Threat of Substitutes

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					                           Assessing the Marketplace – Bombardier Inc.
Introduction to Competition – Overview & Outlook

         Bombardier’s most significant competition is in its largest branch – the transportation market.

Aerospace represented 65% of 2000 revenues, 87% of 2000 profits. Bombardier specializes in small to

medium business aircraft, with two of the industry’s leading developers in Challenger and Learjet.

Bombardier is also footed in the commercial and regional market with Canadair, despite recently selling

off the rights to the de Havilland name to Viking Air of Victoria. With its diverse market scope, Bombardier

is third only to Boeing and Airbus in aircraft manufacturing. Aerospace represents the majority of

Bombardier’s customers; however, the company is also the world leader in rail transportation. The

company produces high-tech railcars, tramways, and more traditional locomotives. Bombardier also has a

large market share in the recreational vehicle market – Ski-Doo and Lynx are well established

snowmobile brands as is the Sea-Doo name in personal watercraft. Bombardier also manufactures ATVs,

small boats, and engines. Despite their well-established brand names in numerous markets, Bombardier

still faces stiff competition.

Competition – Jockeying for a “Piece of the Pie” (Assessing the Threat of New Entrants)

         Bombardier has in recent years enjoyed a steadily-increasing growth rate; however, the rate of

growth is slowing significantly. This is due much in part to a large decline in air travel post-9/11 and the

resulting suffering of commercial airline companies, stern competition from Brazil’s Embraer.

Furthermore, Boeing has indicated its interest in entering the regional jet niche as a major player.

Embraer and Boeing present major competition for Bombardier. Among other advantages, Embraer is

subsidized by the Brazilian government, a luxury not offered by the Canadian government to Bombardier.

Boeing, given its enormous size, know-how and experience in the jet industry, might be a powerful force if

they were to attempt a push into the regional aircraft market. Furthermore, many of Boeing’s larger

customers (such as Continental, American, and Air Canada) operate smaller regional airliners (such as

Continental Express, American Eagle, and Air Canada Jazz). If they were to manufacture regional

aircraft, the large airlines would most likely feel inclined out of history and loyalty with Boeing, to purchase

their aircraft (for their regional airlines) instead of for example, Bombardier or Embraer.
        Although Bombardier is very established in the regional aircraft market, they are facing more and

more competition from other firms, most notably Embraer, as well as the potential for new entrants, most

notably Boeing.

Understanding the Industry

        Most if not all developed (and developing) nations place great emphasis on the progress of their

advanced industries and constantly seek to gain new high-tech knowledge. The extremely high demand

for high-tech products around the world, whether it be in aerospace or electronics, is the foremost reason

for this. If a nation can successfully amass the knowledge required to develop, innovate, and create new

technology, they are most likely in a very advantageous position to reap the benefits. With this in mind,

these developed (and developing) nations generally actively promote competition between high

technology firms within their country, to fuel faster growth. The Aerospace industry is one of the largest

and most important industries in North America. In Canada, more than 70% of this industry's production is

exported. In Canada alone, there are roughly 700 aerospace-related companies, employing nearly 80,000

people. Despite the enormity of the Canadian aerospace industry, the 700 or so firms do not enjoy the

same government assistance given to other commercial aircraft firms in other countries. Most aircraft

manufactures in other countries are heavily supported by their governments, generally through contracts

to develop new technology for the military. The US government grants $12 billion annually to different

aerospace firms throughout the country. Most of this money goes towards new military technology. Three

of Canadian aerospace’s major competitors - Brazil, France, and Italy - are owned and operated (partially

or fully) by their respective governments. The fact that most of Bombardier’s foreign competitors are

subsidized by their governments puts Bombardier at a significant disadvantage – many of these

companies have their research and development expenses funded as well as receiving aid to alleviate

losses. These factors make it much easier for Bombardier’s competitors to offer their products at lower

prices; consequently, making it very challenging for Bombardier to offer competitive products at the same

price levels. Without government support, Bombardier has to work that much harder to compete with its

government-assisted competitors.

