Bombardier's Old Guard May Take Risk With Larger Jet

Paul Tellier is out as the CEO of Bombardier [BBD] and the C series jetliner may be in.

In what some analysts describe as a culture clash between Tellier, a button-down executive from CN Rail, and the entrepreneurial spirit of the Bombardier family, Tellier was fired with one-year remaining on his contract. Two independent board members, who were appointed by Tellier, also quit.

The firing was not about Tellier's day-to-day management of the company, which has continued to perform poorly despite his cost-cutting efforts over the last two years. Instead, Tellier and Laurent Beaudoin, the board chairman and former CEO, clashed over the company's long-term plans.

It is not clear what triggered the final split in what has been described as an acrimonious atmosphere in the Montreal boardroom. While the two apparently support Bombardier efforts to build a larger commercial jetliner, dubbed the C series, the level of enthusiasm may have differed.

"What kindled the fire, I don't know. My speculation is that it could have been another asset sale, what to focus on, the C series, or other financial-related issues, such as whether to take another charge," said Steve Laciak, an analyst in Toronto for National Bank Financial.

A company spokesman confirmed that the Bombardier board would - as scheduled - take up the C series in its late January meeting.

In planning for nearly a year, the C series would be a commercial jetliner capable of carrying 110 to 135 passengers (CRAN, March 8). While market research indicates there would be a 20-year demand for this mainline jet, Bombardier would be competing directly with Boeing [BA] and Airbus as well as RJ rival, Embraer [ERJ].

Bombardier has estimated that it would take $1.5 billion to fund the five-year project. The Canadian government has agreed to kick in one-third of the tab to guarantee that Bombardier maintains its production facilities in Canada. The company has been seeking additional investments from potential partners much like Boeing has spread out the development costs of the 7E7 among its subcontractors.

Bombardier has about $2 billion in cash reserves and another $3 billion in untapped credit. Earlier this year, Bombardier spunoff the Ski-Doo snowmobile division - its original unit - to the Bombardier family and outside investors.

With Beaudoin back at the helm, Bombardier may be willing to take a greater risk on the C series than what Tellier felt comfortable with, said Pierre Bernard, an analyst in Montreal with BLC-Edmond de Rothschild Asset Management.

"Laurent Beaudoin is back to square one again running the company. He is an entrepreneur. Will the company benefit from an entrepreneurial soul or is it too big now?" Bernard asked. "They may go faster [on the C series]. We are working from the assumption they will go ahead."

Laciak and others speculated a source of friction between Tellier and Beaudoin might have been plans to split Bombardier into two companies - an aerospace operation and a rail company. "It could have been a philosophical disagreement on how committed Bombardier should be to stay in the aerospace or mass transit business."

"You get the impression that Tellier knew a bad situation when he saw it. That applies to the C series and regional aircraft in general," said Richard Aboulafia, of The Teal Group, an aviation consulting firm in suburban Washington, D.C. "One thing [RJs], he could do something about and the other [the C series] was unstoppable except with a flamethrower. They will press ahead until the market tells them otherwise. They will press ahead as far as they can, but they will not spend serious money or build a prototype.

"The natural instincts for a guy with a commodities background [Tellier] would be to kill the C Series. I think he did well with a relatively bad situation. To take money away from business jet side - where all hopes lie - and to move to build 125-seat money losers would be undoing all the good he did."

Aboulafia speculated that Beaudoin may want to sell part of the business jet unit to finance the C Series.

Of the merits of the C series, Aboulafia said, "it seems like one of those wrong-headed concepts that scarcely seems debatable."

"It is my hope that they don't proceed [with the C series]," Laciak said, "because they have not made money on their regional jets. I don't believe the RJ program has been profitable so why launch onto the next one?"

Bombardier has little choice but to proceed with the C series, said Alan Sbarra, an analyst with Unysis. "They are in a situation that if they want to continue to be in commercial aerospace, then the C series is the only way to go. As the big network carriers have decided that the small regional jets are not the way to go in the future, the market has dried up. [Bombardier] is concerned about the orders on the book. They have to wonder how many will survive. The C series is their only hope except for business jets."

Three times in the last six months Bombardier has adjusted downward its production rate of the CRJ 200, its 50-seat RJ, because of falling demand.

The larger question, Sbarra said, is does Bombardier want to remain in commercial aviation?

Bombardier's upcoming decision on the C series is a turning point for the aerospace division. On the other hand, management faces incremental decisions on the rail side to get that division to operate more efficiently.

As part of the shake up, Pierre Beaudoin, president of the aerospace division, and Andre Navarri, president of the rail car manufacturing unit, are joining Laurent Beaudoin in the new office of the president and the pair gain seats on the board.

(Laurent Beaudoin is the son-in-law of the late founder, J. Armand Bombardier, and Pierre is Laurent's son.)

Pierre Beaudoin gets mixed grades for his stewardship at the aerospace unit since October 2001.

Given the dire straights of the aviation market, Laciak said that Pierre Beaudoin handled the job "adequately. I would not say it was exceptionally great because he does not have any results to show."

On the other hand, Bernard said that Beaudoin "did very well. He did a good job but it is not recognized, because the industry is in such a mess."

Bombardier is a hostage of the market, Aboulafia said. "You can't blame someone for the erosion of the hub-and-spoke system, which is contributing to the current 50-seat glut."

>>Steve Laciak, National Bank, (416) 869-6420; Pierre Bernard, BLC, (514) 284-7155; Richard Aboulafia, Teal Group, (703) 385-1992; Alan Sbarra, Unysis, (919) 468- 2844.<<