Bombardier ranks #1 or #2 in terms of private jet delivery and sales. This is an attractive duopoly market. The 25% tariff will significantly impact the aerospace industry as a whole and Bombardier.
• The taking delivery in other jurisdictions is less certain – there’s bonus depreciation benefits to taking delivery in the US that may counterweigh tariff impact. That said, BBD customers may have flexibility to take delivery in different jurisdictions if they are a fleet operator. At the onset of the Delta tariffs in 2020, they were able to skirt tariffs through classifying planes as “used” (https://www.ajot.com/news/delta-skirts-trump-tariffs-by-sending-airbus-jets-on-world-tour).
- There are other tools that BBD can use – BBD could incur a transfer fee to bring an aircraft into the US through its own facilities, incurring some tax obligations that can be offset with existing NOLs/tax credits
- Customers can also simply wait until a more constructive tariff regime is in place – as it stands a newbuild order will only be delivered in several years given backlogs across the industry
• The current tariff regime in place (till April 2) indicate that products compliant with existing USMCA will be exempt (BBD planes are compliant). Beyond April 2, it still is unclear whether there’ll be issues, since General Note 6 of the Harmonized Tariff Schedule exempts civil aviation as well (https://hts.usitc.gov/reststop/file?release=currentRelease&filename=General%20Note%206). Prior Trump tariffs on civil aviation (C-series 2017 ~200-300% proposed tariffs, and new Airbus deliveries in 2020) were both trade-oriented and therefore allowed for HTSUS exemptions to be superseded. Since this is a broad tariff agenda, our understanding with 3rd party experts is that HTSUS exemptions will be upheld.
• Most importantly amongst all of this though, is that the market seems to think that it’s a blanket 25% tariff, which alongside countervailing tariffs, means it’s closer to a 35% effective tariff
- In reality, from available government docs on the existing tariffs + corroborated by other potentially affected companies (US auto industry, recreational products like BRP, etc.), the tariff will be only on materials and labor not originating the US
- ~40% of aircraft COGS are either made or performed in the US – lowers effective tariff rate to ~15%
- Pilot training, service training and technical publications are typically included in purchase agreements, and the value of these aren’t subject to tariffs, lowers effective tariff rate to ~12%
- Implies that a HSD to lower DD price increase required by BBD to maintain equivalent EBIT $/plane vs. pre-tariff, which is more than palatable for customers to split with OEM, or even for BBD to eat. Especially vs. a 25% tariff.
More than happy to chat about the other elements of the thesis that I don’t think have been covered here. Specifically 1/ the replacement cycle of mid-2000s fleet aircraft that are being upgraded to heavy jets where BBD has a duopoly with Gulfstream, 2/ the potential for defense growth, 3/ ability for BBD to buy back a large chunk of stock after reaching desired leverage targets, and 4/ continued aftermarket growth from growing fleet exposure / usage which is very accretive to group margins.
At end of day, given the continued strong demand (corroborated with the company as recently as last week) and the recent depreciation in the Canadian dollar, we believe they will be able to almost fully offset the tariff with price and currency-based cost reduction. And while BBD has 40%+ market share of heavy jets, Gulfstream has considerable more non-US content in some models, and therefore would face similar tariff percentages as BBD.
We see BBD trading at 6x 2025 FCF and expect FCF to grow double digits through the cycle. This stock should trade at 15x+ cash flow, equating to CAD300/share at least. The market recognition point should more clarity on the tariff situation and BBD coming out with a specific FY25 guide (they said on 4Q24 call that they wanted to raise their 2025 guide if not for lack of clarity on tariff regime).
Very deep analysis of the tariff impact. I wonder the second effect of AL 25% tariff. I believe this one is here to stay. It has as much impact on gulfstream than BBD imo. I also wonder the applicabilty on plane due to the large pourcentage in AL - AL = Aluminium
A big chunk of aluminum imports from Canada into the US are non-compliant with USMCA (https://x.com/Sammy_the_Nose/status/1900975586996351005/photo/1), which stands to benefit a Canadian OEM who can lock down domestic supply, but of course increases broader industry prices and therefore impacting overall aerospace industry.
It should be noted that the largets individual chunk of the COGS of an aircraft is the engine, and Gulfstream’s G400/500/600 all get them from P&W Canada, whereas BBD’s are essentially all on GE passport, Honeywells and RR Pearls with limited Canadian engine exposure. Especially relevant for relative tariff impact vs. Gulf within the non-US components tariff interpretation
What I have been reading is that non-compliant USMCA product are often canadian made product from SMEs that havent bothered to go through regulations and proof of origin paper work and were relying on legacy free trade rules. This will change if USMCA is enforced.
