Front Burner - Are taxpayer handouts over for Bombardier?

Episode Date: February 10, 2020

Today, the Canadian company Bombardier is more than $9 billion US in debt. Over the years, it has received billions in taxpayer bailouts. But after some big failures, layoffs and criticism over executive bonuses, this time around may be different.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hello, I'm Jamie Poisson. So I take a Bombardier streetcar on the regular here in Toronto. Maybe you're on a Bombardier Skytrain in Vancouver as you listen to this podcast.

Maybe you've even flown on one of their airplanes. Bombardier is a giant in Canadian manufacturing, such a giant, in fact, that the founder has his own heritage minute. Hey, guys, this just came from Montreal. And it's pro equipment. Listen, hey, Joseph Armand, you make a lot of money serving mass, so maybe you could buy this. Sorry, guys, but, well, I've got other plans in mind. The company has created thousands of jobs, particularly in Quebec, where they're headquartered. It has also, over the years, been the beneficiary of a whole bunch of Canadian taxpayer money, billions of dollars of favorable loans and even direct investment,

when the company was in a pinch. Well, they're in a pinch again, more than $9 billion US dollars in debt. But this time around, after some big failures and massive criticism of executive bonuses coupled with layoffs, the days of Bombardier being able to count on a bailout may be over. Today, I'm joined by a friend of the pod, my colleague Jean-Montpetit in Montreal, and we're going to talk about how the once mighty Bombardier has become politically quite toxic, even in its home province. This is Frontburner. Hey, John. Hey, Jamie. So before we get to Bombardier's current predicament, take me back here to the humble roots of Bombardier. We just heard a bit

of that heritage minute. Say, Mr. Laflamme, how much do you want for this? My tools are not for sale. Hey, I can pay. I had completely forgotten that they had a heritage minute, but how was this company born? There's a whole origin

story, right? Yeah, yeah, exactly. So Joseph Armand Bombardier was, he was a kid who loved to build things. And he had been tinkering for a while with how to design a kind of snow craft that would be able to get places through this thick snow. And basically the model he had been working with at the time was what was essentially a car on skis. It worked a little bit, but it wasn't that great. And then one day in 1934, it's the middle of a big snowstorm, his son's appendix burst. And because of the snowstorm, they weren't able to get him to hospital in time and his son dies. And according to the legend, that really motivated Joseph Almond Bombardier to pursue with his development of the snowmobile.

And, you know, just a few years later, he begins to roll out working models for what we now kind of know as the snowmobile of the ski-do. And he kind of, the kind of trick, the missing piece was this track on the bottom that you needed to add to go with the skis. And so by the early 40s, he's building these snowmobiles from his shop in Valcour, Quebec, and he's enjoying a modest bit of success at the time. Ski-do-ing is a fast-growing sport to which more and more Quebec outdoor enthusiasts are becoming addicted each month. Ski-do's are appearing on the highways and ski hills in the Laurentian resorts. In fact, most hotels in Quebec now rent ski-do's.

You know, of course, the company expands into sectors like trains and planes, stuff that we ride today, and it remains headquartered in Quebec. And, John, talk to me about the significance this company has in Quebec, because, of course, it's a company that we know across the country, but I always find it so fascinating, the place that it holds in Quebec for Quebecers. It has a tremendous political significance, cultural significance, historical significance, economic significance in the province.

Bombardier begins its expansion, its kind of global expansion in the 1960s when, again, the markets kind of change. And early 70s, you get oil crisis, there's a recession, and the company needs to find other stuff to build because people stopped buying snowmobiles and skidoos and that kind of stuff like that. And so the mayor of Montreal at the time, this guy called Jean Drapeau, goes to the head of the company at the time, a guy called by the name of Laurent Baudouin. He's like, you know what? You should really bid on the contract to build the Montreal Metro cars.

And so here you have Bombardier wins the contract, builds the Montreal Metro cars, and it's one of the moments where Bombardier begins to kind of integrate itself into the literal infrastructure of the province. In Montreal, the son of Skidoo made its debut. The Bombardier plant has produced its first light rapid transit vehicle. It's called the LRC. The initials stand for light, rapid, and comfortable. And through this period, Bombardier begins to grow, and it always grows with the Baudouin-Bombardier family at the head. They are francophones, and because they are francophones, they kind of are part of this movement in Quebec at the time.

