Bombardier builds jets that burn less

Montreal-based aerospace and transportation company Bombardier specializes in making trains for the busiest cities in the world, including New York, London, and San Francisco. But while the company’s presence in the rail industry is well established, Bombardier is now upping the ante on another important area of travel: commercial and private aircraft. The multi-billion dollar industry is dominated by Boeing and Airbus, but Bombardier believes there’s room for a third player. Fortune’s Adam Lashinsky interviewed Bombardier CEO Pierre Beaudoin to discuss the company’s newest aircraft, high-speed rails, and the future of commercial travel both on the ground and in the sky. A lightly edited transcript follows.

So if you would indulge me and give me an opportunity to practice my French, could you please remind me what the difference is between Bombardier [bom-bar-dee-YAY], your company, and bombardier [bom-ba-DEER], which is not your company?

[Laughs] Well, that’s just the way that some people say it in the U.S. I think it’s more a reference to a bomber, an aircraft that’s a bomber, when you say bombardier [bom-ba-DEER]. Of course in our case it’s a family name, Bombardier, so we try to have people say it in this way.

My understanding is that there are assets in the United States that you formerly owned that you don’t own anymore?

Well, then you are referring to our snowmobile and our recreational products. That’s not part of our public company anymore. That’s a private company, and we call it BRP now.

I see. So you’re still involved with it, but it’s not connected with the public aerospace and transportation company.

Exactly. My family has part ownership with Bain Capital.

Ah, very good. Great. So let’s start with you have two parts to Bombardier: aerospace and rail transportation. Let’s start with aerospace. You have a new aircraft coming out in the near future. Tell me about it, please.

Well, actually we’re working on three new aircraft. I think you’re referring to the CSeries, which is our new commercial aircraft, between 115 and 135 passengers. But we’re also working on a new Learjet called the Lear 85, that’s a mid-size business aircraft that will come out to the market about the same time as the CSeries, and we’re working on the two long-range business aircraft, Global 7000 and 8000.

And so the distinction between business aircraft and commercial aircraft is that business is intended for private jet travel.

Exactly, private aircraft. Since they’re used mainly for business, we call them business aircraft, but you’re right.

And how much between Learjet and Global and Bombardier, how much joint development, if any, are you able to do?

Well, quite a bit because we keep some of our core engineering in Montreal, so when it comes about aerodynamic structure, these are done centrally at Bombardier. Then you have engineers that are product-specific, so that’s the example of Learjet, where they work specifically on Lear products. Then we would have a team that works on our commercial aircraft or our other brands in private jets.

So tell me about the CSeries, please, and what your hopes for it are.

Well, the CSeries for us is our entry into main line. We’ve been the leader, and we are the leader in regional aircraft, turbo props, and jet, but now we’re going into a bigger category typically referred to as single-aisle jets. You would know them as smaller 737s or 318s, 319s, in the Airbus category. So we’re getting in this selling to airlines like Delta, American, United. In the past, we would have sold to their regional feeders. So for us, this is a big development. It’s a category that we forecast will sell 7,000 airplanes over the next 20 years, and we’ve been developing this aircraft for five years. And now it’s very exciting because all the parts are coming together, and we’ll go to first flight in June.

And do you have a specific date for your first flight in June?

Well, that’s as specific as we’re getting now, June. Of course we have a specific date, but [airplanes are such] complicated and technical products that I think targeting a month like June is already precise enough at this point.

And if all goes according to plan, when will passengers by flying in this plane?

After the first flight we’re actually going to have an airplane that starts flying every month. And we’re going to have five airplanes into our test flight. And we should be in test flight for about a year. So first delivery [will be around] the second half of 2014.

And I understand one of the major benefits of a new plane is that it is more fuel efficient. Is that correct?

Well, the CSeries is really about delivering to the airline a more efficient airplane, so it’s 15% more efficient than any other airplane on the market today, or 20% less fuel consumption. But it does a whole lot — a bunch of other things better from a maintenance perspective. So overall they’re going to save 15% cost.

Fuel efficiency obviously has been one of the major selling points of Boeing’s 787 Dreamliner. And so I need to ask the obvious question, will the CSeries use lithium ion batteries?

No. It’s a product that we did evaluate when we were developing the CSeries, and we didn’t feel from a technology perspective that it was mature enough to put in our aircraft. So that’s not the plan.

And how can you describe comfort on the new plane? I get the business imperative first of the regional jets you already do make, but the thought of flying overseas in a smaller jet is not appealing. I like Airbus and Boeing’s great big jets if I’m going to be on the plane for 10 hours.

Well, if you look at the cabin that we’ve designed in the CSeries, it’s actually a very comfortable airplane. It’s going to be better in terms of seat width, in terms of height, in terms of the type of bins to put your [carryon] baggage. It’s going to be better than any other single-aisle airplane on the market. So we did focus a lot on cabin comfort because I do agree with you, that’s very important.

