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Remarks by Mr. Michael Graff, President & Chief Operating Officer, Bombardier Aerospace to the Aero Club of Washington, November 23, 1999

Good afternoon. Let me say first of all what a great pleasure and privilege it is to be with you today.

The Aero Club is one of the oldest and most important aviation forums in this country, and I believe it is the first time someone from Bombardier has addressed the Club. And so it is a particular honor for me to be here today with you. We hope to be regular contributors to the industry dialogue that this important organization has always sought to encourage.

I would like to share with you today both some highlights about our company and also to address some of the broader trends and issues impacting our industry, such as the rapid growth and future prospects for the regional airline section as well as the current outlook for business aviation.

First, I would like to spend a few minutes telling you about Bombardier. Bombardier Aerospace is the largest of four divisions of our company. The other divisions are Bombardier Recreational Products, which makes the Ski-Doo snowmobiles, Sea-Doo personal watercraft, as well as ATVs; Bombardier Transportation - which is the world’s number two supplier of trains, trams, and rolling stock; and Bombardier Capital - the financial services arm of the company.

The company overall had more than $11 billion dollars in revenue last year, and $600 million in net income. We have been growing at over 20% a year for the past decade and Bombardier is viewed by many independent business journalists and institutes as one of the world’s premier growth companies Bombardier Aerospace, for which I am responsible, represents roughly 60% of the revenue of the company. We have consistently enjoyed outstanding growth. In 1986 when Bombardier made its first acquisition of Canadair, revenues were $300 million. Last year they were $6.4 billion. And this year we are on track to increase sales by roughly 30% delivering approximately 300 business and regional aircraft. Our earnings have enjoyed even faster growth. At $158 million five years ago, they have consistently grown reaching a high last year of $682 million, with half-year results this year showing a 30% jump over last year “50% increase for earning”. Our backlog now stands at almost $20 billion.

We are now the revenue market share leader in both regional and business aircraft and the only producer of amphibious waterbomber aircraft. Five years ago, we delivered 123 aircraft. This year we plan to deliver 300 aircraft. And we will deliver 20% more next year. We now have some 32,000 employees in the group, mostly in Canada, UK and US.

We have some 7,000 people working for us in this country, in addition to the 3,000 who work in the US for other divisions of Bombardier. Bombardier Aerospace’s main activities are centered in Wichita, Kansas where we make Learjets, and Tucson Arizona, where we have our largest completions and maintenance base for all of our products, Dallas Texas, where Flexjet, our fractional ownership program is based, and in many other states where are maintenance service centers are located such as West Virginia, Connecticut, and Florida.

Bombardier Aerospace was built through acquisition initially and then has grown through a continuous investment in new products. Canadair was essentially a one-product company with the Challenger business jet, and the CL-215 amphibious water bomber, which was not then in production.

In 1989, we purchased Short Brothers in Belfast, Northern Ireland. This acquisition gave us a base in Europe and expanded our aircraft component manufacturing capabilities, particularly in advanced composite materials; Today we are the largest employer in North Ireland with 6,000 highly skilled employees.

In 1990 we acquired Learjet-the brand synonymous with business jets-to reinforce our position in the business aircraft industry and to expand our product line; and,

In 1992 we acquired de Havilland Aircraft of Toronto, to expand our presence in regional aircraft, to take advantage of the product support organization developed by Boeing, and to complement the Canadair Regional Jet with a family of turboprop aircraft.

We also invested more than $10 billion in plant, equipment, systems, people and new products to enhance the capabilities of these four companies.

What previously were four strongly independent organizations, with traditions dating from the very earliest days of aircraft manufacturing, are now one company capable of collaborating on complex aircraft programs.

Over the past nine years, Bombardier Aerospace has either launched or brought to market one new product a year. A record unmatched by any manufacturer.

Of the nine aircraft we have brought to market three stand out. My predecessor made a big bold move when in 1989, he decided to develop and launch the 50-passenger CRJ. That bet-a gutsy move by anyone’s standards-wagered $250 million, or about half the market value of the company, on a product for which many industry observers proclaimed there was no market.

The regional airline market was then characterized by small, independent airlines, with small, 19- to 30-passenger turboprop aircraft, most offering service that didn’t compare favorably with major carriers.

