MONTREAL -When Bombardier Inc. won its largest single contract in April, 2003, a ?3.4-billion (US$6.9-billion) order to help overhaul the London Underground urban transit system (aka "the Tube") as part of a five-company consortium, some observers warned the deal wouldn't do much for the Montreal-based train and plane maker's bottom line.

Its passenger rail unit earned meager profits, and then-chief executive Paul Tellier said the firm should focus less on winning big orders and more on improving margins.

Sure enough, the London Underground deal has turned into a bloody mess, but it's not Bombardier's fault -- if anything, Bombardier's contribution to the Tube is about the only part of the project to go right.

It is on time and on budget to deliver the first of 1,738 new train cars into service by next year, as well as the new signalling systems. It is also on track to refurbish 450 cars used on the District Line by 2008.

"Most people regard the train manufacturing part of the contract as the part that's working well," said James Abbott, editor of Modern Railways, a monthly focused on the British rail sector.

But that was small comfort yesterday, as Bombardier said it would write off the value of its 20% share of the Metronet Rail BCV Ltd. consortium that won a 30-year deal in 2003 to upgrade, replace and keep up two-thirds of the Tube infrastructure. Bombardier will take a US$164-million charge in the second quarter.

Two of its partners, Balfour Beatty PLC and WS Atkins PLC had already taken similar write-offs.

Instead, Metronet will get just ?121-million, and not a shilling until 2008.

"We don't know how things will unfold," said Bombardier spokeswoman Isabelle Rondeau. "Our part of the contract is still going. Metronet still exists. For the moment, that's how it is."

Metronet has squabbled for years with London Mayor Ken Livingstone and the public agency that owns the Tube over who should call the shots on the "public-private partnership" ordered up by England's central government.

But Metronet did itself no favours by running up ?1-billion in excess costs. Metronet blamed the Tube's owners for changing specifications, while the Mayor called the group dysfunctional.

However, the arbiter said in a report last fall that Metronet had fallen "well short of bid expectations," with track and station fixes behind schedule and over-budget, while the work wasn't done "in an overall efficient and economic matter."

The finding did not cover Bombardier's train supply deal; the problems stemmed from a sub-group of Metronet's other four partners.

"Most of the cost overrun has been caused by the station renewal program, in which we are not directly involved," said Bombardier spokesman Neil Harvey.

Metronet has recently overhauled management and tendered out work originally slated to go to the four partners.

Observers agree Bombardier likely won't suffer as much as its partners, regardless of what happens to Metronet. Bombardier is the only railcar manufacturer in Britain, and the Underground desperately needs the overhaul, even if it won't be ready in time for the 2012 Olympics.

"We expect to continue to work on our contracts [regardless of what] happens to Metronet," Mr. Harvey said.

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Canaccord keeps Bombardier at 'sell' after write-off

National Post: July 17, 2007

Canaccord Adams analyst Robert Fay held his “sell” rating on Bombardier Inc. (BBDb/TSX) after the Montreal-based plane and train maker said it would write off approximately $164-million from its books in the second quarter resulting from its partnership in Metronet Rail BCV Ltd., which has run into cost overruns upgrading London’s subway system.

“Additional cash injections or investments by Bombardier and the other consortium members will be a key focus in the near term,” Mr. Fay wrote in a research note.

Metronet is a joint venture between Bombardier Transportation and four U.K. partners. Each holds a 20% stake in the venture.

“The problems with Metronet do relate to the infrastructure side of this contract which have little to do with Bombardier’s participation,” Mr. Fay said. “While today’s announcements are a negative for Bombardier, we believe its rolling stock and maintenance subcontracts appear to be alright despite this setback for the Metronet consortium, given that Bombardier is the only major rolling stock manufacturer in the U.K. and appears to be doing well under this subcontract to date.”

Mr. Fay said his target price is under review based primarily on the long-term future of Bombardier’s regional jet business and the potential impact of the high Canadian dollar.