25 Aug 04. The FT reported that Bombardier, a Canadian transport equipment group, said it might further scale back production of its regional jets, depending on the financial health of US Airways and Delta AirLines, its two biggest customers.

The two airlines, which make up 40 per cent of Bombardier’s order backlog, are struggling to avoid filing for protection from their creditors under US bankruptcy law.

“Only a fool would deny that there are some major challenges” in the aircraft industry, Paul Tellier, Bombardier’s chief executive, said on Wednesday, as the company announced a two-thirds drop in second-quarter earnings.

But Mr Tellier said difficulties in the regional jet market were balanced by growing demand for Bombardier’s Learjet, Challenger and Global Express business jets, and by gradual progress in putting the company’s rail equipment division on a more stable footing.

Bombardier’s net earnings dropped to $23m, or 1 cent a share, in the quarter ended July 31, from $68m, or 4 cents, a year earlier. Revenues rose fractionally to $3.88bn, with a 5 per cent fall from the aerospace division offset by a 9 per cent gain from rolling stock.

Bombardier’s shares, at a 10-year low, lost 10 Canadian cents to C$3 in early trading in Toronto. Nigel Heath, an analyst at Dominion Bond Rating Service in Toronto, said that the US Airways and Delta orders were a “huge uncertainty”. Bombardier’s unfunded pension liability, one of the biggest among Canadian companies, also remains a substantial drain on cash resources.

Nevertheless, in Mr Heath’s view, the potential loss of the US Airways and Delta business “is not life-threatening” to Bombardier, because other airlines would probably take up at least some of the orders, and the company could speed up deliveries to customers in other parts of the world.

“A number of actions could be taken to reduce the pain threshold,” Mr Heath said. Last month, US Airways deferred deliveries of 19 Bombardier aircraft, which were scheduled to start in the current quarter. The airline also converted orders for 23 of the 50-seat CRJ200 to the 70-seat CRJ700. Bombardier announced this year that it would cut production of the CRJ200 this summer.

Pierre Beaudoin, head of Bombardier’s aerospace division, said he was confident that US Airways’ orders for 12 jets still scheduled for delivery this year would go ahead. The production schedule would then be reviewed.

US Airways’ aggressive expansion in its use of regional jets is a critical part of its new business transformation plan. Delta, the world’s largest operator of regional jets, has warned that it will be forced to file for bankruptcy in the absence of a new pilots’ contract and concessions from its debt holders.Mr Beaudoin said Delta had confirmed its regional jet orders, but that bankruptcy protection would raise questions about financing. Discussions are taking place with the airline, Mr Beaudoin said. In contrast to the turbulence in the regional jet market, Bombardier delivered 26 business jets in the quarter to July 31, up from 14 a year earlier.

Mr Tellier said prices had started to improve and the inventory of used aircraft had dropped substantially. A group of 150 Bombardier employees is pressing ahead with a feasibility study for a 100-135 seat aircraft, which would bring the Canadian company into direct competition for the first time with Boeing and Airbus. Mr Tellier said that no decisions had yet been taken.