Bombardier's Success Story
In the aviation world, they still talk in hushed tones about the telephone call - the one in which BOMBARDIER Inc. coolly walked away from a billion-dollar sale. It happened in June, when all of the industry's major players were gathered at the Paris Air Show. Bombardier chose the venue to unveil a pivotal, $900-million contract with American Airlines for the sale of 25 of the company's new 70-seat regional jets. In trumpeting the deal, however, Bombardier officials failed to mention how much bigger the deal might have been - as much as $1.9 billion.
The story is that only days before the Paris extravaganza, Dan Garton, president of American Airlines' regional subsidiary American Eagle, telephoned Bombardier chairman Laurent Beaudoin and offered to buy an additional 42 smaller, 50-seat jetliners if $3 million were shaved off the $20-million price tag on each plane. Beaudoin crisply refused, losing the sale in the process. "Some might call that arrogance," says aviation analyst Robert Moorman. "But it was also a courageous call, a demonstration of just how much faith the folks at Bombardier have in their marvellous little airplane."
Little it may be. But in terms of its impact on the global aviation business, the Montreal-based aircraft maker's Canadair Regional Jet is far from pint-sized. The CRJ is, in fact, the hottest commercial property in the skies at the moment. "Airlines everywhere are just clamoring to place orders for it," says Moorman, Washington-based regional aviation editor for Air Transport World magazine. The news has not all been positive: in June, Bombardier announced that it had found hairline fractures in the aircraft's fuselage bulkhead, necessitating reinforcement of that area with sheet metal and sparking the attention of federal regulators. Despite that setback in the program, the CRJ is radically altering airline economics as well as the entire pattern of regional air transport - in North America and Europe now, perhaps farther afield in the future. Says Moorman: "The plane has worked a revolution."
A Canadian-made revolution at that - spawned by a business jet manufactured in Canada, conceived by a savvy Canadian aeronautical engineer with a vision and executed to near-perfection by a Canadian company with a corporate aversion to conventional wisdom, a willingness to gamble and a genius for finding - and shrewdly exploiting - lucrative niches in the marketplace.
Like most revolutions, the one the CRJ has wrought is driven by an elegantly simple logic. It begins with the idea that jet travel could be profitable in a niche where the experts at the time said it would never succeed, among the small, short-haul regional carriers that feed big airlines the world over. And succeed it has, beyond the wildest dreams of all but a few. Those once-sleepy little regional airlines, the "mom-and-pop" carriers flying rackety turboprops, now represent the fastest-growing and most profitable sector in the industry. As they grow, they are refashioning civil aviation's "hub-and-spoke" design, the system in place since the 1980s that sees the regionals funnel passengers along the spokes to the hubs where the major transcontinental and overseas airlines operate. The system is in a state of flux at the moment and few in the industry are sure how it will all shake out in the end. But the new regional jets, with their greater range and speed, have made it possible to extend the length of the spokes, allowing carriers to intrude into competitor's turf, as well as simply bypass the old hubs by flying directly "spoke-to-spoke" between locations that once required a stopover or change of aircraft at a major airport hub. "It's driving a lot of the big airlines nuts right now as they try to figure out what's happening and where," says Montreal-based aviation consultant Eric McConachie, the man whose fertile imagination helped foment the unfolding revolution. "But we told them long ago what was likely to occur if jets were introduced into the mix. At the time, they thought we were crazy."
The people who run Bombardier certainly did not. The company's brain trust bought into the concept that McConachie and others had developed just before Bombardier purchased Canadair from the federal government in 1986. Barely more than a decade later, Bombardier is the world's third-largest civil aircraft manufacturer, outranked only by Boeing Co. of Seattle and Europe's Airbus consortium. The company's revenues from its aerospace divisions - $4 billion in the most recent fiscal year, which ended on Jan. 31 - already account for half of the entire conglomerate's total revenues of $8 billion. Moreover, revenues are expected to double over the next five years, as Bombardier chairman Beaudoin assured delighted shareholders at the company's annual meeting late in June.
Much of the credit for that rosy picture belongs to the CRJ. The plane is the prize in Bombardier's stable of smaller commercial aircraft, a workhorse - and a cash cow - among the de Havilland Dash 8 turboprops in the lower range of the market and the glittering array of high-priced Canadair and Lear executive jets at the top end. The first revenue-earning CRJ 100, the 50-seat model, entered service with Germany's Lufthansa CityLine in November, 1992. Not quite five years later, 169 of those aircraft are flying with 16 airlines in 11 countries, including 26 that are flown in Canada by Air Canada. Firm orders exist for another 86, with options to purchase an additional 198. The backlog is so great at Canadair's facilities in the Montreal suburb of St-Laurent that the company is currently gearing up to accelerate production, jumping from the 58 planes a year it now manufactures to 67 beginning next January.
