For Israel Aerospace Industries (IAI), 2016 sees the company at a major crossroads. In short, Israel’s largest aerospace company has been generating impressive turnover at home and abroad, but profits aren’t keeping up with sales growth.
Indeed, the state-owned company is in the midst of an across-the-board effort to adapt itself to major changes in its markets. Driving this corporate overhaul is president and chief executive Joseph Weiss, who has met with some success in this change plan. However, when it came to laying off 1,500 employees, the company hit a brick wall.
Talks are on with a very strong workers union and tension is high. But, Weiss believes the union will understand what he believe needs to happen for the company to compete in a market that has become very complicated: “I really believe that we will reach an agreement in spite of the big gap that exists now.”
IAI has been a super power in the UAV business with sales in 50 countries and more than 1.6m flight hours accumulated by the IAI-made UAVs in use by foreign countries and the Israeli air force. The company’s UAV’s are combat-proven, too, but Weiss admits: “This is not enough and I know that we need to keep our innovative edge.”
He reveals an effort is being made to develop UAVs for paramilitary missions. “This effort involves many regulatory problems and we are busy trying to overcome these problems,” he says.
While IAI is mainly known for its defence systems, its civil activity has been a major source of income. This came mainly from its Bedek passenger-to-freighter conversion unit and from its production of Gulfstream executive jets. Both have been affected by the economic downturn that began in 2008. The civil division also has benefited from an infusion of technology, courtesy of its role supplying composite parts to the Boeing 787 and Gulfstream’s revamp of the G280.
Weiss said a first step was to leverage the civil capabilities under a co-ordinated effort lead by a new civil group.
Joseph Weiss: "IAI can compete with anybody on robust advanced technology"
Israel Aerospace Industries
“This group is working to use the synergies between the different divisions of the company that are focused on the civil market. The joint efforts have begun to fill Bedek’s hangars with 767s, 737s and 747s, and at the same time we are introducing very advanced automation to allow us to better compete in this market.” Weiss thinks the low fuel prices will bring more conversion contracts to existing and new clients.
And, he revealed that parallel to the effort to win more conversion work, the company is “seriously looking” at new civil products: “That includes a possible co-operation in the field of regional jets. We can be a major partner in any such programme because of our proven capabilities.”
Beyond regionals, Weiss want to exploit IAI capabilities in the light business jet market. With a partner, the company has already completed the initial design of a small executive jet that will offer low cost travel over ranges of up to 1,500 miles. The concept, he says, promises low operating costs and capacity for six passengers.
STATE-OWNED
Despite several calls to privatise, IAI remains a state-owned company and, as such, has less flexibility when it comes to co-operating with foreign companies and forming subsidiaries in other countries. “It’s not only the long way that we have to go through, to create foreign co-operation, but some laws put us in an impossible spot,” Weiss says.
He gave as an example the law enabling private Israeli companies to get different bonuses for export activities: “We are excluded from this category. We are now trying to convince our lawmakers to fix this anomaly.”
He revealed that in spite of the difficulties, IAI has only recently formed a foreign subsidiary, though he declined to identify the country.
In addition to all the internal problems and a downturn in the civil market, IAI is being undercut by growing foreign competition. But Weiss does not try to hide his satisfaction when cost-cutting goes wrong: “We have manufactured most of Israel’s series of Amos satellites. Only recently, contact was lost with the Amos-5, the only one of made by a foreign company that offered a lower price than we did.”
IAI, he adds, can compete with any other supplier worldwide when it comes to robust advanced technology.
Another factor that has an effect on the financial results of IAI is growing competition from American companies. Until some years ago, American companies used to compete only on big tenders. As US defence spending has ebbed since 2010, local defence contractors have embraced the export market, with Boeing, for example, targeting a doubling of export share to 25% of its revenues. Now, IAI finds itself competing with US companies on almost every tender.
“This is a change in the market and it was caused mainly by the cuts in the US budgets and the resulting new policy to allow the technology transfer to foreign countries. We now find American companies almost in every market. And this effort has even a greater impact as the US administration – in its highest levels – acts as the promoter of the defence and aerospace exporters. The Israeli government helps from time to time, but this is nothing compared to the American joint effort.”
Weiss said he will not be surprised if, in future, IAI also faces competition from Iran. “After the lifting of sanctions, all the signs are that Tehran is going in this direction,” Weiss says.
The coming months are crucial for IAI’s capability to recover from a “trap” of very low profits that do not reflect the company’s turnover. Only larger profits, as a result of an overall restructuring programme, will enable the company to implement the plans aimed at staying in the forefront of defence and civil aviation.
Source: Cirium Dashboard
