Aerospace: Dogfight

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As irritating as they are, the subsidies, which mostly take the form of government loan guarantees, are a sideshow to the main contest, as Bombardier and Embraer jockey for position in a market that, while stagnant today, is expected to soon explode with demand. Ailing airlines of all sizes around the world have come to rely more and more on smaller, lower-maintenance regional jets--instead of clunky turboprops or inefficient larger craft--to connect hub cities with smaller markets. Airline-industry analysts say regional jets are key to many airlines' survival.

Both Bombardier and Embraer are gambling big money on ever larger regional jets. New 90-plus-seat models, the Bombardier CRJ900 (rolled out in January) and the Embraer ERJ190 (expected next year), cost each firm nearly $1 billion to develop but might face competition from Boeing's and Airbus' smallest models. Bombardier and Embraer are also beefing up international operations, especially in jet-hungry China. Embraer last year launched a $25 million joint venture to build 50-seaters in China for that market. Bombardier is in negotiations with other Chinese partners to build 70- and 90-seat jets.

The fates of the regional-jet makers and the airlines are intertwined as never before. Since the fall of 2001, Bombardier Aerospace has laid off nearly 8,000 employees worldwide, or about 22% of its work force, and Embraer more than 1,800 (almost 10%), as many existing orders have been postponed or converted into purchase options. Revenue is down significantly for both companies, and it was an ominous sign when a major competitor, Germany's Fairchild Dornier, filed for bankruptcy in April 2002. Embraer's usually brash CEO, Mauricio Botelho, 59, last month observed in nervous executivespeak, "The aerospace market right now is very sensitive to change."

Investors feel the same way. Embraer stock has fallen from the high $30s before the 9/11 attacks to about $13 in recent days. Shares in Bombardier are stuck below $3, down from about $18.

The good news for Bombardier Inc. is that it has a respected new chief executive in Tellier, 63, who arrived in January. A roll-up-your-sleeves manager, Tellier took over the moribund, government-owned Canadian National Railway Co. in 1992 and turned it into a lean and efficient publicly traded market leader. He did that by cutting costs (including 14,200 jobs) and eliminating real estate and telecom divisions to focus on rail. Tellier knows Bombardier, having served on its board for the past five years. Besides dumping its highly profitable recreational division as well as ancillary businesses like military-pilot training, the company is reining in its troubled financing arm, Bombardier Capital, which in the future will lend only to buyers of regional aircraft.

Bombardier is the world's biggest producer of railway equipment, including the high-speed locomotives chosen for Amtrak's East Coast Acela service. The company's new plan emphasizes its "many opportunities for synergies," and Tellier is already primed for some serious nipping and tucking. The day after the company halved its earnings guidance in March, Tellier announced he would ax 10% of the work force in the aircraft unit, on the heels of deep job cuts last year.