"We have no choice," shrugs Bombardier Regional Aircraft president Pierre Lortie as he sits in his office overlooking Canadair's humming workshops. "Not if we want to hang onto the 53-per-cent market share that we managed to grab last year." Down the hall, Lortie's immediate superior, Robert Brown, president of Bombardier Aerospace, points to the robust health of the regional airline business in both Europe and North America. Annual growth rates in that sector have ranged between 10 and 15 per cent over the past decade, and individual smaller carriers have been routinely earning 12-per-cent profits, roughly double that of the most profitable major airlines. "The market's booming," says Brown, "We helped to create it. We want to retain our hold on it. That's why we chose to go ahead with the 70-seat program."
Officially launched last January, Bombardier's CRJ 700, as the 70-seater has been dubbed, is a stretched version of the original regional jet. Although its first delivery is not scheduled until late in the year 2000, it has already accumulated 117 orders, options and memoranda of understanding from eight airlines on five continents. The largest by far is the deal announced in June when American Eagle bought 25 CRJ 700s and took out options for 25 more.
For Bombardier, it was a crucial contract, not only because the total value of ordered and optioned aircraft amounted to more than $1.9 billion in Canadian funds. The company has committed $645 million to developing the plane and, until the American Eagle order, it had managed to secure only four firm orders among all the options and MOUs, as memoranda of understanding are known in the trade. What is more, it was up against stiff competition from the only other aircraft manufacturer in the world currently producing a regional jet - Brazil's fifth-ranked Empresa Brasileira de Aeronáutica SA, better known as Embraer.
The Brazilian company had already beaten Bombardier in the crucial U.S. market last year by landing a contract with Continental Express of Houston. The company, Continental Airlines' regional carrier, agreed to purchase 25 EMB 145s, a 50-seat aircraft similar to Bombardier's 50-seater, but $5 million per plane cheaper. That particular battle had been fierce, a no-holds-barred affair that resulted in Bombardier and Embraer both pressuring their respective governments to launch a formal complaint with the World Trade Organization in Geneva. Each company accuses the other of receiving improper government subsidies, banned under international trading regimes. Bombardier officials even suggest that, in the Continental deal, their Brazilian rivals benefited from something more than simple price-discounting. "Before the deal with Embraer, Continental had no flying rights to Brazil," Bombardier Aerospace president Brown acidly remarks. "After the deal, Continental suddenly acquired Brazilian rights. You figure it out."
Burned in the Continental deal, Bombardier redoubled its efforts to pursue American. At stake were orders for 67 jets from a hugely influential carrier, a regional affiliate flying into six hub networks, boarding a million passengers a month on average. With more than 1,400 flights a day to 127 cities throughout the United States, Canada and the Caribbean, American Eagle operates the largest regional airline system in the world. "It's a carrier with enormous marketing and financial clout," says Arnold Lewis of the New York City-based trade publication Business and Commercial Aviation. "When they decide to buy jets, or a particular kind of jet, you can be sure that it won't be long before the rest of the industry sits up to take notice."
Despite the advantages of a sale to American, Bombardier declined to bend on the issue of price, even when American Eagle president Garton made his last-minute phone call to Beaudoin. "We will not take on projects that do not meet our commercial requirements," Bombardier's Brown says by way of explanation. "I think it's very hard for people to meet certain pricing requirements and remain profitable." Faced with Bombardier's refusal to budge, American ultimately chose to split the 67-plane order, buying 25 70-seaters from Bombardier and 42 50-seaters from Embraer. It is a course of action that airlines normally try to avoid, preferring to buy "families" of planes from the same manufacturer in order to reduce training and maintenance costs. But Embraer does not make a 70-seat aircraft. And American was obviously as interested in the bottom line as it was in any degree of commonality between the two sizes of regional jet in its future fleet. American Eagle's Garton made that point clear in his remarks after signing the contract. "Anyone," he declared, "who tells you that price is not a critical factor in buying an airplane is not telling you the truth."
While miffed by the setback - enough for Beaudoin to publicly grumble late in June about Ottawa not trying hard enough when it came to pushing the complaint with the WTO - Bombardier officials remain upbeat about the sales potential of both CRJ versions. The company did manage to acquire a high-profile customer to launch the 70-seater, thereby cementing its presence in a critical market in which regional traffic grew by 20 per cent last year. And Bombardier expects that market to continue growing by leaps and bounds, creating a demand for as many as 600 50-seaters and almost the same number of 70-seaters. If company forecasts are accurate, the potential exists for a mouthwatering $150 billion in sales over the next two decades.
Just as remarkable is the fact that, were it not for the vision of a handful of Bombardier officials, the market for small, regional jets might not even exist. When the company embarked on the journey that eventually led to the CRJ, there was industry-wide skepticism about the viability of a passenger jet with anything less than 100 seats. "They thought we had rocks in our head," recalls aviation consultant McConachie, president of Montreal-based AvPlan Inc. and a former executive with Canadair before it was purchased by the Montreal conglomerate.