Yes totally agree on the engine edge that Bombardier has over Gulfstream. I believe RTX (P&W Canada) and Gulfstream will lobby hard to make sure USMCA product continue to be imported free of tariff - the same goes with the automobile industry. As I mentioned in my post, GE canada makes key components of the CFM-56 - that also needs to stay tariff free.
I honestly think that the biggest fear that Bombardier has - thus the warning of not providing 2025 guidance - is 1) retaliory tariff from Canada that would be imposed on parts coming from USA 2) a blanket 25% tariff - although both competitors and Bombardier would suffer almost equally on this blanket.
The AL 25% tariff is actually slightly positive in my opinion from a competitive landscape point of view in my opinion. Imports of cheap Aluminium from Quebec is actually positive for USA and their manufacturing capability. This makes no sense for USA (an energy limited country) not to import Primary aluminum ingots.
On March 25, we hosted a group of investors for a meeting with the senior leadership team of Bombardier including Bart Demosky, CFO, Francis Richer de La Fleche, VP of Financial Planning & Investor Relations, and members of the IR team. The meeting reinforced our constructive view on BBD. We sense that the recent tariff risk-related volatility in the share price has created a significant disconnect between valuation and the underlying fundamentals of BBD. We reiterate our Outperform rating.
Key Points:
Business jet demand fundamentals appear to be on solid footing. Flight activities remain strong, inventories of used aircraft have declined in recent months and remain well below historical averages, discussions with customers and the pipeline of orders activities remain supportive of around 1x B2B for this year. Supply chain remains challenged, particularly in terms of engine deliveries, but we understand that conditions are stable and continue to support guidance for 150 aircraft deliveries in 2025.
Tariff risk remains top of mind for investors. Bombardier products are not currently subject to tariffs under USMCA exemption, albeit that may still change. Our view remains that given the highly globally integrated nature of the global aerospace supply chain, the industry is not likely to be a target for trade restrictions. Moreover, several mitigation strategies suggest that BBD could limit the impact of tariffs if they were to be imposed. We believe that BBD could potentially release 2025 financial targets concurrent with Q1 results, particularly if visibility into trade policies improve in coming weeks/months. We remain comfortable with our forecast for 150 deliveries, $1.6b in EBITDA, and $700m in free cash flow for 2025
Great article, Thanks a lot. There is a lot to unpack here but its an intriguing story. I am working on a write-up, too. Now I will have a lot less work because I can make many references to your post ;-)
Thanks for the artcle. I was considering my own deep dive. I would add that Bombardier had over $10.7 billion in NOLS. Unless I am misinterpreting the annual report, they should have a nice tax shelter for several years to come. I was also intrigued by BDRBF's small (but likely growing) defense business.
One quick question that crossed my mind: How can Bombardier actively increase the percentage of jets that they service themselves ? Is this only a question of building new service centers or do they have other levers like explict requirements for the warranty etc ?
In any case, the increase from 2020 to 2024 is already impressive. I just wonder how far this can go,
As you know transcript says that market share went from 31% to 45% market share from 2020 to 2024. In the annuel investor transcript they mentioned that they were basically close to capacity so i suspect that increasing number of service centers (6 in USA) and size (e.g. Toronto expansion) other location outside of NA should be sufficient to increase market share. They explained also that the number of larger planes in air (super sized mid and large cabin keeps increasing every year at about a rate of 5-6% as the number of learjet (small cabin) is diminishing while the number of large, super mid (challenger) keeps increasing. For example, the number of planes in operation increased by 100 in 2024 (5000 to 5100). 150 planes were added (all large and super mid) but 50 planes (mostly learjet were replaced). So the number of large and super mid sized are increasing rapidly - and larger planes requires more maintenance according to the company - there are about 2000 learjets still flying today. The conversion of the learjet to a super mid size plane is also a strong trend to increase forward sales.
So you take delivery in Bermuda then you fly the plane back to the US and store it in the US, doesn't that trigger an import tax? To dodge the tax don't you have to store the plane abroad which is a pain. At that point won't it just be easier to buy a Gulfstream. I think I am going to buy a little because the price looks appealing and these tariffs seem too stupid/destructive to last, but maybe the damage of lasting, enforced tariffs is being underestimated?
You are probably right. This was an untested thought. Main thesis is that aerospace will be excluded eventually from the Canada usa tariff like automobile. You will pay a lot more for your G600 with AL material, landing gear and P&W engine coming from Montreal assembled in USA versus cheap labour paid in Cad dollar.
