How Bombardier Uses Switching Costs to Create Annuity-Like Payments
Bombardier gets paid long after the jet is sold
Written by:
Van Hamilton Barbeau
Read time:
4 minutes 22 seconds
Boring.
That’s typically what I look for in investing opportunities.
Companies that are boring.
No startups or bitcoin for me.
Business jets are the antithesis of boring.
There’s nothing boring about taking a luxury car straight to the jet and drinking champagne all the way to my second favorite destination in North America (suspenseful pause) Miami.[i]
Despite operating in a sexy industry, Dorval-based jet manufacturer Bombardier has been able to generate the boring annuity-like revenue I look for.
They’ve done this by building a competitive advantage focused on making it hard for their customers to leave them.
Here’s how Bombardier built that competitive advantage and how you can ensure stable annuity-like revenue by making it hard for your customers to leave.
The Competitive Advantage
The Competitive Advantage
Switching Costs
A switching cost advantage exists when a company’s customers face a real cost to switch to a competitor.
If one week I buy my weekly poutine at Ashton, but then next week I buy my poutine at Patates Plus, there’s no cost to me for switching companies.
But if I owned a Bombardier jet (which I regrettably do not) and next week I switch its servicing from Bombardier to an independent shop, I'd face significant switching costs.
Switching costs can be easily understood by looking at enterprise software companies.
These companies sell the software that businesses rely on to run core operations like billing, payroll, and inventory.
When an enterprise software company like Oracle sells its software, it doesn’t just earn revenue from the software itself.
It also earns revenue from the training, IT support, and customization needed to fit each customer’s needs.
To switch to a competitor, the customer would have to pay for all that customization and training again.
Oracle’s customers therefore face high switching costs, so they usually stay with Oracle.
Bombardier enjoys a similar customer lock-in.
That lock-in and high switching costs have allowed Bombardier to create annuity-like revenue.
How They Built It
How They Built It
1. Build the Owned Service Network
Bombardier’s switching cost advantage is tied to its services revenue stream.
Once you buy a jet and brag about it to everyone who has the misfortune of speaking to you, you’re not done paying.
You still have to pay to maintain and repair your jet periodically.
Historically, jet manufacturers like Bombardier simply built the jets and left maintenance and repairs to separate, independent repair shops.
In that model, Bombardier earned money mainly on the parts it sold to those shops, while the repair work revenue stayed with the shop.
Bombardier ultimately shifted away from this model and began offering maintenance and servicing itself.
To do this, Bombardier built out its own service network, today spanning 10 wholly-owned and company operated service centers.
Heavy maintenance now ran through these service centers, so Bombardier captured the repair revenue that once went to independent shops.
This both increased revenue and became the basis for Bombardier’s high switching costs.
2. Convert Episodic Maintenance Into an Annuity
Once Bombardier had a network of service centers, it started implementing its Smart Services program.
Smart Services is a cost-per-flight-hour program where owners pay a monthly rate for servicing based on hours flown, with parts bundled in.
Jet repairs are infrequent but expensive when they occur, arriving as large, unpredictable bills for parts and labor.
The Smart Services program converts that lumpy expense into a smooth, predictable monthly charge.
Instead of a large bill at each maintenance check, the owner pays a steady per-hour rate all year.
In addition to making revenue steady and predictable, the program also makes switching to an independent shop difficult.
An owner can drop the program and use independent shops, but they’d then be back to lumpy, unpredictable bills and sourcing parts and labor separately.
By handling all that coordination itself, Bombardier makes servicing convenient and costs predictable.
It's that convenience and predictability customers find hard to give up, because God forbid owning a jet be anything but 100% convenient.
Giving up convenience and predictability is costly enough that owners stick with Bombardier for repairs for the lifetime of the plane.
This, in turn, gives Bombardier stable, recurring, annuity-like service revenue.
Why the Moat Is Stable
Why the Moat Is Stable
I don’t care how bad they are for the environment or that they contradict my minimalist lifestyle and my disdain for possessions, I want a jet.
I want one really bad.
If I were to buy one, I'd only have a few large-cabin, long-range options.
Bombardier, Gulfstream, and Dassault.
All three companies have programs similar to Smart Services.
So if all companies have the same capability, how is this a competitive advantage for Bombardier?
The answer is that the capability doesn't have to be unique for it to be an advantage.
Switching costs lock each jet owner into the company they bought from.
Because all three companies have high switching costs, none of them can steal servicing revenue from the others.
Each company keeps its jet owners, and the revenue they generate remains stable.
In this case, it's not about having an edge over your competitors.
It's about having something structural that won't erode your revenue.
This kind of stable moat isn’t unique to jets.
Your company may be able to build this kind of switching cost advantage under three conditions:
- You sell a durable product that customers keep for years
- You control the parts and who is allowed to service your product
- You can bundle that service into one predictable package that no outside company can match
When those conditions hold, you may be able to lock customers in and create long-term repeat revenue.
Québec City, September 1, 2026
[i] If you’re reading this footnote to find out what my favorite North American city is: 1) I appreciate how thorough of a reader you are and 2) Obviously it’s Québec City.
Source: Bombardier, Credit Suisse, Morgan Stanley.
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