If any one person can be singled out as the inspiration behind the CRJ concept, it is McConachie. An Edmonton-born graduate of MIT and Stanford, he was one of the first to see the commercial potential in Canadair's 12-seat Challenger executive jet. In 1986, McConachie was running his own aviation consultancy, which he started in 1967, after a decade spent as marketing manager for Canadair. At the time, Bombardier was negotiating with the federal government to purchase the trouble-plagued Montreal aircraft maker, a deal that was eventually concluded when Ottawa agreed to swallow Canadair's $1.4-billion debt, selling the entire operation to Bombardier for $121 million. Not long before that, McConachie sent an unsolicited proposal to Canadair suggesting the transformation of the Challenger from executive jet to passenger airliner. "The possibility was there because the Challenger, unlike the other narrow-bodied executive jets of the time, had been built with a wide-body fuselage, capable of two-by-two seating," says McConachie. "I just wanted to change it from a racehorse into a workhorse."
Bombardier's executives, having taken control of Canadair, found McConachie's ideas intriguing. After McConachie did some market research, Canadair budgeted $14 million for an "advanced design phase," installing a team of engineers in a rented warehouse in St-Laurent to study how to best stretch the Challenger. After surveying "hundreds of airlines and thousands of passengers," he discovered something he had always suspected. "Call it the jet-preference factor," he explains. "Give customers a choice between jets and turboprops and they'll always choose jets. The bottom line is most people seem to feel there's something out-of-date when you look out the window of a plane and see that big bug-smasher whirling around."
But while passengers liked the idea of jets flying short-haul routes, most airlines did not. "That was a long, hard sell - a lot of heartburn," recalls McConachie. Still, he found enough interest to tell Bombardier's board of directors in 1987, a year after he began researching the concept, that he saw a market for an estimated 450 aircraft during the first 10 years of a regional jet program, a prescient forecast in view of the 453 CRJ's Bombardier has sold or optioned to date. By 1988, the company was convinced, not least because it would not have to build a jet from scratch. It already had one in the Challenger, a state-of-the-art aircraft that had cost Canadair's previous owner - Ottawa - $1.2 billion to develop. And the team of engineers in the St-Laurent warehouse had come up with a $250-million redesign scheme, a relatively small sum given the industry's rough rule-of-thumb that developing a new jet costs about $20 million per seat.
In 1988, Bombardier lured McConachie away from his private aviation consultancy, hiring him to run the marketing end of the CRJ program. A year later, the company officially launched its regional jet program and three years after that, the first CRJ with paying passengers aboard took off from an airport in Germany. Ever since, the plane has been performing much as its creators said it would, flying routes of 650 to 1,500 km in length that are longer than those flown by the regional turboprops but shorter than those conventional jets can cover while still making a profit. The bigger jets are more expensive to run since they burn more fuel and are more expensive to build. "The routes have always existed," says retired Bombardier executive Robert Wohl, who ran the company's CRJ development program from 1988 to 1990 and was president of Bombardier's regional aircraft division in Toronto until he retired in 1993. "There just wasn't a plane to service them until our jet."
The plane is quieter than a turboprop and faster, with jets flying 800 km/h while turboprops cruise at about 550 km/h. With six-feet, one-inch of headroom, four-abreast seating in two rows and a reasonable 31 inches of legroom, it is as roomy as the economy-class cabin of most major airlines. Two flaws stand out: the low placement of the windows, which can make it uncomfortable to look out, and a metal-fatigue problem that sometimes allows cracks to appear in fuselage bulkheads, causing minor losses of cabin air pressure.
Neither glitch is regarded as serious by the company and both are being corrected on the new 70-seaters. But the bulkhead cracks, which Bombardier insists are not a safety hazard and cost less than $6,000 per plane to fix, are worrying nonetheless. "The regulatory authorities will be watching this plane with a keener eye now," says analyst Moorman. "I don't think it's a major problem, but I am a little concerned that so many of the planes developed the same problem in the same place so early on in the lifespan of the aircraft."
"Hub busters" is the term former Air Canada president Hollis Harris coined when he announced the purchase of 26 CRJs in 1993. And that is precisely the function they have been performing for the country's biggest carrier since they began flying Air Canada routes in 1994. With their range and speed, they are tailor-made for the trans-border traffic the airline had been hoping to capture after the 1995 Open Skies agreement largely deregulated air transport between Canada and the United States. These are primarily routes with not enough passengers to fill a conventional 130-seat jet, but ideal for a 50-seater. They directly link cities, such as Toronto and Philadelphia or Montreal and Washington, that previously required lengthy stopovers at major airport hubs. "We've been opening new markets that were never served by direct, nonstop service before," says Air Canada official Priscille LeBlanc. "Without these new aircraft, it would not be happening," she says. In fact, a lot of other developments now unfolding would not be happening without Bombardier's plane, the little jet from Canada that is busily carving a big reputation for itself among the world's airlines.
Maclean's August 11, 1997