in jobs.

Bombardier’s aerospace division announced the layoff of 1,800 employees, an organizational restructuring and the retirement of the division’s CEO last week. The aerospace division has been split into three units, each reporting to Beaudoin.

The CEO said the change, which has been in the works for “quite some time”, will cut 15 per cent in overhead costs and make aerospace more profitable, agile, and flexible, while the separation of aerostructures will provide more transparency about its results.

Beaudoin said a major change was warranted because he was dissatisfied with the division’s executive and wanted a more direct hands-on role to monitor heavy investments in aircraft development.

He wouldn’t say if a specific event prompted the change, which included the departure of aerospace CEO Guy Hachey.

“Mr. Hachey retired. That’s his own personal choice,” Beaudoin told reporters when pressed about the leadership change.

He also wouldn’t categorically rule out further job cuts.

“I will not speculate on that one. Our goal right now is for 1,800 and we want to make sure that our three new business units work adequately.”

Analysts said the results were largely in-line with expectations, while the company used $424 million in free cash flow in the quarter, better than the $602 million forecast.

“(The) free cash flow usage beat and stronger margins provide more confidence that stock is poised to bounce back in response to overly negative market sentiment,” wrote Benoit Poirier of Desjardins Capital Markets.

On the Toronto Stock Exchange, Bombardier’s shares lost four cents at C$3.63 in Thursday morning trading.

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