People call it Quebec Inc., which basically this movement to support Francophone entrepreneurship, support businesses being owned by Francophones, which was a big reversal from the situation that existed prior to the Quiet Revolution, this was this period in Quebec, it was all about francophones essentially agitating for more control of the province. Yeah. So basically, business in Quebec was dominated by anglophones up until the Quiet Revolution, up until the 1960s. All the financial services industry, the banks and all that kind of stuff, all the upper management were Anglophones. If you owned a factory, chances are it was the factory was owned by an Anglophone and the Francophones were the workers. And so even though the Francophones made the majority or the majority in Quebec, they kind of occupied a minority when it came to owning the means of production. And that begins to shift in the 1960s and in the 1970s. And one of the companies that is really held out as the standard bearer of that movement is Bombardier. Okay.

Talk to me about numbers here. Like how many people is Bombardier employing in Quebec? I imagine that the number is a little bit less today because of these layoffs in recent years. It's a bit less today, but just to kind of give you a sense. So Bombardier employs about 20,000 people in both Quebec and Ontario. But its real, I think, impact in Quebec is particularly in the aerospace industry. That's an industry that employs currently about more than 40,000 people in Quebec alone. There are about 200 companies that exist as, in some way, either supplying Bombardier, training, that kind of stuff like that. And so this is a business,

an industry that's worth almost $15 billion in Quebec. And at the heart of that business is Bombardier. It's Bombardier's making planes. Right. It's not just Bombardier itself, but also the complex network of businesses around it. Exactly. We've got this company with this incredibly symbolic importance in Quebec, but then, of course, this economic importance. And this has bestowed on Bombardier some political sway over the years. And what has that political sway looked like? The political sway, I think, has looked like the expectation that when the going gets rough, the Quebec government will be there to support Bombardier in one way or another. The Quebec government was there in the 1970s when Bombardier looked to expand into the transportation industry.

It helped facilitate the deal that allowed it to build the Montreal Metro cars. Throughout its history, the Quebec government and also the federal government has been there to help Bombardier along the way, especially at these key moments where it seeks to expand, where it seeks to diversify its business operations. The federal government has invested more than $2 billion in Canadair since it bought it 10 years ago. It won't get that much back.

Bombardier has promised to keep Canadair in Montreal. And just to kind of give you an example of how contentious this has been at certain points in its history, not only today, but so in the mid-1980s, when Bombardier was just getting into aerospace, the Canadian government had this big contract for the maintenance of CF-18s, the fighter jet. Whoever wins the job will get access to some of the world's most advanced technology and make up to $1.8 billion over 20 years. And Bombardier was competing with a company from Winnipeg called Bristol Aerospace. Now Bristol Aerospace actually put in a lower bid. For Bristol to remain in the aerospace business, it needs the CF-18 contract.

It's already spent $5 million preparing for it. The company expanded its facilities, installed a computer system. But the government chose to give the contract to Bombardier instead. The pressure from Quebec increased. Last month, the premier, Robert Barraza, had a private meeting with Prime Minister Mulroney. They discussed the CF-18.

And that caused such an outrage at the time, such anger out West. And it was actually one of the things that people think led to the creation of the Reform Party. And so, you know, that's a narrative of Canadian politics. We're obviously seeing the repercussions even today. Right, right. And then obviously this most recent bailout, we're talking 2016, 2017,

the federal government provided Barbardia with $372.5 million in interest-free loans. This support will help ensure that our thousands of engineers and technicians will continue to push the technology envelope in commercial aerospace. And then the Quebec government provided about $1.3 billion as a direct investment, equally controversial at the time. And why did they do that? So at the time, Bombardier was basically on the verge of bankruptcy.