All that has changed, thanks largely to the introduction of this aircraft. The regional airline industry has experienced tremendous change largely because of affordable jet aircraft. This year more than 200 RJs from the three major manufacturers will enter service, and that number should be closer to 300 next year.

Regional airlines are growing rapidly and carrying an increasing share of overall revenue passenger miles. In North America, regional airlines have experienced 10 per cent annual growth in passengers over the past decade, and in Europe, traffic growth has been even faster. This compares to a 4% growth rate for the major airlines over the same period.

Nearly every second departure in the U.S. is made by a regional carrier. The impact on our major airlines is very important, over 25 per cent of the passengers traveling on a major airline originated with a regional carrier.

In marked contrast to when Bombardier launched the CRJ, regional airlines are now demonstrably bigger, more capable organizations. They are operating bigger aircraft and increasingly turning to jet equipment; and they are consistently profitable.

Regional airlines are also delivering a much higher standard of service that generally compares favorably with the mainline carriers. Since the introduction of the CRJ many more large carriers have now acquired, invested in, or otherwise allied themselves with regional airlines to obtain feeder traffic, or to shift marginal routes to the regionals’ low cost structures, or both. The Delta acquisition of Comair and ASA is the most recent example.

But what a change we have seen since the first CRJ entered U.S. service in the spring of 1993 with Comair of Cincinnati.

U.S. CRJ customers now account for 66% of orders and include the regional affiliates of American Airlines, Delta, United, Northwest and US Airways, as well as leading independent regional carriers.

More than 345 of our CRJs have been delivered to 24 airlines around the world and, including deliveries and firm-ordered aircraft, sales now exceed 690 aircraft. If one were to include options, our total program has surpassed 1100 aircraft. Building on the success of the 50 seater our 70 seater, the CRJ 700, which will enter service in about a year and will meet regional airlines’ needs for ever larger jet aircraft. The CRJ 700 has 99 firm orders and 172 options, and will be the first on the market by one to two years. Its reception in the US - has been particularly strong. It has been ordered by almost all US airlines whose scope clause agreements permit use of 70 seat RJs.

And, although the recent shift to jets is unmistakable, turboprops retained their role as the low-cost solution on routes of less than 200 nautical miles. Bombardier’s order share of that market this year is 73%. And volume is up slightly on last year, although significantly down form the early 90s. The pace of changes in our industry is best illustrated by looking at the number of manufacturers that are no longer producing turboprop aircraft - Saab, British Aerospace, Embraer, Dornier, Shorts, and Fokker.

Unfortunately, two significant market distortions cloud our industry. Restrictive pilot scope clauses have artificially reduced demand for RJs and the extreme use of government subsidies by the Brazilians has artificially reduced the cost of RJs, making turboprops relatively disadvantaged.

Scope clauses in their various forms have undoubtedly secured some employment protection for mainline pilots. However, that protection, at least in its present form, has come at a high price to the customer. The full benefit of the regional jet for millions of consumers and many mid-sized communities is not being fully enjoyed. One recent industry study estimated that there were upwards of 800 city pair opportunities that were not being served due to existing restrictions on the use of this aircraft and restrictions on frequency of service to other communities. That doesn’t make sense. It is easy to assume that scope clauses will be loosened by the natural order of market rationality. We certainly would like to believe that. But we also know that that might be wishful thinking.

The RJ has helped grow the pie, not rearrange the portions. We hope the airlines and their pilots realize that, by building strong and unrestricted regional networks, the majors strengthen their hubs and international routes, creating advantages versus those that don’t and certainly those international carriers seeking to gain share in US passengers. Our view is that the RJ has stimulated passenger travel and therefore industry growth.

As for public subsidies, the days of massive market distorting subsidies which violate international trade rules must come to an end. I think we are making real progress, with the recent ruling by the WTO in Geneva, which ruled that the Brazilian subsidies were illegal. Implementation of the WTO rulings, which called for change by both Canada and Brazil, is due to start this week. Canada has already fully complied, but Brazil has not.

These rulings, as you know, have held the Brazilian financing program PROEX to be an illegal export subsidy that must be withdrawn. Brazil has responded in kind claiming non-compliance by Canada with a WTO ruling that held that a Canadian technology development program, called TPC, was an export-contingent subsidy and therefore prohibited.

Surely this is not the way true competition should take place. Surely no one is served by protracted litigation that over time begins to resemble less an appropriate defense of one’s rights, than a deliberate effort to temporize, and delay the rightful application of the law. And surely a trade war is no way to gain sustainable competitive advantage.

