Bombardier Inc. is making an all-in bet on the unpredictable corporate jet market, with no ace in the hole.

After shedding its commercial and propeller aircraft businesses, and agreeing to sell its passenger train equipment unit to Alstom SA, the Canadian company’s only remaining product will be making and servicing corporate jets. That’s a risk none of Bombardier’s competitors has been willing to take.

The producers of Gulfstream, Falcon, Cessna and Legacy brand corporate planes all have defense units or other businesses to help offset the downturns that routinely hit the market. During the last recession, private-jet deliveries plummeted to 846 in 2009 from more than 1,100 in the previous year, and then sank to a low of 614 in 2018, according to JPMorgan Chase & Co., amid trade-war concerns and sluggish commodity prices.

The defense businesses have allowed private jet makers to weather periods of weak demand and maintain investment in new plane models, which helps drive sales, said Roland Vincent, an aviation consultant based in Plano, Texas. Stripping away that counterbalance puts Bombardier in a more precarious position than its competitors, he said.

While rivals have their defensive businesses, “Bombardier has none,” Vincent said. “It exposes the company to more cyclicality.”

Best Option

Bombardier didn’t have much choice but to sell off parts of the company to pay down debt, according to Chief Executive Officer Alain Bellemare. The company’s commercial aviation unit racked up losses of US$400 million in 2016 and was burning through US$1 billion in cash, Bellemare said last week. The train unit was confronting “challenging projects” this year that were expected to drag on profit margins.

By contrast, the jet business is poised to do well this year as Bombardier ramps up deliveries of the Global 7500, the biggest and farthest-flying business plane now on the market, the CEO said. The aircraft, listed at US$73 million, went into service at the end of 2018 after a two-year delay and is sold out through 2022. Bombardier expects 160 business jet shipments this year, including 35 to 40 Global 7500s, up from 142 in 2019.

“We’re extremely well positioned,” Bellemare said in an interview with BNN Bloomberg television in Canada. “We have a world-class franchise, amazing products and great capabilities.”

Bombardier fell 9.7 per cent to $1.49 at the close Tuesday in Toronto. The shares have dropped 23 per cent this year.

Bombardier has one of the largest line-ups of corporate jets, ranging from the popular Challenger 350, which seats 10 and can cover trips between the U.S. East and West coasts, to the Global 7500, which can fly to Hong Kong from New York with the comfort of a shower and bedroom. The planemaker also refreshed its Global series, with new engines and more range for the 5500 and 6500.

Last year, Bombardiers business jets accounted for $5.4 billion of revenue and had a backlog of pending orders valued at $14.4 billion. The global market in 2018 for business aircraft was about $20 billion, according to the General Aviation Manufacturers Association.

Still, Gulfstream, the industry leader, has announced a new plane that will overtake the Global 7500 as the largest corporate jet with the longest range. Gulfstream, a unit of General Dynamics Corp., flew its G700 for the first time on Feb. 14 and is expected to begin deliveries in 2022.

As a standalone business, Bombardier’s jet unit could be vulnerable to a takeover offer, especially from a large U.S. defense company that doesn’t have a civilian aviation business, such as Lockheed Martin Corp. or Northrop Grumman Corp., Vincent said. The Wall Street Journal reported that Textron Inc., which makes Cessna jets, armored vehicles and tilt-rotor military aircraft, had been in talks to buy the jet business before Bombardier decided to sell its rail-equipment unit instead.

Counterweight

The defense companies provide the financial stability to invest in corporate aircraft, Vincent said. Gulfstream stepped up investment and boosted brand loyalty and service after General Dynamics bought the corporate plane maker in 1999. The defense unit of Dassault Aviation SA, the French plane producer, is booming even as its Falcon jet business has struggled, Vincent said. Brazilian producer Embraer SA will keep its defense and corporate jet units as it seeks regulatory approval to sell its commercial jet business to Boeing Co.

“To me, that’s the way you get around the cyclicality of civil aviation is you have a military business,” Vincent said. “Defense is not going away as an industry.”

For now, Bombardier is enticing for investors because it will trade at an “exaggerated discount” to rivals after the deal to sell the train unit closes, Benoit Poirier, an analyst at Desjardins Securities, said in a note to clients. That discount holds up even after factoring in competitors’ defense businesses. Bombardier also will have a “decent balance sheet,” he said.

“Bottom line, we encourage long-term investors to revisit the story and buy the shares to benefit from the potential value creation arising from management’s efforts to solidify the balance sheet,” Poirier said.