Understanding the Market

        In Bombardier’s largest branch, aerospace, there are several sub markets:
Large aircraft (i.e. airliners): Boeing and Airbus are the dominate suppliers in this market. The large

aircraft market is shared almost exclusively between the two companies, at roughly 50-50.

Regional aircraft: Bombardier, Embraer, and Fairchild Dornier are the major suppliers in this market.

Canadian suppliers represent roughly 40% of this market.

Business aircraft: Gulfstream, Cessna, Raytheon, and Learjet (Bombardier) are the major suppliers in this


Military aircraft: American firms dominate this market with Lockheed Martin and Boeing leading the way

with massive US military contracts. This market is heavily regulated by national defense authorities. Most

other competitors are based in Europe with BAE Systems, Dassault, and Saab Aerospace.

Threat of Substitutes

          The main substitute threats to Bombardier are in the regional transportation industry. While

Bombardier’s main strengths are in their regional aircraft branch, other forms of regional transportation
that might substitute for Bombardier’s airplanes include civilian charters, such as buses and trains. The

graph below demonstrates the competitive relationship. Trains offer a favorable substitute, because of the

noticeable price difference between air and train travel. Since the travel from Ottawa to Vancouver, British
Columbia takes roughly three days, they must offer the luxury of lodging and food. On a plane (via Air

Canada, Bombardier’s #1 consumer) it would take roughly five hours to get to the destination. It is

obvious that air travel is the more efficient choice between the two, simply because it is cheaper, and is

less time consuming. Bus charters represent a possible substitute threat to Bombardier. Buses are

particularly attractive to lower-income people who might not necessarily be able to afford air travel.

Furthermore, the costs of air travel continue to rise with the constant flux of the market and the continuing

rise of fuel costs. While buses do offer a cheaper alternative, air travel is far more time efficient and brings

in far more revenue. Taking a train is too costly, taking a bus is cheaper, yet takes longer. Flying is more

expensive than taking a bus, but makes up in time efficiency, comfort, and safety. All in all, flying is the

way to go, and as seen in the below examples the threat of substitutes are favorable, simply because

they fail to compete with the convenience, speed, and reliability of air travel.

          Flying Positives and Negatives Compared to Substitutes
    Quicker than most substitutes                                                      Cost of Transportation
    Affordable for most people (especially mid to
        upper income people)

    Fastest way to travel long distances                                                 Buses       $370.80

                                                                          Type of
        (regional air travel becoming more
                                                                                        Airplanes      $443
Negatives (in comparison to other substitutes)                                                          $694.30
      Can be more expensive than other
         substitutes (i.e. buses)                                                               $0    $200 $400 $600 $800
      Environmentally unfriendly
                                                                                                    Price of Transportation
      Might not be the most efficient (time and
         money) way to travel a short distance (e.g.                              Trains             Airplanes        Buses
         from Antigonish to Halifax – might be more             Cost           $694.30                 $443          $370.80
         efficient to take a bus)
                                                         Graph #1 = a scale of pricing from travel from Ottawa to Vancouver
Supplier Power
Level of standardization/specialization: Low. Importance to End Product: Great. Bombardier is a large

corporation, which help the supplier expand in its ever-growing market. Safety standards are important to

Bombardier, therefore the suppliers have to maintain consistent safety regulations in order to maintain a
good reputation in the business environment. With the good reputation that the supplier has, Bombardier

has a high likelihood of returning. Availability of Supply: Limited. The increase of demand from suppliers

by Bombardier has caused problems with supply and demand. The suppliers cannot supply products as

quickly as Bombardier needs. Size/Power of Customer: HIGH. A supplier of Bombardier, Heroux-

Devtek’s, has experienced a downfall in sales, since Bombardier was ordering 50 or less, the deliveries
for the Heroux-Devtek’s industry has gone down from 239 units in 2003 to 188 units in 2004.                                        This

suggests that in order for Bombardier’s suppliers to maintain its orders, it depends heavily on Bombardier

and other manufactures to go to their suppliers to place their orders. There are numerous suppliers from

which Bombardier are able to choose from, which means Bombardier has the opportunity to influence
their suppliers. Cost/Ease to Customer: High. Bombardier is experiencing pressure from issues such as

deregulation, and a private sector emerging with another private sector,

as well as a change in the European Union with regards to policies and

practices. If Bombardier cannot keep up with these changes in regulation

and policy, they will “operate at less than 50% capacity.” This means that

Bombardier has to spend more money to restructure their industry in
order to satisfy their European national market.
        In light of the September 11 attacks on the World Trade Center in 2001, the airline industry
incurred an immediate decrease in both the demand of traveling and the production of airplanes.

