Bombardier bailout likely still needed despite Delta deal

With Bombardier'sdeal tosell its new CSeries jets to Delta Air Lines, one might think that the aerospace manufacturerno longerneedsthebillion dollars it is seeking from thefederal government.

The Montreal-based company announced on Thursday that it had received an order fromDelta for75CS100aircraft with options for an additional 50 a deal, at list prices,potentially worth $5.6 billion.

• Delta buying 75 Bombardier CSeries jets, with options for 50 more
• Bombardier deal with Delta renews Quebec calls for Ottawa bailout
• ANALYSIS |Is Bombardier a no-brainer investment for Ottawa or a house of cards?

It also comes as the Liberal governmentconsiders a request from Bombardier for $1 billion in funding, the same amount the Quebec government has already pledged.

ButtheDeltadealdoesn't necessarily meanBombardier, which is about two years behind schedule on the CSeriesand at least $2 billion US over budget,will be rescinding its request toOttawa any time soon.

"They will not get [the Delta dealmoney] today, tomorrow, or in three yearsorfive years," saidKonarkGupta, an equity researchanalystatMacquarieGroup."They willgetit over many yearsas they deliver the plane. So that money isscatteredover the long term."

'Come as a bullet'

"And the federal money, ifthatcomes,thatwillprobablycome as a bullet. It will come in one or two days," he said."Let's say they need $1 billion. The Delta orderdoesn'tnecessarilysatisfythat $1 billion need right away."

He said it's alsoimportant to note that the real value of the Deltadeal will be less than what it's being purportedto beworth, and will also include discounts on commercial orders.

Bombardierneeds a certain amount of cash on hand every year,Guptasaid.For example, the investment byCaissededptet placement duQubec, the province's largest pension fund manager, requires Bombardier to have $1.25 billion cash on the balance sheet at any time.

"They have a certain minimum requirement on the cash side so if they do not get the federal funding, do they breach any of those [obligations]? And that's tough to say."

Karl Moore, associate professor atMcGillUniversity'sDesautelsFaculty of Management, said that Bombardier's need from Ottawahas "probably slightly diminished by the order."

'A cash flow issue'

However, he said, there's a gap between when the company isspending money to build the plane and when therevenuecomes in.

"So there'sacashflow issuethey have," Moore said.

"The orders are greatbutthey have to make the planes before they get paid," he said."Sothat'swhere the gap is and that'swheretheyneed themoneyto help fulfilthecashflow issue."

TylerChamberlin, an associate professor at University of Ottawa'sTelferSchool of Management, said while a deal is certainly better than no deal, it will not end all Bombardier'sproblems. Bombardier reported on Thursday a first-quarter loss of $161 million US. And earlierthis year, it announced it wouldbecutting7,000 jobs over the next two years as the company faces declining revenues. Meanwhile, officials ofToronto's public transit system have expressed frustration that its order for more than 200 streetcars has encountered numerous delays.

Chamberlin said it's still unclearhow muchBombardierwill make off theseplanes as the company may have beenincentivizedto make sure this deal wasgoingto be done and that Delta received a goodprice.

"What'seven harder is to figure out how much thesethingscost per [plane],becauseit's not only that they're expensive to build, but development that has gone into them is enormous and has been over budget," he said.

"When you work through what it's actually going to cost to build the planes and then to work through what they've spent in developing the planes, it's not necessarily clear this is the end of the rainbow and that they will be in perfect shape."

Ian Lee, an assistant professor at Carleton University's Sprott School of Business, said that each additional contract to new or repeat buyers will reduce theneed for the federal government to invest.

"Instead, the [federal economicdevelopment] ministercould issue agovernmentstatement sayingthey stand behind Bombardier now and in the future instead of actually investing the billion," he said.

Instead, what Bombardier needs is solid assurances to aviation markets that it will be in business for the next 20 to 30 years.

"When a company is buying a large, long-term asset, that is very complex and specialized, you need to know the company will exist in the long run to servicethe asset and continue to make spare parts for the asset," he said. "Loan guarantees or equity injections from Quebec and the government of Canadaprovide that assurance.

"However, a strong record of continued sales in the market alsoprovide the assurance," he said.

Not desperate for cash

The company itself, while still seeking federal governmentfunding,has seemed to downplay any notion that they are desperate for a cash infusion.

In March, Rob Dewar, vice-president of theCSeries aircraft program, saidthat they had secured all the funding required to "ramp up the CSeries program and also for the rest of aerospace.

"Really, the federal funding would just be an extra endorsement for the program," he told the Financial Post. "That's really just an extra bonus that would be helpful but is very clearly not required."

On Wednesday, CEO Alain Bellemaresimplysaid he "would welcome the participation of the federal government to add financial flexibility to what we're doing in terms of theCSeries, but also our ability to keep investing in aerospace in the future, right here in Canada."