The CEO at the time, Alain Belmach, who's actually still the CEO now, said in an interview that bailout prevented the company from going bankrupt. And the company was in that financial position, that difficult financial position, because it had invested all this money in developing a new jet. This was called the C-Series. It was going to be a fancy new jet. It was going to allow Bombardier to compete with big aerospace industry players like Boeing and Airbus. It's a whole new design airplane. So this airplane is pushing the envelope as far as design.

It will be the game changer for the next 20 years. But it ended up costing the company a lot more, taking a lot more time. And so over that period, the company ran into serious financial difficulties. And that's when the Quebec government came in with this $1.3 billion investment and basically took a 49.5, I think, percent stake in the C-Series program. And there continue to be problems with this program, right? Even after the bailout. So one of the first things that happens is the big competitor, Boeing, decides to strike back. And what Boeing does, it convinces the U.S. government that,

you know, this bailout is allowing, is kind of an unfair subsidy and that you should, that the U.S. government should slap a huge import tariff on Bombardier. The U.S. Department of Commerce hit Canadian aerospace giant Bombardier with an additional 80% tariff today. That's on top of the 220% in countervailing duties already slapped on the company, meaning the cost of those C-series jets that Delta wants to buy will quadruple. So that dries up the cost of its planes in the U.S. It really hurts Bombardier's chances of recouping immediately some of the profits in it.

Then the bailout itself ends up becoming politically toxic in the province because what happens a year after the bailout, Bombardier's board of directors decides to give raises to all the executives. They give like a 50% raise to its C-suites. And people in Quebec are saying, well, what's going on here, guys? We just gave you a huge bailout and you're giving people raises all over the place? This is lining the pockets of the 1% of the 1% with tax dollars. Isn't the Prime Minister embarrassed? How is this helping the middle class? Mr. Speaker, I'm happy to correct the member opposite. We made a loan to Bombardier, a repayable loan that will ensure good jobs in the C-Series.

And there were layoffs around the same time, right? And then layoffs around the same time. So there were layoffs in 2016, layoffs in 2017. And then layoffs around the same time. So there were layoffs in 2016, layoffs in 2017, another big round of layoffs in 2018, 2,500 people. And the company doesn't really do much to explain why it's laying off people. And now more and more politicians are getting on the bandwagon, so to speak, and questioning what we're getting out of this $1.3 billion investment. It's around the same time that because sales are low, Bombardier is looking at reducing its liability in the C-Series. And so what it does in order to kind of reduce its liability and bring on more production capacity is it sells the C-Series program for $1 to Airbus. Simply put, Airbus brings global reach and scale.

It gives greater confidence to new customers and accelerates commercial momentum. So now Airbus has a controlling stake in the C-Series, and it goes on to rename the C-Series the A220. And that, too, led a lot of people to question what's going on at Bombardier. They basically just gave away this program that the Quebec government had invested $1.3 billion in to get off the ground. Right, and of course, Airbus is a French plane manufacturing company. Yes, exactly.

The agreement we have announced here with our partners is a commitment to Canada and to Canadian industry here in Quebec and all across the country. I remember when all of these bonuses were going out, under pressure, the company had to delay the payout of the bonuses. There was this Gary Clement editorial cartoon from the time of the board taking a vote on the question. And it was like the quote, you know, of the board taking a vote on the question. And it was like the quote, you know, all in favor of temporarily pretending to give an S-H-I-T about what people think. And, you know, everybody sort of raises their hand,

which I think also raises questions about, you know, the structure of the board itself, right? There's criticisms there too. Huge amount of criticisms there. It's because basically the way that the Bombardier-Baudouin family has retained control. So maybe I should just back up a second. So when I say the Bombardier-Baudouin family, Laurent Baudouin, who was the CEO of Bombardier for about 50 years, he's the son-in-law of the founder, Joseph Armand Bombardier.

