Industry analysis

Commercial Passenger aircraft Manufactures

Bombardier

Corporate Analysis

Jerome Healey

Group G

Contents

Introduction...........................................................................................................................................3

Strategies...............................................................................................................................................3

Bombardier growth strategies...............................................................................................................4

Porters five forces..............................................................................................................................5

Corporate social responsibility (CSR)...................................................................................................11

IntroductionBombardier is the world’s only manufacturer of both trains and planes. Offering a diversified choice of products, these include: trains, rail equipment, business jets and commercial aircraft. The world’s first aircraft manufacturer (Short Brothers) was acquired by Bombardier and it has gone on to becoming the world’s third largest manufacturer of passenger aircrafts. Bombardier is the world’s leading provider of business aircrafts but it also owns the most diversified portfolio in terms of its holdings of commercial aircraft. It currently owns 34% of the market share of business aircraft deliveries (2013) with its closes rival Gulfstream achieving a 25% market share. However, Gulfstream is ahead by 1% in terms of the revenue it achieves from sales. It appears as though the industry is very competitive.

Worldwide Bombardier employs around 38,000 people in 70 different countries. Bombardier is the world’s largest manufacturer of small jets that seat 25-90 passengers and the firm’s headquarters are based in Canada. Bombardier is traded on the Toronto stock exchange under the name BBDb.TO and currently sits at $2.40 per share (20th February 2015) (Reuters, 2015).

StrategiesThe previous Bombardier Aerospace has been divided into three reporting segments: Bombardier Business Aircraft, Bombardier Commercial Aircraft and Bombardier Aerostructure and Engineering Services effective as of 1st of January 2015. Splitting the firm up into these three parts will give the management the opportunity to assess what parts of the firm are performing well in terms of the profits that they are generating and which parts of the firm need restructuring.

Bombardier growth strategiesTo develop industry leading projects

- Involves significant expansion of customer services is continuing to better meet customer needs

- Three aircraft models are in development which will help to strengthen product leadership

- Broadest portfolio of business aircraft providing customers with specific performance advantage

Grow local roots in key markets

- International expansion- Continue to provide customer services worldwide

Achieve flawless execution

- The new organizational structure will enable Bombardier to be more agile in fulfilling customer needs and enable the ability to capture growth opportunities

- Dedicated to improving customer satisfaction by continuing improvements on product reliability and on time delivery service and performance support

- Focused on driving down costs and optimising capacity

The competitive foundation of the firm is based around strong recruitment of individual’s worldwide as well as achieving financial discipline and efficient risk management.

SWOT Analysis

A SWOT analysis is a useful technique for understanding your strengths and weaknesses, it also helps to give an insight into the potential opportunities that may arise in the market and the potential threats that the company may face in the future.

Strengths Diversified portfolio of products Manufacture planes and trains Leading manufacturer of small jets Customer loyalty Use of sustainable products Recyclability of materials

Weaknesses High levels of debt 10th January 2015 profit warning issued 25% decrease in share price Postponement in Learjet 85 program Lack of immediate cash reserves to

finance new projectsOpportunities

Opportunity to successfully undercut Boeing and Airbus and enter the large passenger aircraft market

To expand market share in the small aircraft market

New energy saving techniques could make Bombardiers planes more fuel efficient and could lead to an increase in the demand for products

Threats Very difficult to enter the large

passenger aircraft market because of the high start-up costs

High barriers to entry in large passenger aircraft market

Inability to be able to challenge Boeing and Airbus

2008 recession has caused low demand for small jets as they are a luxury good with an elastic price elasticity of demand

Fears that Bombardier may default because they are not selling enough products

Porters five forcesThreat of new entrants- The threat of potential entrants in the large passenger aircraft market is low because of the sheer size of economies of scale needed to reach the minimum efficient scale enabling Bombardier to be able to compete with Boeing and Airbus. The threat of potential entrants in the small jet manufacturing industry is lower however.- High start-up/research costs- High level of experience and expertise needed to manufacture aircraft-

Buyer power- There are few suppliers of both large passenger aircraft and small business jets- It could be argued that there is low buyer power in the aircraft manufacturing industry as

there is a concentrated number of buyers and few suppliers which sell the product- It also could be argued that buyer power is low because the unique element of flying at high

speed is so desirable- Boeing and Airbus’ large passenger aircraft could be argued to be more price inelastic than

high cost small jets that Bombardier produces

Supplier power

- There are few suppliers of both large passenger aircraft and small business jets- Boeing and Airbus dominate market share of large passenger aircraft- Bombardier and Gulfstream dominate the market share of business jets accounting to 2/3 of

the market- Weak buyer power because of few suppliers in the market dominate the market share- Oligopolistic supply- May be an element of co-operation within pricing strategies- Strong demand for large passenger aircraft as people always want to travel on low-cost

flights which consume far less time in comparison to a car or a boat- Co-operation between the firms can make the industry less competitive- Decreasing consumer surplus

Threat of substitution- Airplane travel very unique in terms of the speed of travel and also the low cost of travel- Luxury jet travel has suffered because of the economic downturn- Consumers would prefer to save money and travel on larger passenger aircraft such as the

