Aerospace: Dogfight

Executives of Bombardier Aerospace seemed a bit defensive when they traveled from their Montreal headquarters to a recent aviation fair in Sao Paulo. Just east of Brazil's business capital are the headquarters of Embraer, Bombardier's smaller but aggressive rival. The two companies had fought for a decade over the burgeoning global market for regional jets--the ones with 20 to 100 seats that fly routes like Chicago to Cedar Rapids, Iowa. But at the Sao Paulo show, Embraer opened a new front in the battle, flaunting its first executive jet, the attractively priced $20 million Legacy.

"There is really no competition" between the Legacy and Bombardier's business fleet, sniffed Bombardier spokesman Leo Knappen. "We have a whole family of jets specifically tailored for the executive-aircraft market, while Embraer has simply refitted one of its commercial jets." But as Knappen spoke, the government of India announced it had bought five 10-seat Legacys for use by its top officials. Bombardier--which owns Learjet, the world's most famous business-jet maker, and Global, a line of larger craft costing as much as $44 million--had competed for that contract.

Bombardier, while proud of its status as the world's third largest aircraftmaker (after Boeing and Airbus), is feeling more and more like Goliath to Embraer's David. Under new CEO Paul Tellier, a proven cost cutter, Bombardier Inc., the parent company of Bombardier Aerospace, is paring down its operations to become nimbler and more focused on its core businesses, making trains and planes. "Rigor and consolidation are the order of the day," Tellier said recently, as he announced plans to raise $1 billion by selling Bombardier's recreational-products division, which makes popular Sea-Doo watercraft and Ski-Doo snowmobiles. "We have taken the measures to ensure we will be ready when the business-jet market picks up." But as Merrill Lynch analyst Ronald Epstein points out, Embraer doesn't depend on business-jet sales, and it has invested heavily in regional-jet R. and D. during the market downturn.

Though Embraer's 2002 revenues of $2.5 billion were less than a third of Bombardier Aerospace's, the smaller firm has captured more than a third of the regional-jet market after entering only seven years ago with its 50-seat ERJ135 and has become the fourth largest aircraftmaker. The rivalry involves two of the best-run companies in the hemisphere, yet each side protests that the other doesn't play fair because it relies on taxpayer subsidies. Embraer says it needs government help to counter Bombardier's easier access to First World financing and technology; Bombardier says it has to have aid to offset Embraer's low Third World labor costs and cheap currency. The firms have put their World Trade Organization complaints on hold and will sit down this month to try to work out a settlement.