Bombardier Tops Buffett Order With $7.8 Billion Jet Deal

Wednesday, 28 Nov 2012 08:49 AM

 

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Bombardier Inc. won the biggest business-jet deal in its history with luxury air-charter company VistaJet Holding SA, exceeding a transaction five months ago with Warren Buffett’s plane-leasing unit.

VistaJet ordered 56 Global-series aircraft and took options for 86 more as it taps Asian demand. The deal has a value of $3.1 billion, which would rise to $7.8 billion should all the planes be taken, Montreal-based Bombardier said Tuesday in a statement. Bombardier shares gained the most since June.

The business-jet agreement marks a second significant win for Bombardier, which in June reached a $7.3 billion agreement for as many as 275 of its Challenger aircraft with the NetJets unit of Buffett’s Berkshire Hathaway Inc. Purchases of private aircraft had languished amid a recession and the global financial crisis that intensified in late 2008.

“These orders reinforce the outlook for solid growth in production rates in the large-cabin business-aircraft segment over the next several years,” said Fadi Chamoun, a BMO Capital Markets analyst in Toronto, who rates Bombardier shares outperform.

The sizable cabins on Global-series planes make them well-suited to demand in China, where the emphasis is on high-status models, as well as promising markets including Indonesia, said Paul Sheridan, head of Asian consulting at aviation advisory firm Ascend Worldwide Ltd.

Business-Jet Outlook

VistaJet’s order comprises 25 Global 5000 planes, which can seat 20 people and connect San Francisco with Seoul, 25 Global 6000s seating eight and able to fly from London to Tokyo, and six Global 8000s that can also carry eight and travel 7,900 nautical miles (14,630 kilometers) to link New York with Hong Kong. The options are for 40 each of the 5000 and 6000, plus six 8000s.

Deliveries will begin in January 2014 and unfold at a rate of one a month for 10 years.

Bombardier sees demand for 24,000 business jets during the next two decades, with 45 percent of sales falling into the Global family segment, Steve Ridolfi, president of the company’s business-aircraft unit, said at a press briefing in London.

The Global 5000 carries a catalog price of $48.6 million, while the 6000 is listed at $58.5 million and the 8000 at $66.3 million, Bombardier said.

Today’s order probably means that Bombardier will boost output of the Global, said Cameron Doerksen, an analyst at National Bank Financial in Montreal. The Global is Bombardier’s highest-margin aircraft, he said in a telephone interview.

‘Good Spot’

“It’s a good spot to be in to have your most profitable plane with a huge backlog and your production rate fairly secure for the next number of years,” said Doerksen, who rates the shares sector perform. “It’s my belief that this order will assure a production rate increase on the Global line.”

Bombardier had orders equivalent to 34 months of production for the Global as of Sept. 30, according to its third-quarter filing. That exceeds the company’s target of 24 to 30 months. VistaJet’s purchase probably expands Bombardier’s backlog for Global jets to 41 months of output, Benoit Poirier, an analyst at Desjardins Securities in Montreal, said today in a note to clients. He recommends buying the shares.

Bombardier’s widely traded Class B stock climbed 7.7 percent to C$3.36 at 2:44 p.m. in Toronto after gaining as much as 9.6 percent. That was the most intraday since June 12, after the NetJets agreement was announced the previous evening.

Bombardier Bonds

The company’s bonds rose, and the cost to insure its debt dropped after the order was announced. Bombardier’s $500 million of 5.75 percent notes due in March 2022 climbed 0.88 cent to 101 cents as of 11 a.m., yielding 5.61 percent, according to data compiled by Bloomberg.

The cost to insure Bombardier debt for five years using credit-default swaps fell 6 basis points to 435.85 basis points at 12:53 p.m., the biggest intraday drop among members of Canada’s benchmark Standard & Poor’s/TSX Composite Index.

Ridolfi said in an interview last month that Bombardier was thinking about a production increase for the Global amid growing demand for large business jets.

“You have to take it up slowly, given all the magnitude of the work and the intensity of the completion process,” Ridolfi said at the time. “The Global has been a tank for us right through this recession. It’s continued to grow and grow.”

Even so, orders from fleet operators such as VistaJet are more likely to be scrapped if the global economy starts faltering, National Bank’s Doerksen said.

Top End

“Large orders such as these have historically carried a higher risk of cancellation should there be a market downturn,” he said in a note to clients. “Given the heavy weighting of NetJets and now VistaJet, we would argue that Bombardier’s backlog carries a higher degree of risk.”

Domiciled in Switzerland with its main base in London, VistaJet already has 50 planes with which it targets corporate customers and wealthy individuals traveling point to point at short notice. The new jets will link remoter markets with the rest of the world, especially for clients whose travel patterns don’t justify membership in a time-share style program like NetJets, owner Thomas Flohr said today in an interview.

“We’re advising clients not to take fractional assets just for wanting to fly 100, 200 hours a year,” said Flohr, who founded VistaJet seven years ago. “We’re focusing on the very top end of the market, which is intercontinental traffic.”

Requirements such as a need to fly from New York to Shanghai non-stop and as fast as possible are tilting the market toward the biggest, most luxurious models such as the Global 8000, he said. VistaJet said it will deploy its jets in markets such as China, Russia, the Middle East and Africa.

Growth in emerging markets is poised to switch demand toward more modern aircraft from older, secondhand planes, said Flohr, who plans a 13-day sales trip to 17 cities in nations including Kazakhstan, Mongolia, Angola and Azerbaijan.


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