And instead of working the same way as he worked in the past, we had to change the orientation of our company. He was the man, and he was the company. And then Laurent Baudouin's son becomes CEO. And so there's kind of this family you know, family controlling stake that runs throughout. And one of the ways they're able to, the family is able to retain control of the company are these dual, what they call dual class voting shares. So the shares owned by the Boadway Bombardier family are worth 10 votes, whereas everybody else's shares are only worth one. And so the family only has about a 12% equity stake in the company, but they control 50% plus one of the

voting shares. So that allows them to retain control of the company. And this has been object of a lot of criticism from shareholders' rights activists, a lot of politicians say, also kind of questioning this way of operating. The whole C-Series adventure was basically pushed by Pierre Baudouin, the CEO that basically got the job because of his dad. It's a category that we forecast will sell 7,000 airplanes over the next 20 years. For Boeing and Airbus, they have other priorities. So we feel that this category needs an all-new airplane.

And that caused a lot of, again, a lot of concerns from people. The other, the kind of flip side of the argument is that this kind of way of controlling the company with these dual voting shares has allowed the company to fend off any foreign takeovers, which is another big thing in Quebec. We're very much concerned in the province about these kind of like foreign companies going in and buying up Quebec companies and then moving the head offices somewhere else. And so kind of, you know, diluting the influence of this kind of francophone entrepreneur through these foreign takeovers. And so one of the arguments in favor of this ownership structure

is that it's allowed Bombardier to remain a Quebec company. Right. And, you know, I know the C-Series was a big issue in the last couple of years. But just to bring up another factor that turned some people against Bombardier here in Toronto, we spent a billion dollars on 204 new streetcars from Bombardier, as people might remember this. Their arrival was hugely delayed. And then when we finally got our first batch of 89 streetcars, 67 of them had to be sent back for repairs. A welding defect means that new streetcars have to be sent back to Quebec, completely taken apart

and then repaired. It is a frustrating development for both the mayor and TTC chair Josh Cole. It's very disappointing. You know, it's one of a series of disappointments. At this point, I kind of have come to expect everything. And that also played, I think, a significant role in undermining the company's reputation across the country. And not just across the country. Bombardier had similar problems in New York City. Just last month, New York City had to pull 300 subway cars from service

because of problems with the doors that Bombardier had built. And there was a city official down there who said, you know what, Bombardier sold us lemons. OK, so we've got all these problems with these big projects, criticisms of the layoffs and the executive bonuses around the last big bail off, questions about how Canadian and how Quebec-centric this company even is anymore. And that all brings us to today. Bombardier says it is roughly $9 billion, I think more than $9 billion U.S. dollars in debt. And it's interesting to me that when Bombardier goes through hard times,

it seems like automatically journalists are asking the Quebec government, well, like, what are you going to do about it? And so how is that playing this time around? It's playing differently, I think. And I think one of the reasons it's playing differently in Quebec is the negative vibes left over from that $1.3 billion investment in the C-Series. that $1.3 billion investment in the C-Series. And so the Quebec government has given signals recently that there's going to be no big bailout coming. The economy minister, Pierre Fitzgibbon, basically offered a very blunt assessment of the company's prospects.

Can Boisbaudier survive with the three businesses like we have today? The answer is no. You know, the company right now is composed of a plane-making division Can Bombardier a lifeline that would allow it to keep both those divisions. And so the thinking is that Bombardier is really going to have to do some hard thinking about where its future lies. Does its future lie in aerospace or does its future lie in transportation? Okay. John Malpate, thank you so much.

Thanks, Jamie. Okay, so before we sign off today, the latest on the coronavirus. First, seven cases of the virus have now been confirmed in Canada, four in BC, three in Ontario. And as of Sunday evening, there were more than 37,000 cases around the world and 800 deaths. The death toll has now surpassed the death toll of SARS. the death toll has now surpassed the death toll of SARS. Though it's important to note here that the number of people who have recovered has also risen in recent days. And the suggestion here is that its fatality rate is relatively low.

A second plane is en route to Wuhan to bring back more Canadians who have asked to leave China. It is first stopping in Hong Kong to wait for permission to land in the epicentre of the virus, and we'll keep you posted on that. The first plane, of course, of people is currently quarantined in Trenton, Ontario. The Canadian government also says it's monitoring the well-being of Canadians quarantined aboard a cruise ship docked in Japan. So far, seven Canadians aboard have contracted the virus. That is all for today. I'm Jamie Poisson. Thanks so much for listening to FrontBurner

and talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.