Thanks for the write-up. A few points on tariffs:
• The taking delivery in other jurisdictions is less certain – there’s bonus depreciation benefits to taking delivery in the US that may counterweigh tariff impact. That said, BBD customers may have flexibility to take delivery in different jurisdictions if they are a fleet operator. At the onset of the Delta tariffs in 2020, they were able to skirt tariffs through classifying planes as “used” (https://www.ajot.com/news/delta-skirts-trump-tariffs-by-sending-airbus-jets-on-world-tour).
- There are other tools that BBD can use – BBD could incur a transfer fee to bring an aircraft into the US through its own facilities, incurring some tax obligations that can be offset with existing NOLs/tax credits
- Customers can also simply wait until a more constructive tariff regime is in place – as it stands a newbuild order will only be delivered in several years given backlogs across the industry
• The current tariff regime in place (till April 2) indicate that products compliant with existing USMCA will be exempt (BBD planes are compliant). Beyond April 2, it still is unclear whether there’ll be issues, since General Note 6 of the Harmonized Tariff Schedule exempts civil aviation as well (https://hts.usitc.gov/reststop/file?release=currentRelease&filename=General%20Note%206). Prior Trump tariffs on civil aviation (C-series 2017 ~200-300% proposed tariffs, and new Airbus deliveries in 2020) were both trade-oriented and therefore allowed for HTSUS exemptions to be superseded. Since this is a broad tariff agenda, our understanding with 3rd party experts is that HTSUS exemptions will be upheld.
• Most importantly amongst all of this though, is that the market seems to think that it’s a blanket 25% tariff, which alongside countervailing tariffs, means it’s closer to a 35% effective tariff
- In reality, from available government docs on the existing tariffs + corroborated by other potentially affected companies (US auto industry, recreational products like BRP, etc.), the tariff will be only on materials and labor not originating the US
- ~40% of aircraft COGS are either made or performed in the US – lowers effective tariff rate to ~15%
- Pilot training, service training and technical publications are typically included in purchase agreements, and the value of these aren’t subject to tariffs, lowers effective tariff rate to ~12%
- Implies that a HSD to lower DD price increase required by BBD to maintain equivalent EBIT $/plane vs. pre-tariff, which is more than palatable for customers to split with OEM, or even for BBD to eat. Especially vs. a 25% tariff.
More than happy to chat about the other elements of the thesis that I don’t think have been covered here. Specifically 1/ the replacement cycle of mid-2000s fleet aircraft that are being upgraded to heavy jets where BBD has a duopoly with Gulfstream, 2/ the potential for defense growth, 3/ ability for BBD to buy back a large chunk of stock after reaching desired leverage targets, and 4/ continued aftermarket growth from growing fleet exposure / usage which is very accretive to group margins.
At end of day, given the continued strong demand (corroborated with the company as recently as last week) and the recent depreciation in the Canadian dollar, we believe they will be able to almost fully offset the tariff with price and currency-based cost reduction. And while BBD has 40%+ market share of heavy jets, Gulfstream has considerable more non-US content in some models, and therefore would face similar tariff percentages as BBD.
We see BBD trading at 6x 2025 FCF and expect FCF to grow double digits through the cycle. This stock should trade at 15x+ cash flow, equating to CAD300/share at least. The market recognition point should more clarity on the tariff situation and BBD coming out with a specific FY25 guide (they said on 4Q24 call that they wanted to raise their 2025 guide if not for lack of clarity on tariff regime).
Very deep analysis of the tariff impact. I wonder the second effect of AL 25% tariff. I believe this one is here to stay. It has as much impact on gulfstream than BBD imo. I also wonder the applicabilty on plane due to the large pourcentage in AL - AL = Aluminium
A big chunk of aluminum imports from Canada into the US are non-compliant with USMCA (https://x.com/Sammy_the_Nose/status/1900975586996351005/photo/1), which stands to benefit a Canadian OEM who can lock down domestic supply, but of course increases broader industry prices and therefore impacting overall aerospace industry.
It should be noted that the largets individual chunk of the COGS of an aircraft is the engine, and Gulfstream’s G400/500/600 all get them from P&W Canada, whereas BBD’s are essentially all on GE passport, Honeywells and RR Pearls with limited Canadian engine exposure. Especially relevant for relative tariff impact vs. Gulf within the non-US components tariff interpretation
What I have been reading is that non-compliant USMCA product are often canadian made product from SMEs that havent bothered to go through regulations and proof of origin paper work and were relying on legacy free trade rules. This will change if USMCA is enforced.
