Analysis - Bombardier hits cash snag on Australian train order

SYDNEY/MONTREAL: Bombardier Inc's hopes of receiving initial payments for a A$4.4 billion contract to build 75 electric trains for Australia's Queensland state government have been hit amid accusations of design faults.

The Canadian company had expected to start booking proceeds from that deal late last year to help meet cash-flow targets.

A person familiar with the company's thinking said it had concerns over its rail division's operational cash flow in the first quarter of this year.

Delays in being paid, and the added cost of fixing any manufacturing faults, could make it harder for Bombardier Transportation to reach its 2017 revenue target of around $8.5 billion, up from $8 billion in 2016, said an industry analyst, who didn't want to be named as he is not authorised to talk to the media. Similarly, it aims to push up its EBIT (earnings before interest and tax) margin slightly to about 7.5 percent.

The issues with the Queensland order - ranging from braking problems to driver visibility and disability access - come on top of other hitches that have weighed on Bombardier's rail division. Separately, a Canadian judge is poised to rule on a dispute over a C$770 million contract with Toronto's Metrolinx system.

They also come to light as Bombardier is again discussing a potential merger of its rail unit, the Montreal-based plane and train maker's most reliable cash generator, with Germany's Siemens, people close to the matter said this week.

Siemens' transportation business has also had product flaws in its trams, and there were delays recently in supplying high-speed trains to state-owned German rail operator Deutsche Bahn.

Claas Belling, spokesman for Germany-based Bombardier Transportation, declined to comment on specific, confidential contract terms, but said the Queensland deal is one of several hundred agreements globally. "Some may be performing better than plan, while others may lag," he said in an email to Reuters.

The possible rail merger talks come as Bombardier aggressively cuts costs as part of a 5-year turnaround plan. The company considered bankruptcy in 2015 when it faced a cash crunch while bringing two jets to market, but CEO Alain Bellemare has since led a restructuring, and the company has received cash infusions from the Quebec government and Canada's second-largest pension fund.

ONE-SIDED CONTRACT

It's not clear to what extent Bombardier is responsible for the design flaws on the Queensland contract.

Australia was mentioned as an example in a broad internal review of the rail division from 2015 that raised concerns about a systemic problem: at the time, the company agreed to custom-build trains to the client's request, which is more risky and costly than offering a standard line of equipment, said another person familiar with the matter.

While Bellemare, who has been CEO for a little over two years, has addressed that issue, deals signed before his time, including the 2013 Queensland contract won by a Bombardier-led consortium, are a potential drag on the company.

A person with knowledge of the contract said it was one-sided in favour of the state government. It could change its mind and order planes instead, and Bombardier would probably have to pay the difference, the person quipped.

Downer Group, a Sydney-headquartered engineering firm, told Reuters it decided against bidding for the Queensland order because of the "onerous" contract terms.

SUSPENDED

By early this year, Queensland had received 13 six-car trains, but suspended further deliveries apart from two that were already en route from Bombardier's factory in Savli, India.

The state has not yet paid any money to Bombardier.

The Canadian firm is now trying to have four or five of the trains certified for use in Australia before the end of this year, two people familiar with the issue said.

"There's no funding until they get through testing and are certified," said a political source with knowledge of the contract terms, which are not public. "The issues with the trains include unsatisfactory braking, which are design flaws."

Paul Bini, a spokesman for the bid consortium - which also includes Aberdeen Asset Management, UK developer John Laing and Japanese trading company Itochu Corp - said it wasn't unusual for issues to be identified during testing, especially on large and complex projects.

"All 75 New Generation Rollingstock trains are expected to be delivered and rolled-out on to the South East Queensland rail network by late-2018," he added.

The Queensland government previously cited problems with the trains' braking systems, the design of the driver cabs, which it said had inadequate visibility, and doorway disability access that did not meet Australian standards.

"We are working around the clock to resolve the issues as soon as possible, without compromising safety," Deputy Premier and Transport Minister Jackie Trad told Reuters.

Bini said the trains were being tested to meet safety standards, and the brake issue had been resolved. He added that feedback from rail groups and the disability sector were incorporated into the train's design.