Bombardier was only one of many companies that were affected because of this event. The figures

located in Table 1.0 for 2002 reflect the amount in which the demand declined for both the industry and

Bombardier itself as their market share fell by 1.92%. This continued to fall in 2003 along with the number

of units they sold. As Bombardier’s growth was dropping, the growth of the industry began to recover by

increasing the number of units to 2686, which is almost a 24% rise in the total demand. Despite this,

Bombardier’s market share began to rise in 2004 as they sold 59 more planes than in the previous year.
This is due to the introduction of the new Bombardier Learjet40, Challenger 300, Global 5000             business

aircraft and other regional jets. Because of the effects of the terrorist attacks in the United States, both

consumers and investors were fickle to support the airline industry leading to a sudden and dramatic

decrease in the demand.

Gauging the Aerospace Industry Demand and Market Share
                         2001         2002          2003             2004                     2005
$ Demand                 23.2         21.5          21.3             21.7                     21.8
(In billions)
Unit Demand              2994         2532          2686             2963                     3580
% Growth                 N/A          -18.25%       5.73%            9.35%                    17.23%
Bombardier Sales in 177               101           70               129                      188
% Growth                 N/A          -75.25%       -44.29%          45.74%                   31.38%
Market Share             5.91%        3.99%         2.61%            4.35%                    5.25%
Table 1.0
          According to the Conference Board of Canada, the industry’s profits in 2006         are expected to

reach $802 million since there has been rising shipment levels and demand from new markets of China

and India. Europe is also predicted to have a larger demand for aircrafts given that the power of the Euro

is increasing. However, as new potential customers enter the market, the United States is still the largest
customer as seen in Figure 1.0 and they also account for 69% of Bombardiers sales of jetliners.

Assessing Buyer Power Using Porter’s 5 Forces

Buyer Power: Low. Their market is targeted towards the regional, business and amphibious aircraft

markets rather than their rival Embraer in which they have a larger focus on manufacturing military

aircrafts. Bombardier has placed itself within the international market, branding themselves as the leaders

in regional aircraft manufacturing.
Size and Purchase Volume - Business jets are purchased in small amounts to fit the need of the

consumer such as individuals, but this purchase may amount to millions in revenue. Regional Jets

represents a larger customer base as well as revenue possibility. In October 2006, Northwest Airlines

placed an order of over a billion dollars for 36 Bombardier CRJ900 aircrafts along with the potential of

adding 92 more aircrafts.

Number of Buyers - Bombardier has a range of different buyers. Currently in Bombardier’s regional airline

market, they house twelve (12) of the twenty (20) largest airlines and their subsidiaries such as Delta, Us

Airways and Germany's Augsburg Airways. Their business Jets caters to the those persons with
individual wealth or corporate offices.

Buyer’s Incentives - Bombardier Skyjet
                                                                Bombardier's Total Units Delivered
signed an agreement with Air Canada
                                                                                      2005    2006
Jetz in which travelers holding a jet card
                                                                Types of

                                                                           Amphibious Aircraft

can plan to decide to go on a trip 12
                                                                              Regional Aircraft
hours in advance and experience a                                            Business Aircraft
                                                                                                  0   50 100 150 200
private and luxurious flight on a business
                                                                                                  Total Number of
jet. This is ideal for businessmen on the                                                             Aircrafts
                                                                          Business      Regional Aircraft    Amphibious
go without having the drawback on
                                                         2006               186               149                2
waiting         in long   lines   and   avoiding                            128               200                1
delays.         Since the launch of FlexJet

Asia as a charter network, businesses that were once chartering jets in Asia had to deal with a number of

independent companies in different countries to successfully travel within Asia. Flexjet Asia will make it

easier by having the customer make multiple bookings with just a telephone call instead of the making the
same arrangements among these different companies.