Boeing 757- Substitution can also come about through switching to :Boats, Trains and Cars to travel

Competitive rivalry- It could be argued that the passenger aircraft manufacturing industry is a competitive one

because of the high fixed costs associated with designing and producing the aircraft- Within the small jet industry there is fierce competition for market share mainly between

Bombardier and Gulfstream. However, there are other small jet producers such as: Boeing, Embraer and Comac also competing for market share

- The similar market share of Bombardier and Gulfstream creates a competitive market where each firm could use aggressive pricing techniques in order to attract more sales

- This is the same in the large passenger aircraft market where Airbus and Boeing are highly competitive with their prices in order to draw sales

- However, could be argued to be a less competitive market as there are few firms dominating the market share. Co-operation between firms could reduce competition and rivalry and this would create negative consequences for consumers

Financials

Performance Ratios (emphasis on growth of the firm)

Gross profit margin – Formula = (Gross profit/sales)*100

2010=16% 2011=15.82% 2012=14.38% 2013 =14% 2014= 13%

These figures illustrate that Bombardier’s performance has worsened in relation to their ability to pay for additional expenses and future savings from 2010 to 2014. There has been a decline in this margin by 3% over the period. For investors this is worrying because this

margin should be stable and not fluctuating. It is also a sign that the overall profitability of the company is declining.

2009.5 2010 2010.5 2011 2011.5 2012 2012.5 2013 2013.5 2014 2014.50.00

2.00

4.00

6.00

8.00

10.00

12.00

Gross profit margin

ROCE – Formula =EBIT/Capital employed

2010=2% 2011=2% 2012=2% 2013 =6% 2014 =-4%

This ratio shows that the profitability of Bombardier has been stable since 2012 and with an increase of 4% in 2013 which then led to a drastic fall in 2014 with a difference between the two figures of -10%. This implies that Bombardier is not employing its capital effectively and is not generating shareholder value. This is a very worrying indicator for shareholders and stakeholders of Bombardier as it shows that the company underperformed massively in 2014 with such a large fall in the profitability of the company.

2009.5 2010 2010.5 2011 2011.5 2012 2012.5 2013 2013.5 2014 2014.5

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-1.00

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ROCE

Net profit margin – Formula =EBIT (earnings before interest and tax)/sales revenue

2010=7% 2011=7% 2012=2% 2013 =5% 2014 =-3%

This is a very concerning ratio for Bombardier as it shows a large decline of -8% from 2013 to 2014. The net profit margin is now -3%. Just like the ROCE figures it showed that from 2010 to 2011 the figures were stable, and then in 2012 there was a 5% fall. In 2013 there was a slight recovery and then in 2014 the figures plummeted. This indicates that Bombardier is not translating the revenue earned into profits and this ratio shows that the company are now losing money. This means that Bombardier is going to struggle to pay their short term obligations and fixed costs. The money used to pay for their fixed costs will have to come from profit reserves from previous years or an increase in debt. This will mean money is being derived away from potential investment projects which could enhance the outward growth of the firm and a potential higher income stream in the future. The postponement of projects such as the Learjet 85 illustrates that Bombardier are not making enough profit in order to fund new developments.

2009.5 2010 2010.5 2011 2011.5 2012 2012.5 2013 2013.5 2014 2014.5

-2.00

-1.00

0.00

1.00

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Net profit margin

Gearing ratios

Interest coverage ratio- Formula used= EBIT/interest paid

2010=2.43times 2011=2.06times 2012=1.05times 2013= 3.04times 2014= -1.59times

This ratio shows how many times a company can cover its interest payments in relation to how much earnings the company is generating. This ratio shows that Bombardiers ability to cover its debt payments in 2014 has significantly worsened in comparison with its interest coverage ratio in 2013. The ratio shows that in 2013 Bombardier could cover its interest payments over 3times. However, in 2014 the company cannot even afford to cover its debt payments 1 time. This illustrates that the firm is not generating enough cash to pay its short-

term debt obligations and this is a very precarious position as it means the firm can easily be forced into bankruptcy by defaulting on its debt.

2009.5 2010 2010.5 2011 2011.5 2012 2012.5 2013 2013.5 2014 2014.5

-2.00

-1.00

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Interest coverage ratio

Efficiency ratios

Sales revenue per employee- Formula used= Revenue/number of employees

2010=$501346 2011=$494585 2012=$455944 2013=$471454 2014=$506574

2009.5 2010 2010.5 2011 2011.5 2012 2012.5 2013 2013.5 2014 2014.5$430,000.00

$440,000.00

$450,000.00

$460,000.00

$470,000.00

$480,000.00

$490,000.00

$500,000.00

$510,000.00

$520,000.00

Sales rev-enue per employee

This ratio shows that Bombardier is not performing badly in terms of how much revenue it produces per employee. This shows that the management of Bombardier have been efficient in being able to sustain high revenues with a high number of employees. This ratio would indicate positivity to an investor as it shows that Bombardier are producing high revenues for the number of people working there.

