Why Canada Will Not Let Bombardier, Inc. Fail

A bailout of Bombardier, Inc. (TSX:BBD.B) may be unpopular, but the company is clearly too big to fail.

| More on:
The Motley Fool

Justin Trudeau has a very difficult decision on his hands. Bombardier, Inc. (TSX:BBD.B) is in need of more capital and has reportedly asked the federal government for US$1 billion of capital.

If Mr. Trudeau were to grant Bombardier’s wish, there would be a serious political backlash. Left-wing voters see Bombardier as a large corporation trying to win political favours at the expense of ordinary people. Meanwhile, right-wing voters would see any capital injection as a bailout, as government overreach, and as a violation of free-market principles.

Yet at the same time, Canada cannot simply let Bombardier fail. We take a look at why below.

Others get help, too

Bombardier’s misadventure with the CSeries has helped demonstrate the power of competitors such as Boeing Co. (NYSE:BA) and Airbus. But let’s not forget that these companies have received plenty of government funding, too.

Let’s start with Boeing. According to a 2015 report from Good Jobs First, an American think-tank, Boeing is one of the largest beneficiaries of government assistance in the United States. The company has received over US$450 million in federal grants and tax credits since 2000, as well as more than US$64 billion in loan guarantees over the same time. Boeing has also received more state aid than any other corporation.

Airbus is just as bad. The company was originally created by a consortium of European governments and has repeatedly received launch aid for new aircraft projects. This practice was so heavy-handed that the World Trade Organization ruled it illegal in 2010.

So when people say Bombardier is unable to compete, let’s not forget who the company is competing against.

The cost of unemployment

Bombardier employs roughly 45,000 people in Canada, and salaries are typically quite high. In Quebec, Bombardier employees make roughly double what the average Quebec resident makes.

And if Bombardier were to go under, many of these people would have great difficulty finding new jobs. Some would take their skills to other countries. Parts makers and other suppliers would suffer. There would be strong ripple effects in certain regions. All told, Bombardier’s failure would result in a tremendous loss of tax revenue for provincial and federal governments. Unemployment benefits would also be expensive. These losses would make US$1 billion look like a drop in the bucket.

A better option

At this point, one thing should be clear: Bombardier is too big to fail. None of us want to admit it, but it’s the truth. So what should Mr. Trudeau do?

Here’s one solution: first, wait for Bombardier to fail. Then, just like what happened with the auto companies, the government could step in and help with a reorganization. The process ideally would result in a brand new Bombardier, one with ownership split between the bondholders, the employees, and the taxpayer.

Of course, this solution would leave current Bombardier shareholders out in the cold. So if you hold shares, you better hope that Mr. Trudeau doesn’t go down this road.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Investing

Tractor spraying a field of wheat
Investing

Is Nutrien Stock a Buy for its 4.7% Dividend Yield?

Nutrien (TSX:NTR) is a well-known defensive commodities play. But is this stock worth buying for its dividend yield alone?

Read more »

Happy shoppers look at a cellphone.
Tech Stocks

So You Own Shopify Stock: Is it Still a Good Investment?

Shopify (TSX:SHOP) stock has had a run, but there's still room to the upside.

Read more »

Paper Canadian currency of various denominations
Investing

The Best Stocks to Invest $2,000 in Right Now

Do you have some extra cash to spare? Here are three Canadian stocks to add to your watch list today.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, November 22

Continued gains in gold, oil, and natural gas prices could give the commodity-focused TSX benchmark a boost at the opening…

Read more »

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

Hourglass and stock price chart
Stock Market

It’s Not Too Late: Invest in These TSX Growth Stocks Now

Solid fundamentals of these top TSX growth stocks could help them maintain strong upward momentum in the years to come.

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »