This story is the final of a two-part series. To see Part One, click here.
Digital Journal — Corporate battles have their legendary showdowns: Pepsi versus Coca-Cola, Rogers versus Bell, Microsoft versus everybody. For the past several years, a rivalry for the sky above has been waged: Montreal-based Bombardier Aerospace, a world-leading airplane manufacturer, is trying to keep its lofty position amidst fierce competition from Brazilian behemoth Embraer. In this arena, Bombardier aims to rebound from a disappointing slump and is under fire for barely keeping up with the risk-taking Embraer. This dogfight has been nasty, and the two companies have the battle scars to prove it.
WHO CAN REBOUND QUICKER?
If you’re a frequent flyer, you’ve likely sat in a Bombardier plane once or twice. The company’s CRJ regional jet series is the most successful regional aircraft program in history, with more than 1,290 orders to date. Fifteen years ago, a 50-seater CRJ launched with fevered excitement, and ever since, Bombardier has developed powerful planes that reach global markets. Learjets, Challengers and regional planes in the 20- and 90-seat range propel Bombardier to be the third-largest aircraft maker, after Boeing and Airbus.
But there’s a Brazilian David creeping ever closer to the Canadian Goliath. Entering the regional-jet market only seven years ago, Embraer (the fourth-largest aircraft maker) has made its mark on the hungry market for jets that fly routes like Toronto to Thunder Bay. Although this sector has severely declined since 9/11, airline analysts say regional jets are key to many airlines’ survival. Embraer expects the booty, in the next 20 years, to be worth around $180 million (US).
At the heart of the competition is what some insiders deem to be the future of flying. The race to build the 100-plus-seat plane marks one of the few times Bombardier is on the outside looking in. Embraer agreed to finance the 108-seat Embraer 195, due in mid-2006.
“More than half of all U.S. domestic airlines operating narrow-body mainline aircraft have passenger loads better suited to 70- to 110-seat aircraft,” notes Orlando José Ferreira Neto, director of market intelligence for Embraer.
Bombardier has a group studying the 100-seat opportunity, says Barry MacKinnon, Bombardier’s vice-president of marketing and airline analysis. “We want an airplane attractive to passengers that provides a 15-20 per cent advantage in operational efficiencies over what the competition presently offers,” he says, adding that early 2005 will reveal the aerospace company’s decision on this weighty matter.
Another year may prove risky, especially with the aerospace market’s sensitivity to change. For instance, US Airways emerged from bankruptcy protection with barely the shirt on its back: The airline may sell its regional jet service, a move that could spell doomsday for Bombardier. US Airways accounts for 28 per cent of Bombardier’s outstanding firm orders, and cancelled contracts are the bane of the aircraft industry.
To further dishearten manufacturers, the state of aircraft orders affords a little good, some bad, but mainly ugly news. Although MacKinnon reports that Bombardier captured 56 per cent of the regional jet market share in 2003, net orders for fiscal 2003 plummeted to 38 from 209 jets last year. The backlog of planes manufactured also decreased drastically in the past year, as deliveries continued to outpace new orders.
Embraer hasn’t fared much better, considering third-quarter orders decreased 22 per cent since Q2, and its stock has fallen from the pre-9/11 range of $30 to about $13 recently.
Despite the setbacks afflicting both companies, Bombardier receives the brunt of critical attacks. “Bombardier is taking the more conservative road,” says Gregory Polek, senior editor of Aviation International News. “It’s not taking chances by introducing a new product into the market.”
“Embraer is making the better plane,” asserts Steve Laciak, aerospace analyst at National Bank Financial. He applauds Embraer’s initiative to build aircraft like the ERJ170 and 190, whose added cabin width and height surpass Bombardier’s equivalent.
Even the respected CEO of Bombardier can’t deflect the criticism, and Paul Tellier’s one-year anniversary on the job this past January was a sharp reminder that the aerospace division needed retooling. Layoffs eased somewhat and the sale of Bombardier’s recreational products group discarded a nasty albatross; but Tellier hasn’t placated shareholders yet. While he looks over his shoulder at Embraer, the Brazilian company is looking forward to a close race for the number-three spot in this lucrative market.
Cutthroat competition is standard fare for these two rivals; they’ve been trying to trip each other up for so long, it’s surprising that both of them are still standing tall.
SIBLING RIVALRY
Picture two brothers who both complain the other gets more allowance from a parent. Now picture each brother whining to the problem-solving grandfather about the unfair situation.
Bombardier and Embraer would likely smirk at the brotherly comparison, but the parallel works. Embraer has long charged Bombardier for enjoying close ties to the federal government, translating into loan guarantees to help boost export sales. Bombardier defends itself by saying it needs aid to offset Embraer’s low Third World labour costs and cheap currency.
But the best defense is a better offense. Bombardier is taking shots at its rival, attacking Embraer for using cut-rate financing provided by a government subsidy program. Embraer points to Bombardier’s easy access to First World financing and technology as advantages that exculpate Brazilian subsidies.
Every argument deserves a hearing, and the World Trade Organization has been the grandfatherly arbiter for the disputing companies. In fact, the WTO is green-lighting the business one-upmanship, having ruled last year that Brazil could impose countertrade measures against Canada. Embraer CEO Maurício Botelho said at the time, “[The WTO decision] is confirmation of the fact that Canada is subsidizing its regional jet industry.” Bombardier barely flinched, and instead agreed with Embraer — even arguing that more government support would save the aerospace industry from troubled times. In November, Tellier said more financing from government agencies, such as Export Development Canada, is needed. He is quick to point out, though, that EDC doesn’t provide direct support to Bombardier, but offers crucial financing to foreign buyers of the company’s jets. “If the financing is not in place, we can’t make those sales and we’ll have to reduce the rate of production,” warned Tellier.
One way to reverse the downturn in aircraft orders is to reach international customers, exemplified in the fight for the Chinese market. China plans to spend about $14.4 billion (US) on regional jets during the next two decades, and although that figure is smaller than what’s expected from the U.S. and Europe, Bombardier and Embraer consider China a gainful opportunity. Embraer is banking on the Chinese appetite for small planes, while Bombardier is hoping to attract contracts by building bigger planes.
It’s fitting that the two competitors shared positive headlines thanks to an understanding uncle — Air Canada. In December, Air Canada purchased 90 jets for $3.6 billion, split evenly between Bombardier and Embraer. For at least a few moments, the bickering faded as dollar signs subdued the tension.
THE NEVER-ENDING STORY
Economists will tell you that competition breeds progress, so the current aerospace rivalry could birth long-term passenger benefits. Already, Bombardier has leapfrogged Embraer by introducing a more advanced business jet than its predecessor. The Global Express XRS refuels more quickly, reaches higher speeds faster and better brightens seating areas with LED (light-emitting diode) technology. Due out in 2006, the XRS is part of Bombardier’s plan to revitalize the business jet market — a key profit-making division that even Tellier emphasized as integral to Bombardier’s full recovery.
Embraer will probably abstain from jabbing back at the Bombardier business jet offensive, but it’s unlikely the Brazilians will passively watch Canada inch higher on the aerospace ladder. Rung by rung, Embraer aims to keep pace, guaranteeing that the battle in the skies will rage for decades to come.
This article is part of Digital Journal’s 2004 spring issue. Pick up your copy of Digital Journal in bookstores across Canada. Or subscribe to Digital Journal now, and receive 8 issues for $19.95 + GST ($39.95 USD).