No country, large or small, should be allowed to flout international trade rules. WTO rules need to be respected and respected fully. Our view at Bombardier is that the significant changes the Canadian government has brought to its TPC program have ensured that this program is now in full conformity with WTO rules. And this we have little doubt will be shortly proven.

Brazil, however, has been unwilling to clarify precisely how its proposed replacement measures will function. Just as importantly, it refuses to recognize that it must withdraw the some $3.7 billion dollars in illegal Proex subsidies it has committed over the past three years to the sale of some 900 still undelivered aircraft. That is what the WTO rulings say must be done. That is what we at Bombardier believe to be necessary. And that is what is at stake in Geneva today.

The impact of these subsidies has squeezed our margins on our regional jets and we are reacting appropriately - but we are not the only ones affected. Our suppliers on the RJ are largely US based with Rockwell-Collins avionics and GE engines being the largest individual systems. Jobs have been lost there too. Another impact of these subsidies has been the accelerated demise of the turboprop. With these subsidies, the small 35-seat jets have been priced at close to turboprop levels. This has put enormous pressure on turboprop margins and has hastened the exit of some of the manufacturers and their customers. Will the regional airlines be better off? I doubt it, as small jets replace props, costs go up without more seats, so either prices must rise, or margins will decline.

We applaud the efforts of various members of Congress here in Washington who have taken an interest in this issue. I am thinking in particular of Senators Kennedy and Roberts, and Congressman Tiahrt, Mollohan, Walsh and others who have formally asked Secretaries Summers, Barshefsky and Daley to adhere to a policy that the Clinton Administration has already approved, and that is to ensure that the IMF refuse to provide monies to countries who are unwilling to abolish wasteful programs that provide below market financing, particularly when they are WTO-inconsistent. Put simply, the IMF, which has already granted Brazil $20 billion dollars in a $40 billion financing package, should refrain from granting another penny to Brazil unless PROEX is abolished, not just going forward, but on the almost 900 aircraft Embraer has yet to deliver.

This is not a question of might meaning right. It really is a question of the application of the rule of law, and the refusal to lend money that will later be spent in a market-distorting and illegal manner.

At Bombardier we are confident that we are on the cusp of a new day when market rules - and not government largesse - will truly decide who wins in this market. That is a day we look forward to. And we are confident that faced with that new competitive world, our competitive prospects will continue to look bright, indeed.

BUSINESS AIRCRAFT

In Business aircraft we have benefited significantly, as have all manufacturers, from the exceptionally strong performance of the economy over the last eight years. Three years ago we delivered 77 aircraft. We reached that number this year before the end of the first half. And we hope to deliver well over 180 aircraft by the end of the year. We now offer six business aircraft covering a greater range of product segments than any competitor in the industry, starting with the Lear 31 right up to the Global Express. And this year we surpassed Gulfstream as the top business aircraft manufacturer in the world in terms of revenue market share. Moreover we are bullish about the future.

Will our good fortunes continue? We believe they will for a number of reasons. Firstly, the economy shows little sign of deterioration. Secondly, the key sources of demand, be they the replacement market, the introduction of entirely new segments of products such as the ultra-long range Global Express, or the strong emergence of fractional ownership which is pulling in many first time buyers, all ensure that this will remain a very strong market for some time yet. These trends have strongly stimulated awareness of the product offerings and will continue to generate incremental demand for business aircraft. We are trying to drive down the cost of owning and operating business aircraft to give more choice to business travel.

Fractional ownership, as many of you know, has been enjoying explosive growth. It is truly reshaping business aviation. It has grown at more than 50% annually over the past few years.We predict that in two years fractional ownership will represent roughly 17% of industry deliveries, up from 12% last year and headed to 25-30% within the next decade. So in a buoyant market, the growth in fractional ownership is easily exceeding the strong total growth in the business aircraft industry. In fact, in the first eight months of this year, fractional deliveries were 38% stronger than the same point last year.

It is not hard to see why fractional ownership is doing so well. Consider the value proposition offered by Flexjet, which is Bombardier’s fractional ownership program based in Dallas. We assure you a plane of your choice with as little as four hours notice to take you anywhere you wish. You need not worry about having your own pilot or maintaining the plane, you have the flexibility of trading up from a small Learjet to a Challenger 604, depending on your mission needs. Your capital investment is low and your costs are quite predictable as you only need to pay hourly fees only when you are on board.

