Quotes of the Day

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.

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.

A decade ago, few would have guessed Embraer would be Bombardier's main competitor in the regional-jet business. But Embraer's 1994 privatization heralded Brazil's new push to be a global economic player. To exploit the late-'90s boom in worldwide regional-jet travel, Botelho committed Embraer to lighter, faster, farther-ranging and less expensive jets, which proved attractive to airlines even though they weren't — and still aren't — considered as technologically advanced as Bombardier's. Says Doug Abbey, executive director of the Regional Air Service Initiative, an industry advocacy group in Washington: "Embraer is the risk-taking company that Bombardier used to be."

A boon may be coming soon for both companies: US Airways, which just emerged from bankruptcy protection, has announced that it is negotiating with them and anticipates placing "a significant order in the near future." Other airlines are expected to follow suit as their pilots' unions — which complain that regional-jet pilots earn about one-fourth as much as large-jet pilots — reluctantly agree to relax the ceiling on the number of regional jets the airlines can use. That's just the kind of small thinking the regional-jet rivals need to hear.

• Tim Padgett