MONTREAL - Bombardier Inc. (TSX:BBD.B) has lost one of the largest business jet orders in its history with its decision to cancel an order worth up to US$1.5 billion following the insolvency of private European company Jet Republic.
The Montreal-based plane and train maker said the cancellation affects a firm order for 25 Learjet 60 XR aircraft, valued at US$340 million, along with options to purchase 85 more. First delivery to Jet Republic was scheduled for October, with a further 14 deliveries in 2010.
"This is an unfortunate business decision and it's especially unfortunate for the Learjet team, however, we're working closely with them to re-energize sales and move forward," spokeswoman Danielle Boudreau said in an interview.
Like all aircraft manufacturers, Bombardier is feeling the effects of a slowdown in orders caused by the recession and global financial crisis. It plans to layoff 4,360 employees by Jan. 31, including 820 at the Wichita, Kan., plant where all Learjets are assembled.
Boudreau wouldn't say if the order cancellation will force the manufacturer to further reduce production rates of the mid-size business plane. A decision could be announced at its second-quarter results on Sept. 2.
"At this time there's no decision made so things remain as is. If we do have anything to announce, it would be then."
The Jet Republic cancellation marks the second time in about a week that Bombardier has taken the dramatic step. It previously cancelled an order for 15 remaining CRJ1000s from Italy's My Air, which also faced financial problems. The original 2006 order for 19 planes was worth about US$750 million.
Bombardier has said it expects business jet deliveries will fall 25 per cent this year. But analysts believe the worsening situation will cause deeper production declines, especially in the small cabin Learjets.
Chris Murray of CIBC World Markets has forecast that total deliveries will be down 32 per cent in fiscal 2010 and another 15 per cent in fiscal 2011.
Even though the Jet Republic order was Bombardier's largest for Learjet 60 XRs, its cancellation will have a smaller impact on Bombardier aerospace's backlog, which was US$22.4 billion as of the first quarter, he said.
Murray said Bombardier's decision to cancel the order wasn't a surprise because fractional share operators like Jet Republic have been hit hard by the economic slowdown as businesses and wealthy individuals have reduced the use of private jets.
NetJets (NYSE:BRK.A) last week reported significant losses and has stopped taking new aircraft for the foreseeable future from Hawker Beechcraft and Cessna (NYSE:TXT).
"While the cancellation is a negative, we believe Bombardier retains a strong backlog that should allow the company to manage through this current downturn," he wrote in a report.
Cameron Doerksen of Versant Partners said the order cancellation "highlights the ongoing difficulties facing the business jet market."
"Given the challenges facing the aerospace segment we expect Bombardier's earnings to remain depressed through fiscal 2011," he wrote in a report.
Doerksen added that the Jet Republic cancellation raises questions about whether Bombardier will experience further backlog erosion through order cancellations.
The analyst this week said Bombardier recently asked suppliers for price concessions as it tries to reduce costs.
Bombardier's suppliers are currently delivering fewer parts as the global recession saps aircraft demand.
On the Toronto Stock Exchange, Bombardier shares fell to $3.94 in midday trading, a drop of 20 cents or nearly five per cent.