Joined: Tue Jun 14, 2005 2:48 pm
|http://www.ainonline.com/aviation-news/ ... 85-program
Bombardier Halts Learjet 85 Program
Struggling to balance a hefty development schedule that was quickly burning cash, Bombardier is “pausing” its Learjet 85 program in a move that will result in a $1.4 billion pre-tax charge in its fourth-quarter 2014 results and the layoff of 1,000 workers this year. The decision to halt the Learjet 85 program was widely expected after Bombardier refocused its resources last year on seeing through the CSeries program and moving ahead with the Global 7000/8000 programs.
“The Lear 85 pause is not a major surprise,” said J.P.Morgan analyst Joseph Nadol. “We had expected Bombardier’s decision to shelve the Learjet 85 for now due to the program’s struggles and the more important development and production challenges Bombardier faces for the CSeries and Global 7000/8000.”
Analysts noted that the success of the CSeries, which has suffered costly, prolonged delays, is critical to the future of the company. The Global 7000/8000 program offers higher margins and has enjoyed stronger sales. The light jet market, meanwhile, is just now showing signs of improvement after the prolonged downturn, and with the exception of orders from the former Bombardier-owned Flexjet, sales of the Learjet 85 have been slower.
“Bombardier constantly monitors its product strategy and development priorities,” said Bombardier president and CEO Pierre Beaudoin. “Given the weakness of the market, we made the difficult decision to pause the Learjet 85 program at this time.” He added, “We see tremendous market potential [for the CSeries and Global 7000/8000]. Both programs are progressing well.”
Beaudoin discounted technical issues as a factor in the decision, saying it was purely market driven. He noted given the other models in the Learjet 85 niche, “the market doesn’t justify us continuing investment at this time.”
Bombardier said it is continuing to experience weakness in the light jet market and is scaling back its business jet sales forecast. At the same time, though, the company’s 2014 business aircraft deliveries exceeded its original target of 200. The company said it delivered 204 business jets in the year, up from 180 in 2013.
The company also has been encouraged by the sales of the Learjet 70 and 75, and said its order intake overall had climbed in 2014. The company had orders for close to 130 business aircraft in the year. “We’re doing OK on the Learjet 70 and 75,” Beaudoin said, but added, “It is not the level it was pre-2008.”
Analysts Weigh In
Business aviation analyst Rolland Vincent disputes Bombardier's assertion that the light jet market is experiencing “weakness.” Vincent, the creator of JetNet IQ and former marketing and communications director at Learjet, said he is forecasting “no decrease” in the light or midsize jet market. In fact, he is merely reallocating the market share for the Learjet 85 to competitors, namely the Embraer Legacy 450/500 and Cessna Citation Latitude. “This is good news for these two manufacturers,” he told AIN. “But what this move really comes down to is a CSeries cost-reduction program. It's not a light or midsize jet market issue.”
Vincent also contends that the “pause” is a “de facto cancellation” of the Learjet 85. He believes that Bombardier “might try to market the program to other companies or sell the Learjet 85 assets.”
Richard Aboulafia, vice president of analysis at the Teal Group, agreed, commenting that the Learjet 85 had become “another CSeries casualty. What a carnivorous program that's turned out to be. Embraer is the big winner here. The 500 is arriving at exactly the right time.”
Business aircraft market tracker Brian Foley added, “It’s refreshing to see Bombardier show some level of transparency, which should normally be a matter of full disclosure to shareholders. Now, about that CSeries being delivered later this year…”
The decision, however, sparked concerns among analysts that Bombardier is facing liquidity issues. Analysts closely questioned the manufacturer about its liquidity position during a January 15 call.
“Liquidity is now the key issue for the stock,” said Nadol, noting that the $2.4 billion cash at the end of the year was $600 million below estimates. “Management has noted in the past that it needs about $2 billion to run the business, and Bombardier typically burns cash during the first nine months of the year.” Further causing concern was a decision by Bombardier to lower its margin guidance for the Aerospace group to 4 percent for the year, instead of 5 percent.
The $1.4 billion impairment charge is primarily related to development costs for the composite Learjet 85. In addition, Bombardier is planning a $25 million severance provision in the first quarter of this year as it cuts its workforce in Querétaro, Mexico, and Wichita. The reductions will begin immediately, with Wichita accounting for 620 of the job losses.
But Bombardier stressed that each location remains a critical part of its activities, with Wichita housing Learjet 70 and 75 assembly, along with the Bombardier flight-test center and a service center. Querétaro, meanwhile, is providing structures for the Globals.
The decision comes less than a year after the Learjet 85 completed its first flight in April 2014. Bombardier would not reveal a certification schedule though, saying only that it was accruing hours and the program was progressing well. Bombardier had completed more than 70 test flights. The company had also nearly completed a second flight-test vehicle, and Beaudoin said it was almost ready to move into the flight-test program.
The company brought the Learjet 85 to the most recent NBAA Convention in Orlando, providing a public showing that the company was still backing the model at the time. But speculation continued over the program's ultimate fate.
Company executives maintain that its decision is just a pause and that the program will be ready to ramp back up should the market dictate. When the market picks up, Beaudoin said, “I think we have a fantastic airplane.” However, he would not estimate how long it would take to ramp the program back up, given the layoffs and writeoffs.
“If Bombardier recovers from the CSeries, the Learjet 85 could be relaunched, although it might come back as something less ambitious, which is just as well,” Aboulafia said. “It's far from clear that the market wants a composite jet.”
In the meantime, Bombardier is working with its Learjet 85 customer base. The company is not revealing total number of orders for the jet, but Flexjet had been the aircraft’s largest customer with firm orders for 60 valued at $1.2 billion.
Bombardier is hoping to shift those customers either to its 70/75 or up into the Challenger line. Otherwise, it will refund deposits. But Beaudoin said of the deposits, “It is not a significant amount.” This is particularly true because with fleet orders, the deposits are spaced out according to the lead times of the delivery schedule.