Bombardier Inc. (BBD/B) built planes such as the Challenger 605 and Learjet 70 to transport company executives. Now it’s overhauling them to monitor terrorists, hunt for submarines and find sailors lost at sea.
As governments chop defense budgets, the world’s largest maker of corporate jets is adapting by offering cheaper alternatives to military designs. Bombardier projects that sales of such models ultimately may grow 10-fold to 20 percent of aerospace revenue, which totaled $8.63 billion in 2012.
“It would be pretty significant if they can pull it off,” David Tyerman, a Canaccord Genuity analyst, said in a telephone interview from Toronto. “Defense is part of their backlog, but it’s a small part. They obviously see a new opportunity and they’re going to put a lot more resources into it.”
Modified Challengers are being marketed as high-altitude search-and-rescue aircraft, and the smaller Learjets as signal-intercepting spy planes, according to Ben Boehm, the executive leading the initiative at Montreal-based Bombardier.
Presidents and prime ministers are potential customers for Bombardier’s CSeries narrow-body jetliner, just as the U.S. commander in chief flies in a U.S. Air Force Boeing Co. (BA:US) 747, while duties such as coastal patrols can be performed by Q400 turboprops that now serve regional airports, Boehm said.
“Every single government is realizing they have to reconcile how they spend their dollars,” Boehm said in an interview. “There’s a growing trend to look for off-the-shelf, commercially certified product lines.”
Expanding a defense business that Boehm said generates about 1 percent to 2 percent of aerospace revenue would help Bombardier revive annual sales that have yet to surpass a peak of $19.7 billion set in 2009. Aerospace made up 51 percent of the $16.8 billion in 2012 revenue at Bombardier, which reports second-quarter results on Aug. 1.
The widely traded Class B shares climbed 3.3 percent to C$5.06 at the close in Toronto, the most since June 25. Their 35 percent gain this year compares with a 1.9 percent advance for Canada’s benchmark S&P/Toronto Stock Exchange Composite Index and a 40 percent surge for Brazilian jetmaker Embraer SA. (EMBR3)
Tyerman is among 16 analysts who rate Bombardier as a buy, compared with seven who say hold and one sell recommendation, according to data compiled by Bloomberg.
Bombardier’s current forays into the military niche include selling Global 5000 jets to Raytheon Co. (RTN:US) to be reworked into an airborne radar platform for the U.K.’s Royal Air Force and turboprops to the Swedish and Japanese coast guards.
Governments can save money by sidestepping the costly design process for purpose-built military aircraft, Boehm said. The planes also are less expensive to fly because of Bombardier’s worldwide maintenance network for commercial customers, he said.
Revenue from that segment will grow to a range of 10 percent and 20 percent of aircraft sales “over time,” said Boehm, 43, a former Royal Canadian Air Force officer. He estimated the size of the market at about 1,700 planes over the next five years.
The push will open a new front in Bombardier’s competition with rivals such as Embraer and General Dynamics Corp. (GD:US)’s Gulfstream, which adapt their business aircraft for military use, too. Embraer, for example, offers command-and-control and reconnaissance versions of its ERJ-145 regional jet, and got about 17 percent of its $12.2 billion in 2012 sales from its defense and government aviation division.
While executive jets may lack the range, speed or payload of a warplane, they cost less. A Boeing 737, the base model for the U.S. Navy’s submarine-hunting P-8 Poseidon, has a catalog price of about $75 million to $90 million in its commercial variants. A Global 5000 lists for about $49 million.
“As electronics become more sophisticated and smaller and lighter, there’s a really broad demand for smaller airframe and engine pairings,” Dave Fitzpatrick, a San Francisco-based managing director at consultant AlixPartners, said in a telephone interview. “Some of the regional-jet makers are becoming really capable in this market.”
Bombardier faces its own execution challenges first.
The maiden flight of the CSeries jetliner, a C$3.4 billion ($3.31 billion) program to develop Bombardier’s biggest-ever model, has been postponed three times in the past eight months. Once targeted for takeoff by July 31, the plane is now supposed to fly “in the coming weeks,” Bombardier said.
Costs associated with the CSeries probably will crimp margins at Bombardier’s aerospace unit by 2 percentage points in 2014 and 2015 before the aircraft starts contributing to profits, Chief Financial Officer Pierre Alary told analysts on a conference call May 9.
Defense sales also are hardly a cure-all for a planemaker facing rivals in all its aviation segments -- executive and regional jets, and turboprops for commuter carriers.
“It’s highly unlikely that they’ll be able to sell enough of these planes to make up for the dwindling margins at aerospace,” said George Tsopeis, a former Bombardier executive who is now a vice president at Montreal-based advisory firm Zenith Jet. “There are not enough programs, especially since there are competitors out there like Gulfstream.”
Global military spending fell 0.5 percent last year to $1.75 trillion, the first drop since 1998, the Stockholm International Peace Research Institute said in a study in April. Western and Central European countries were at the forefront after slashing expenditures by 10 percent since 2008, while outlays fell 6 percent in the U.S., the study found.
Meanwhile, Asian and Middle Eastern governments are boosting spending and have shown an appetite for converted civilian planes. The United Arab Emirates, for example, was first customer for Air Tractor Inc.’s new light-attack aircraft based on a two-decade-old design for a crop-duster.
Global defense cuts are a bigger risk to competitors selling aircraft designed exclusively for military use than they are for Bombardier, Boehm said.
“The days of putting a one-off product design into the market are limited,” he said.
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