Yes totally agree on the engine edge that Bombardier has over Gulfstream. I believe RTX (P&W Canada) and Gulfstream will lobby hard to make sure USMCA product continue to be imported free of tariff - the same goes with the automobile industry. As I mentioned in my post, GE canada makes key components of the CFM-56 - that also needs to stay tariff free.
I honestly think that the biggest fear that Bombardier has - thus the warning of not providing 2025 guidance - is 1) retaliory tariff from Canada that would be imposed on parts coming from USA 2) a blanket 25% tariff - although both competitors and Bombardier would suffer almost equally on this blanket.
The AL 25% tariff is actually slightly positive in my opinion from a competitive landscape point of view in my opinion. Imports of cheap Aluminium from Quebec is actually positive for USA and their manufacturing capability. This makes no sense for USA (an energy limited country) not to import Primary aluminum ingots.
From BMO earlier today:
Bottom Line:
On March 25, we hosted a group of investors for a meeting with the senior leadership team of Bombardier including Bart Demosky, CFO, Francis Richer de La Fleche, VP of Financial Planning & Investor Relations, and members of the IR team. The meeting reinforced our constructive view on BBD. We sense that the recent tariff risk-related volatility in the share price has created a significant disconnect between valuation and the underlying fundamentals of BBD. We reiterate our Outperform rating.
Key Points:
Business jet demand fundamentals appear to be on solid footing. Flight activities remain strong, inventories of used aircraft have declined in recent months and remain well below historical averages, discussions with customers and the pipeline of orders activities remain supportive of around 1x B2B for this year. Supply chain remains challenged, particularly in terms of engine deliveries, but we understand that conditions are stable and continue to support guidance for 150 aircraft deliveries in 2025.
Tariff risk remains top of mind for investors. Bombardier products are not currently subject to tariffs under USMCA exemption, albeit that may still change. Our view remains that given the highly globally integrated nature of the global aerospace supply chain, the industry is not likely to be a target for trade restrictions. Moreover, several mitigation strategies suggest that BBD could limit the impact of tariffs if they were to be imposed. We believe that BBD could potentially release 2025 financial targets concurrent with Q1 results, particularly if visibility into trade policies improve in coming weeks/months. We remain comfortable with our forecast for 150 deliveries, $1.6b in EBITDA, and $700m in free cash flow for 2025
Great article, Thanks a lot. There is a lot to unpack here but its an intriguing story. I am working on a write-up, too. Now I will have a lot less work because I can make many references to your post ;-)
Last time this happen was Logistec which turn out all right - looking forward to your writeup
Thanks for the artcle. I was considering my own deep dive. I would add that Bombardier had over $10.7 billion in NOLS. Unless I am misinterpreting the annual report, they should have a nice tax shelter for several years to come. I was also intrigued by BDRBF's small (but likely growing) defense business.
One quick question that crossed my mind: How can Bombardier actively increase the percentage of jets that they service themselves ? Is this only a question of building new service centers or do they have other levers like explict requirements for the warranty etc ?
In any case, the increase from 2020 to 2024 is already impressive. I just wonder how far this can go,
As you know transcript says that market share went from 31% to 45% market share from 2020 to 2024. In the annuel investor transcript they mentioned that they were basically close to capacity so i suspect that increasing number of service centers (6 in USA) and size (e.g. Toronto expansion) other location outside of NA should be sufficient to increase market share. They explained also that the number of larger planes in air (super sized mid and large cabin keeps increasing every year at about a rate of 5-6% as the number of learjet (small cabin) is diminishing while the number of large, super mid (challenger) keeps increasing. For example, the number of planes in operation increased by 100 in 2024 (5000 to 5100). 150 planes were added (all large and super mid) but 50 planes (mostly learjet were replaced). So the number of large and super mid sized are increasing rapidly - and larger planes requires more maintenance according to the company - there are about 2000 learjets still flying today. The conversion of the learjet to a super mid size plane is also a strong trend to increase forward sales.
Thanks, that is interesting. If indeed capacity is the constraint, then future growth might be relatively easy to obtain.
So you take delivery in Bermuda then you fly the plane back to the US and store it in the US, doesn't that trigger an import tax? To dodge the tax don't you have to store the plane abroad which is a pain. At that point won't it just be easier to buy a Gulfstream. I think I am going to buy a little because the price looks appealing and these tariffs seem too stupid/destructive to last, but maybe the damage of lasting, enforced tariffs is being underestimated?
You are probably right. This was an untested thought. Main thesis is that aerospace will be excluded eventually from the Canada usa tariff like automobile. You will pay a lot more for your G600 with AL material, landing gear and P&W engine coming from Montreal assembled in USA versus cheap labour paid in Cad dollar.
Are private jet buyers really so price sensitive?