Fight and Flight: The case for a federal investment in Bombardier

Jonathan Kates

On October 29th, 2015, exactly 10 days after Justin Trudeau had been elected Prime Minister of Canada with a majority mandate, his provincial cousins in Quebec put him in a bind when they agreed to a CAD$1.3 billion/49.5 per cent equity stake bailout investment in Bombardier’s C Series jets. Now the Quebec government has asked Ottawa to match its contribution. For those unfamiliar with the company, Bombardier is a homegrown multinational aerospace and transportation company that was started in the 1940s when Joseph-Armand Bombardier built a factory in Valcourt, Quebec to build and sell the new machine he invented, the snowmobile. Today, it is an important contributor to Quebec’s economy as one of the few multinationals in the province, and a provider of 41,000 well-paying jobs. This fact remains true despite recently announcing 7,000 job cuts worldwide – including 2,400 in Quebec – and posting a loss of $5.3 billion in 2015.

The October bailout came as the company was in the process of dealing with a series of failures, including the previous day’s decision by the TTC to sue the company after Bombardier announced they would deliver 16 of the 73 promised streetcars by year’s end (2015) and failed to do so. On top of that, the company had been (and is) plagued by delivery delays for their C Series jets for the past two and a half years, and facing a budget overrun north of $2 billion.

The C Series is comprised of two models, a 110-seat CS100 and a 135-seat CS300, and these are meant to compete in the 100-150 seat narrow body commercial jet market currently dominated by Boeing and Airbus. According to the Bombardier website, their jets have three cost efficiencies, perhaps the most important being a 20 per cent fuel burn advantage. It’s not the least bit ironic that fuel, which the website describes as the largest variable cost for operators, is at rock-bottom prices and consequently the lure of fuel efficiency has likely tapered off.

If all this weren’t enough, Bombardier is governed by a controversial dual-class share structure, which means that there are multiple levels of shares and each level has a different value. In Bombardier’s case, there are are two, and Class A shares, which carry a 10-to-1 weight of subordinate Class B shares, are 64% owned by Beaudoin-Bombardier family members. This cronyistic imbalance has been considered a major hindrance to any competitive re-structuring, and it is now that restructuring is a supposedly necessary condition for the federal government to proceed with an investment. Now may be the opportune moment to again demand for this previously rejected shakeup, as the families have seen their wealth value in the company drop from $2.2 billion to $260 million since 2008. (Curiously, this dual-class system isn’t exclusive to Bombardier and is the modus operandi in many important Quebec-based family-run enterprises including Alimentation Couche-Tard Inc., CGI Group Inc., and Quebecor Inc.)

These are the types of factors that Navdeep Bains, Minister of Innovation, Science and Economic Development, is mulling over with his team in Ottawa as they decide whether or not to meet the request of the Quebec government to match its investment. A few columns in national publications like Maclean’s and the Financial Post have laid out credible arguments against a public investment. For instance, Jason Kirby explains that a failure at Bombardier “could be exactly what’s needed to spark a much-needed spirit of entrepreneurialism in Quebec,” and Terence Corcoran opines that taxpayers have likely contributed more to the company than its October 28th, 2015 value of $3.6 billion and that enough is enough. Furthermore, the recent oil price crash and the current economic situations in Alberta and Newfoundland require federal policy solutions as well, and with the recent revelation that the Liberal budget deficit could be over 3 times what was originally projected, financial resources will be spread thin.

Notwithstanding there are lots of reasons – economic and political – for the government to make the investment, provided it can secure a governance change. Assuming the hypothetical but plausible situation that this change is a non-negotiable part of the deal, there is a business case to be made that saving a company that produces jobs that drive production and innovation is a worthwhile use of public money. Out of its not insignificant 41,000 employees in the province, 18,000 enjoy average salaries twice the rate of the province’s average. Ontario has an interest in the company as well, with production facilities in Sudbury and at Downsview Airport in Toronto. When the broader supply chain is taken into account, Bombardier’s economic ripples grow into waves.

The company’s predicament is of course not unprecedented in the modern era, as the Conservative federal government and the Ontario Liberal government bailed out Chrysler and General motors for a whopping $13.7 billion in 2009. In comparison, a combined $2.6 billion investment from the Quebec and the federal government seems like a drop in the bucket. It’s also worth noting that the political support that the federal Liberals received from voters in both provinces was substantial and they are surely keeping that in mind while reviewing the file.

Another political consideration is the money the United Kingdom has invested in the Bombardier C Series, in large part to prop up the aerospace division that employs 6,000 people in Belfast. That number represents less than a quarter of the company’s 25,000 employees in the U.K., where it also contributes a combined £2.6 billion to the local and national economies.

Some prominent members of the business community say that a federal investment in Bombardier is a must and that “the resulting losses would cost Canadian taxpayers more than the assistance being called for,” likely through lost income and revenues for both the employers and employees. In fact, the Quebec government is banking on just that. In a last-ditch to keep the C Series alive, the provincial Liberals told Air Canada it would drop their lawsuit against the airline if the latter agreed to buy 45 CS 300 jets (along with an option for an additional 30). The lawsuit stemmed from a 2012 decision by Air Canada to break their pact to keep part of their aircraft maintenance in Montreal, which resulted in 1700 layoffs. Air Canada’s order is said to be worth up to $3.8 billion.

Then just a few days later, Bombardier announced they would be closing the C Series test site in the Montreal suburb of Mirabel and moving it to an existing test facility in Wichita, Kansas. Three days after that Bombardier received even more bad news. One of the C Series’ largest customers, Republic Airways Holding Corp., a feeder airline for U.S.-based airlines like Delta, United Airlines, and American Airlines, filed for Chapter 11 bankruptcy protection, which put an order of 40 CS300 jets in jeopardy. This order represents 16 per cent of Bombardier’s firm 243 C Series commitments so far.

In sum, despite a strong case against a bailout, the potential economic and political windfalls of not investing suggest the Liberal government will grant Bombardier the $1.3 billion being asked of them. But in order to mitigate backlash, Prime Minister Trudeau and Minister Bains must be successful in getting the owning families to relinquish control over their rapidly dwindling empire. If the Beaudoin-Bombardier conglomerate is unwilling to budge, the government cannot justify using public money to further erode constituent trust in fiscal policy. The loss of well-paying manufacturing jobs, the collapse of a strong industry, and the economic blow this will cause in Quebec will be because of the Bombardier family’s inaction, not the inaction of any government.


Jonathan Kates is a is a 2017 Master of Public Policy candidate at the University of Toronto’s School of Public Policy & Governance. He holds a bilingual Bachelor’s degree in International Studies and Sociology from Glendon, and his areas of interest are education, social policy, cities, and government accountability. His favourite food group is pizza.

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