Investor Ratios (emphasis on equity capital and market prices)

Dividend payout ratio- Formula used =(Dividends announced for the year/Earnings available for the year available for dividends)*100

2010=2.9% 2011=2.1% 2012=5.2% 2013=3.3% 2014=-1.4%

A stable dividend policy is looked favourably among investors especially a dividend which is increasing every year. Bombardier’s showing of dividend policy has been far from consistent fluctuating from year to year. The dividend payout ratio has deteriorated during the period 2010-2014 illustrating a fall of 4.4% in relation to the dividends paid derived from earnings. This is a very poor performance from Bombardier this would be a very worrying concern for the shareholders and stakeholders of the company.

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Dividend payout ratio

EPS- Formula used=Earnings available to ordinary shareholders/number of ordinary shares in issue

2010=0.38 2011=0.42 2012=0.26 2013=0.32 2014=-0.74

EPS is one of the most crucial ratios used by investors to determine how profitable a company is. It shows how much earnings are available in relation to the number of shares that are issued, the higher the ratio the better. Bombardier’s showings of EPS seem to be very inconsistent much like many of the other ratio’s assessed. The findings illustrate that Bombardier’s EPS over the period are very poor representing a low figure. The 2014 figure is especially worrying for potential investors as the figures are negative illustrating that shareholders are getting no earnings back from holding the share. This is another ratio showing poor performance from Bombardier.

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P/E ratio formula used= market value of share/earnings per share

2010=15 2011=9.49 2012=14.40 2013=14.18 2014=-5.70

This another worrying ratio for Bombardier as this ratio illustrates a distinct downward trend in the period, despite the rebound in 2012. This ratio shows how much investors are willing to pay for $1 (Canadian dollars) of earnings. A high P/E ratio would illustrate that investors think that the company has high growth potential. However, in this case judging by the 2014 figures, investors believe that Bombardier does not have a very positive outlook in terms of outward growth.

2009.5 2010 2010.5 2011 2011.5 2012 2012.5 2013 2013.5 2014 2014.5

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P/E

Liquidity Ratios (showing the ability for the firm to be able to pay current liabilities)

Current ratio – Formula= Current assets/Current liabilities

2010=1% 2011=1% 2012=0.98% 2013 =1.04% 2014=0.98%

This ratio shows that the ability for Bombardier to pay its short-term debt obligations as they fall due has worsened indicating that Bombardier has a higher risk of default now in comparison with its standings between 2010 and 2014. Any company with a current ratio below 1 suggests that they will not able to pay their short terms debts off at that point in time. This is a worrying indicator for current shareholders/stakeholders of Bombardier.

2009.5 2010 2010.5 2011 2011.5 2012 2012.5 2013 2013.5 2014 2014.50.00

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Current ratio

Acid test ratio – (Current assets-inventories)/current liabilities

2010=0.52 2011= 2012= 2013 – 0.44 2014 – 0.38

Companies with an Acid test ratio of below 1 will struggle to pay their current liabilities and as the figures show the liquidity of Bombardier has worsened between 2013 and 2014. In comparison with the Current ratio it also shows that current assets are highly dependent on levels of inventory. The liquidity of Bombardier of in 2013 was worrying for investors and stakeholders and the position of the company seems to of become more severe in 2014. This signals a high chance of bankruptcy.

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Acid test ra-tio

Corporate social responsibility (CSR)Bombardier enforces a strategy known as the Evolution of Mobility in order to be a socially and ethically responsible business.

The Evolution of Mobility consists of three interrelated growth strategies:

Invest in leading mobility solutions- Bombardier innovates as a responsible business to create industry-leading products that bring people together, address societal needs, focus on safety and respect the planet.

Grow local roots in key markets– Bombardier partners as a responsible business with our stakeholders to create shared value by turning societal needs into business opportunities in the markets in which we operate around the world.

Achieve flawless execution every step of the way- Bombardier operates as a responsible business by upholding the highest ethical standards, communicating transparently about our operations and actively engaging with our stakeholders.

These strategies are supported by Bombardier’s competitive foundations, active risk management, strong financial discipline and commitment to CSR.

Corporate Governance

Bombardier has a board of directors which consists of 15 directors. The corporate governance and nominating committee (CNGC) has determined that 9 of the 15 directors are independent. The CNGC are also involved in selecting possible candidates that meet the criteria in which candidates can be voted as directors by shareholders of Bombardier. It is also responsible for judging the performance of current directors and the re-election of directors to remain on the board. The CNGC is responsible for electing the chairman of the board of directors. At present the current chairman of Bombardier is Mr Lauren Beaudoin.

Orientation programs for new directors

Bombardier has a orientation program for new directors which provides crucial information about the financial situation of Bombardier and also the strategic planning of the company. Once new directors are elected they are provided with appropriate documentations which includes a directors manual including key information required for the Board. Senior executives permit that new directors familiarise themselves rapidly with Bombardiers operations.

Continuing Education programs for directors

Bombardier encourages its current directors to pursue further education programs and activities in order to gain information which could help to provide them with the best information in order to improve their practices relating to the board and the committee.

References