It strikes me as one of the most audacious business goals I’ve heard of recently to go after a duopoly like Boeing and Airbus.

Well, we’re not going after that duopoly. We feel that the segment of 100 to 149 seats is a category that they’re abandoning. They used to build a lot of aircraft in this category, but if you look at their sales in the last few years, Boeing is only selling their bigger 737, called the 737-800. That’s 160-passenger aircraft. Or Airbus is selling the 320, which is an equivalent size aircraft. So that’s a category that adds a lot of volume, but for Boeing and Airbus, they have other priorities. So we feel that this category needs an all-new airplane, and that’s what we’re doing.

I read that your first customers are Korean Air and Lufthansa, which of course are also big customers of Boeing and Airbus. Is that correct?

Yeah. We’re going to sell to the same airlines that Boeing and Airbus are selling, so yes, they view us sometimes as a competitor because we’re entering a market that there are only two players today, and I guess they don’t like to see a third player coming in. But we’re addressing a different niche, and in the end I think Bombardier can bring value to the airline. And for me, my customer is the airline, and really that’s what’s important to us.

I was particularly interested to read how much money you’re spending to develop these aircraft and also how long they take to become profitable. I wrote an article recently about Boeing’s development of the 707 in the 1950s, and I read that it’s not clear if the 707 was ever profitable.

Yeah. It takes a lot of patience. It takes a lot of know-how. So it’s about five years of development. It’s [an] investment of multibillion dollars. But in the end if you do it right, which I think the CSeries is a category-defining airplane — if you do it right you’ve got great barriers to entry. It’s not easy for somebody to make a product to compete with you. And at the same time, we should be in production with the CSeries for 20 years, and that’s not something you see in many industries.

It’s truly impressive. Before we leave aerospace, I read that the Learjet 85 program has been delayed. Why is that?

Well, we decided with the Lear 85 to make an all-composite airplane. And this is using a new technology. Most of the structure is done in our factory in Mexico. And this has given us some challenge to get this right from a production perspective. I mean from a strength and structure perspective it’s going very well, but actually putting this aircraft into production was a little bit more challenging than what we had anticipated. But it’s going better and better now, and we feel that we’ll be delivering these aircraft in 2014.

Very good. Now, the other part of your business is a rail business, and it occurs to me that anybody watching this video or listening — or reading this interview who lives in a city has ridden on a Bombardier train. Do you think that’s true?

Well, it’s very likely. In the U.S. you would think of New York, Chicago, major cities in the U.S., San Diego, San Francisco. So yeah, it’s like that if you’ve ridden a metro or a train, you’ve ridden in a Bombardier product. Worldwide, in fact.

Can you tell me approximately how many different models of trains you make?

Well, that would be very hard because most customers have their own specifications. So the metro, we make in New York has — nothing is similar with the one we make in London. They’re both in stainless steel, but they’re very different products. So every city has their specification. Every train has their own specification. We have a very broad product portfolio. We do from signaling on the track to keep the traffic control on the tracks if you want, all the way to electric locomotives. But in between there are monorails, there are Airport People Movers, there are trams, there are metros, so many different products.

So you confirmed what I thought and that I was thinking, that the BART (Bay Area Rapid Transit) in San Francisco, the BART cars which you make, have nothing in common with the subway trains in New York. Isn’t this a technical and manufacturing and standards challenge for you?

It is. I would compare it to the construction business. You have a lot of high-rises, and when you know how to build a high-rise, you know, you’re a company that understands what to do. But every high-rise is customized in a significant way. But the basic principles apply. It is the same thing with a train. The wheelset under the train, which we called bogies, or truck in America, these tend to be similar. You can standardize there. Propulsion system, so the electric engines that we use and the systems, those can be standardized. So although the train is different in its look, in its weight, in its material that we use, some of the systems are standard.

And what would you say is the most exciting thing going on in the passenger rail industry? What I’m getting at is we’re talking about an industry that has been around for 100 years, and the experience of going from one end of a city to another feels about the same to me today as it did when I was a child 40 years ago.

Well, there’s a few areas of exciting development in the industry. The high-speed trains. You know, they were common if you want in Japan and maybe France, but now we’re seeing them appear everywhere in the world. And these really give a really good traveling experience. We’re developing a train right now in China that is in tests and we will start delivering at the end of ’13, that goes 380 kilometers an hour, and it can do that 10 hours non-stop. So I think that’s very exciting from a technology perspective, but also from a passenger comfort [perspective]. In the cities, we’re seeing some cities include more electronic equipment to have better — I guess a better environment in the train while you’re coming in to the city, things like Wi-Fi, things like TV and entertainment. I guess they’re more and more focused now on passenger comfort.

Pierre, to what extent is the passenger train business economically sensitive?