Bombardier’s Flexjet is the second largest fractional ownership program in the market. Today we have more than 360 flight crew in our employ, flying 75 different aircraft, for 400 different owners. And we believe that Flexjet’s success is just beginning.

But like all fractional ownership programs contributing to this rapid reshaping of the industry, Flexjet is faced with the serious regulatory debate over whether it should be regulated under Part 91 or under Part 135 of the FARs. This is a debate that has been ongoing now for three years. And just this past week, the FAA’s Fractional Ownership Aviation Rulemaking Committee held its first meetings here in Washington to try and resolve the issue before the end of the year.

It will probably not come as a great surprise to many of you to hear that, like my counterparts at the other manufacturers, I am strongly in favour of keeping fractional ownership program’s regulated under Part 91. The added constraints imposed by Part 135 are unwarranted in the case of fractional ownership. It is important to remember, that the safety record of fractional ownership (at .391 accidents per 100,000 flight hours), is nearly as good as Part 121 airline operations, (at .262) and better than Part 135 operations, whether it be scheduled flights (at 1.559) or unscheduled flights (at 3.11). It is also important to recognize that the ability to fly into any of the public use airports in the US that can safely accommodate a business aircraft has always been one of the primary incentives for companies to operate their own aircraft. Many of these public use airports are in rural areas in which companies have established factories to which they need ready access. Their ability to reach these additional airports provides them with the flexibility to be as productive and competitive as possible. So my view is simple: Additional regulation should occur only when it has shown to be demonstrably necessary. That is not the case today.

Lastly, I would like to speak to you about the promising future of amphibious aircraft here in the US, but also around the world. Amphibious aircraft - otherwise known as waterbombers - in our view, are the single most effective way to put out forest fires.

Unlike land-based air tankers which need to return to their base to reload after each drop, with a turn-around time of 45-60 minutes, and are dependent on a limited number of airfields, Bombardier’s Canadair-415 can reload 1620 gallons of water in a 12 second scoop, and most importantly enjoys a turn around time of 5-12 minutes when the water is 3-10 miles away.

In our view it knows no equal in terms of providing a sustained attack on forest fires.

This increasingly is a matter of public concern affecting not only the quality of our environment but also the safety of our communities. For perhaps the greatest threat of all is the emergence of urban/wildland interfaces being propelled by the significant population growth and flight to the suburbs over the last 30 years. Urban/wildland interfaces are defined by the National Fire Protection Association as areas where development and wildland meet with no clearly defined boundary between them.

In the state of California, they know the dangers of these areas all too well. Between 1989 and 1993, wildfires were responsible for 75 deaths and the destruction of 7,000 homes, causing in excess of $3 billion dollars in damage.

And this is a problem which regrettably may only get worse if we do not equip ourselves appropriately. The Census Bureau estimates a 50% population growth rate over the next half-century. And the difficulty with interface fires is that they take place in areas with limited water supplies, many inaccessible to narrow roads. These two factors combine to decrease accessibility to the fires for traditional firefighting equipment, and as a result decrease the ability to contain and suppress fires, creating greater danger to firefighters and citizenry alike.

The Bombardier CL-415 offers the most effective response to this public concern. It has been widely received in all areas of the world where it has always proved its mettle, be it in Canada, France, Spain, Italy, or elsewhere. The one disappointing note is that it has not yet won the support we believe it deserves here in the US.

Our challenge at Bombardier is to ensure that more members of Congress come to the view of CongressWoman Fowler and recognize the important contribution this aircraft can make to the nation’s firefighting abilities.

We strongly believe that once this product’s entry in this country begins, it will quickly prove its worth, its usefulness will be more fully recognized, and we will begin to see more of it.

In closing, I hope that this has provided you with a somewhat fuller picture of Bombardier Aerospace than you may have had. I have touched on a few of the key issues currently confronting our business and, in particular, those impacting our efforts in the U.S. marketplace.

Innovation in North American civil aviation has probably never been more pronounced than in the past five years, and I think Bombardier Aerospace has contributed significantly to that trend. It is my intention to continue to invest in leading edge customer services and aircraft products so that heritage is upheld.

Thank you for your time and I would be happy to respond to any questions you may have.