Why Bombardier shouldn’t sell its rail business

Reuters is today reporting that Bombardier (Bombardier Stock Quote, Chart, News: TSX:BBD.B) is looking to raise cash from its transportation division, including the possible sale of all or part of the business.

Other possibilities, says Reuters, include an IPO in Germany or the U.K.

For Bombardier, rail has been an important source of diversity and a buffer against the volatile airline industry. And despite the fact that new CEO Alain Bellemare clearly has the M&A experience to pull off such a sale, the company would be wise to breathe deep before considering it.

Bombardier is a leader in the manufacture of subway cars, high-speed trains, and locomotives. It makes up about half its business. And business is getting better.

“It’s a situation today where everything is kind of fluid an dynamic. The rail industry, for the transit sector has never looked better -in a decade-than it does today,” William Blair analyst Nick Heymann told BNN this morning.

On the other side of the coin is a aircraft business that appears fraught with risk. While Bombardier has faced down multiple delays and cost overruns with its CSeries, some experts wonder whether the market for the planes that were once hailed as “game changers” will really contribute meaningfully to the company’s bottom line.

“We’re in the midst of the railway renaissance,” says Morningstar analyst Keith Schoonmaker. “It seems strange that for this 150-year-old industry, the turnabout would be so recent, but it’s true.”

“There’s going to be a huge bubble in narrow bodies, so those residual values are going to plummet, which is going to be a great buying opportunity for a carrier like Delta,” said Delta Air Lines CEO Richard Anderson at a luncheon last June in Washington.

What’s more, the seeming new reality of lower oil prices has changed the economics of the market.

“Given the widespread availability of cheap used A319s — and to a lesser extent, Boeing 737-700s — it’s hard to justify spending tens of millions of dollars more for a CSeries jet with jet fuel prices below $2. Even with 20% lower fuel consumption, it would take an extremely long time to save enough on fuel to justify the CSeries purchase price,” writes Motley Fool’s Adam Levine-Weinberg, who believes that Bombardier faces a “…long road to try to salvage the CSeries program”.

Meanwhile, the rail business has never looked better.

“We’re in the midst of the railway renaissance,” says Morningstar analyst Keith Schoonmaker. “It seems strange that for this 150-year-old industry, the turnabout would be so recent, but it’s true.”

The boom in the rail freight business is well documented, but the passenger side of the equation is at least as promising. In the U.S., Amtrak has been breaking its own ridership records for more than a decade now, resulting in a 50% increase since 2000.

“Amtrak’s ridership growth is not centered in one part of the country, but in more than 500 communities across America. Furthermore, ridership is growing across all regions,” said a report from the U.S. Department of Transportation. “While ridership for state-supported services grew to a record 15.4 million passengers, long distance routes experienced their best ridership in 20 years.

And the growth in the United States is dwarfed by what is happening in China, where 20,000 kilometres of high speed rail lines have been added in just a few years.

A recent study by traffic consulting firm SCI Verkeh says passenger rail is poised for a worldwide renaissance. The report, called “Rail Transport Markets – Global Market Trends 2014-2023” says growth will come from Eastern Europe, from the Middle-East and South America, from the Australia/Pacific region and, especially, from urban centres in China and India, where the study says growth will be “dynamic”.