Just as expectations for a revived business jet market were beginning to take off, Bombardier announced Thursday that it was suspending work on its new Learjet 85 airplane and laying off 1,000 workers, including 620 in Wichita.
Officials of the Montreal-based train- and planemaker said in a conference call Thursday that market conditions weren’t good for the plane that has been in test flights.
But some analysts said the business jet market appears to be in recovery. They said a combination of factors – including Bombardier’s efforts to get its much delayed CSeries to customers – likely contributed to the decision.
Regardless of the reasons, the news was another blow to the aviation industry in Wichita. The layoffs in Wichita were effective immediately and will leave Bombardier’s factory and flight test center on the west side of Mid-Continent Airport with about 1,850 employees.
Pierre Beaudoin, Bombardier Inc. president and CEO, said during the call that the decision was “difficult” but “necessary” because demand for the airplane and the segment of the business jet market it occupies isn’t as strong as the company had hoped.
“We don’t see a significant pickup, and at this point (it’s) the right decision for the company,” he said.
A local workforce official said he thinks a lot of the laid-off employees will be able to find jobs at other aviation manufacturers and suppliers in the area.
“It’s not like we were, back in 2009,” said Keith Lawing, CEO of the Workforce Alliance of South Central Kansas. “I think if they want to work, I think there will be job opportunities for them.”
Bombardier said that because of its pause with the Learjet 85, it would write down the value of the program, resulting in a pretax charge of about $1.4 billion. The world’s third-largest maker of commercial aircraft will also record $25 million for severance costs in its first quarter of 2015.
Beaudoin said the affected workers in Wichita and Mexico would be those working on the engineering, manufacturing and testing of the Learjet 85; the first test airplane has completed about 70 flights.
“Most of these 620 in Wichita are related to the development program,” Beaudoin said.
He said some workers on the program could be reassigned to other aircraft programs, but he did not have an exact number.
Most of the remaining cuts will occur at Bombardier’s plant in Queretaro, Mexico, which after the layoffs will have about 1,800 employees.
Beaudoin dismissed questions from analysts and media about whether the pause was really a way of ending the Learjet 85 program altogether.
“When the market shows signs of really picking up, I think we have a fantastic plane to take to the market,” he said.
Bombardier also does the flight testing of all its aircraft in Wichita as well as final assembly of the Learjet 70 and Learjet 75.
“We’re doing OK with the Lear 70, 75 for the targets we’ve set,” Beaudoin said of orders and deliveries
Bombardier spokeswoman Isabelle Rondeau said after the call that no additional job cuts in Wichita were planned.
Industry analysts said they don’t think Bombardier’s pause in the Learjet 85 is just about market demand.
“It’s a little bit of both, company-related and market-related,” Stern Agee analyst Peter Arment said Thursday.
“The low end of the biz jet market hasn’t been very robust over the last several years, coming out of ’08, ’09 credit crisis,” Arment said. “(But) it has begun to heal itself.”
RBC Capital Markets analyst Robert Stallard said in a note to investors Thursday that the market for midsize business jets – where the Learjet 85 fits – is growing and will continue to grow.
“As best we can tell the decisions detailed today were pretty BBD (Bombardier) specific, and we’d be hesitant to read them across as a sign of weaker demand for … competing bizjet products,” Stallard wrote.
The Learjet 85 made its debut at the National Business Aviation Association conference in Orlando, Fla., in October.
The company launched the Learjet 85 in 2007. It had been set to enter service in 2013 but was beset by delays.
Beaudoin acknowledged on Thursday the Learjet 85’s development problems, but said they were in the past.
“We did have some challenges a few years ago, but these technical challenges have been fixed,” Beaudoin said.
Business jet analyst Rolland Vincent said Thursday that those challenges were a “technology road map issue” that drove development costs of the airplane higher and “pushed the schedule.”
“I don’t think you could call it a market issue,” Vincent said.
Vincent said he’s forecasting about 10 percent year-over-year growth in business jet deliveries in 2015.
The Learjet 85 is not the only problematic airplane development program for Bombardier. The CSeries, its newest and largest commercial airplane that is intended to compete with the Boeing 737, was supposed to be in operation by now.
But the 7-year-old composite fuselage airliner has had its share of difficulties along the way and is now expected by the company to begin deliveries late this year.
Arment said the pause in the Learjet 85 program could be a way to re-direct some money from the Learjet 85 to the potentially more profitable CSeries and Global 7000/8000 aircraft programs. Those programs could prove a bigger profit margin because they are larger cabin business and commercial jets, he said.
“They’ve paused it for now because obviously they need to get those other programs across the goal line,” Arment said. “In this case it’s preserving and putting more attention on a higher-margin program.”
Arment sent a note to investors before Thursday morning’s conference call asserting the same thing.
But Beaudoin said in the call Thursday that the pause to the Learjet 85 was “strictly related to our view of the market.”
Another loss for city
The loss of 620 jobs does hurt, local officials said Thursday.
Wichita Mayor Carl Brewer said in a news conference Thursday afternoon that the city was first told about the layoffs Wednesday evening and in more detail Thursday morning.
It wasn’t unexpected because the city keeps in contact with aircraft makers on how they are doing, but that doesn’t make it any easier, he said.
“Any time we start talking about losing any kind of jobs here in the city of Wichita and in the aircraft industry, which is certainly a challenging industry for our community, it’s disturbing because it does affect our community; it affects families and individuals.”
But Lawing, of the Workforce Alliance, said the loss is more manageable today than when the bottom dropped out of the business jet market. He said he knows that other aviation manufacturers such as Spirit AeroSystems and suppliers are doing well and currently hiring.
“Our economy is so much stronger than it was two or three years ago, and I think those individuals impacted today and over the next few weeks, we’ll able to absorb them into the workforce,” Lawing said.
He added that the Alliance is preparing to help the affected Bombardier workers.
“There’s going to be a whole network of support for them,” Lawing said.
The biggest customer for the Learjet 85 has been Flexjet, the former Bombardier-owned fractional operation, which placed a firm order for 60 Learjet 85s with an option for 65 more.
Beaudoin declined to specify orders for the Learjet 85 or its backlog for the airplane, citing competitive reasons. He said that when the company releases its fourth-quarter 2014 financial results on Feb. 12, he expects Bombardier to report that it delivered about 129 business jets for all of 2014 – which includes its larger-cabin business jets – including 32 in the fourth quarter.
Beaudoin said Thursday that the company would be negotiating with those who had placed orders for the planes, and said some might choose a different Bombardier-made aircraft.
On the call Thursday, Bombardier officials fielded a lot of questions from analysts about the company’s liquidity going into 2015. The company lowered its cash flow from operating activities within the aerospace division to approximately $800 million compared with earlier estimates of cash flow from operating activities at between $1.2 billion and $1.6 billion.
The company’s stock dropped about 25 percent in trading on Thursday, as investors mulled the news.
Beaudoin said during the conference call that the company ended 2014 with $2.4 billion in liquidity and access to an additional $1.4 billion.
“We believe that there is sufficient liquidity going forward for our various development programs,” he said in the call.
Contributing: Dan Voorhis of The Eagle