Well, that’s one of the benefits of this industry. It doesn’t tend to vary with the cycles. In fact, in down cycle, in economic down cycle, very often countries choose to invest in infrastructure to create jobs, and when they do it’s good for the train business. But right now what’s going on, there’s a lot of emerging countries, emerging economies, and the first thing they need to do is develop their infrastructure. So that’s very good for us because we can develop new projects across the world. But also in the developed economies, like the U.S. or all over Europe, the systems are aging, and people want modern platforms to travel in to work in the morning, so there there’s a big pressure for replacement.

Is there a concern that the United States either can’t or won’t pay for infrastructure upgrades?

Well, I think there’s a battle between building more highways or developing a system that can move more people in a more efficient way. In the United States, it’s still very much a car culture, and that’s good. We all like our cars. But as the cities expand, it’s important that the cities look at more efficient ways to move passengers. And I think there’s a really good discussion that’s engaged right now about high-speed trains, about regional trains. And the more we talk about it and can look at specific routes for the customers in the U.S., I think eventually you’ll have some very efficient systems.

Are you involved in the proposal for a high-speed train between San Francisco and Los Angeles in California?

Yeah, we’re looking at it. This is a project that is developing step by step, I can say. The financing seems to be in place. There are a lot of steps to accomplish, like getting the land to actually do the route. There are areas it’s solved; there are areas it’s not solved. But we think we have a product that would be very efficient for that route, so definitely we’ll be at the table.

When you say the financing is in place, you mean the state’s financing.

Yeah. Because these projects require large financing, and the state has raised the money or a big part of the money to do the project.

And how much financing does it require from your perspective if you were to be chosen to build the system?

Well, it always depends on exactly what they will land on, and that’s the debate we have when we sit with customers. You can make a train that goes 125 miles an hour and use pretty much a conventional infrastructure that’s in place, but then if you want to go faster, you need to electrify the system, so that’s a further investment. And then if you want to go above 150 miles per hour, you need to now have specific tracks that have been completely redesigned with the curves that you need to take that speed, and that would require a very large investment. In that case, you’re talking above $20 billion.

And this would be the state’s responsibility or yours?

It depends on each of the projects. Sometimes they’re a public-private partnership, sometimes they’re state financed. We tend to think that anything that has to do with infrastructure, like a road, should be typically financed by the states. When you talk about the trains, you could use private financing to do that, or public, depending on the priorities of the state.

Your rail business has had execution issues in several geographies. Could you tell me what those have been?

Well, last year we had a few projects that were more difficult in Germany and France. But you have to understand, we execute about 200 projects a year. If I talk about major projects across the world, we had three that were large. So we spoke about it because it had a financial impact on the company. But generally we execute very well, because the other, you know, 197 projects were going well.

Last thing on the subject of investment. You currently are investing in the neighborhood of $2 billion annually in capital projects. You plan to pare that back in the next couple years, is that correct?

Yeah, that’s correct. It’s because right now we’re developing, like I said before, three new aircraft programs at the same time. That requires a lot of investment. But we think for a company our size, $1 billion a year is about the sustainable level that we should be at. Now we’re at $2 billion, so we’ll reduce it by about $500 million a year, next two years.

To become much more profitable by cutting your spending by 50%.

Well, it certainly will help the cash flow. Right now it requires a lot of cash, of course, to develop these airplanes, but as they also start to deliver, they will increase revenue by the new products we’re bringing to the market, and at the same time we’re reducing capital spending. So from a cash flow perspective, it’s very good.

So I want to just close with one last question on the industry. I know that what’s going on with Boeing is, number one, outside of your technological decision-making, and that you’ve chosen not to use lithium ion batteries. And also the plane involved is bigger than anything that you manufacture. But I’d like to know your guess on when Boeing will be able to resolve its problems and get the 787 back in the air for passengers.

Well, those are very complex problems, and they need to take the time to solve it and really understand the root cause. And I wouldn’t be able to guess. I know that Boeing is very good, and they’re putting all the effort to get it resolved. But I can’t guess. That’s something they should answer.

I’ll ask you one last question that is more germane to your business. Watching their issues, I’ve been surprised — or I’ve been interested that it seems like the U.S. and the Japanese regulatory authorities, when it comes to air safety, are the most important in terms of global players. Is that true, or are there other jurisdictions that I’m overlooking?

Well, you have the European authorities of course, with Airbus being principally assembled in Europe. And of course for us, we focus on Transport Canada because that’s who we deal with for most of our airplanes. And these jurisdictions that I just named have reciprocity. So if I have an airplane certified by Transport Canada, the FAA will accept most of the tests, and I’m able to get an FAA certification. So right now we heard a lot about FAA because of the Boeing issues.

A shorter version of this interview appeared in the April 29, 2013 issue of Fortune.

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