Italy’s aerospace and defence powerhouse Leonardo has been poised to turn a corner for much of this century – only to find itself in numerous cul-de-sacs. This time, under chief executive and one-time Italian railways boss Mauro Moretti, the former Finmeccanica could finally be finding its way to sustainable profitability with a structure that has seen it bring all of its operations worldwide under the Leonardo brand and concentrate its energies on rotorcraft and defence electronics.
Moretti’s medicine does seem to be working. In 2015, the group returned to profit for the first time in five years as it took steps to reduce crippling debts. Loss-making rail and power businesses, a massive writedown from its Boeing 787 aerostructures contract, corporate scandals, and the $5.2 billion acquisition in 2008 of US defence electronics company DRS – completed just as US defence spending was starting to wind down – all contributed to the company’s travails in recent years.
Although Leonardo will not announce full-year results for a few weeks, Moretti, who took charge in mid-2014, says the company’s financial performance in 2015 and 2016 “shows that we made the right choices”. Net debt – he noted at a media event in London on 12 January, to unveil rebranded UK subsidiary Leonardo MW – is down to €2.8 billion ($3 billion) from more than €4 billion in 2014, “one year ahead of our investment plan”. Margins before interest and tax should be around 10%.
“Now we are in a different situation,” he told the press conference. “All conditions are in place for the next stage – growth.” This expansion, he says, will come organically but also through potential mergers and acquisitions to “increase the dimensions of our [defence] electronics business in particular”. The former Selex and DRS units are, along with rotorcraft manufacturer AgustaWestland, Leonardo’s biggest contributors, together accounting for about three-quarters of revenues.
The Leonardo rebrand – introduced last year and legally completed on 1 January – was partly about clearing up the “brand soup” of multiple legacy companies – including Alenia, Westland, Agusta, Aermacchi and Selex – all of which existed alongside that of holding company Finmeccanica. While some of the brands will continue in product designations, Leonardo – like its fellow-European groups Airbus and Safran – is now going to market under one name.
However, the move goes beyond simply introducing a new identity. Moretti is also keen to instil a new corporate culture throughout its now seven divisions, with tighter reporting lines, more sharing of technology and easier promotion paths through the organisation. As Norman Bone, who heads Leonardo’s new UK subsidiary, stated at the event: “We’ve never moved a graduate apprentice between our helicopter and defence electronics business in the UK. We will now.”
Part of the reason for this is that Moretti sees the air defence market moving increasingly from an emphasis on developing new airframes to enhancements of existing platforms. It is hardly a radical view among defence industry leaders, but Moretti views Leonardo – with its strong electronics and systems presence, and a massive installed fleet of helicopters – ideally placed to exploit the demand for upgrades, both on its own aircraft and those of other manufacturers.
It could require acting more nimbly across the group, with more emphasis on developing upgrade solutions rather than focusing on long-term, in-house aircraft programmes. As Moretti says: “We are seeing now with the extended lifespan of aircraft that you can intervene on the same platform maybe four or five times. We want to invest in this capability in Europe, the USA and other markets.”
Other than its semi-autonomous DRS subsidiary in the USA, Leonardo’s defence electronics and helicopter activities are concentrated in what Moretti calls its “twin-pillar domestic markets” of Italy and the UK. In the latter, where Leonardo employs more than 7,000 people at sites including Yeovil, Edinburgh, Basildon and Luton, the subsidiary’s name, Leonardo MW, is a nod to the legacy Marconi and Westland businesses subsumed into Finmeccanica in the 2000s.
Moretti believes the British unit – currently second in size to BAE Systems – has the “potential to become the UK’s flagship company in defence and security” through its extensive defence electronics capabilities as well as its claim to be the country’s only “end-to-end helicopter provider able to respond to urgent requirements”. Coming together as Leonardo MW means, says Bone, “we can now truly speak as one voice in the UK market”.
Hurdles to that objective include an AW159 Wildcat programme that, without further export deals, could be reaching the end of its production life, and the UK’s Brexit vote last June, something that could drive a wedge between UK industry and European partners and customers. However, Moretti dismisses concerns over the referendum decision, stating that it will not directly affect the defence and security sector.
“I don’t see problems from Brexit,” he says. “All European nations face the same security threats, and we have to respond together.” Similarly, he believes the Trump administration could be good for business. The new president has criticised those who do not pay their share for NATO’s protection. “[Trump] has called for more contributions from European countries, so some will need to reinforce their position within the alliance. The opportunity for this for Leonardo is quite important,” he says.
In Italy, as well as complementary businesses in defence electronics, communications, missiles, space technology and helicopters, Leonardo’s aeronautics unit – the former Alenia Aeronautica –makes up about a quarter of overall turnover. Its biggest third-party customer is Boeing – Leonardo assembles the 787’s fuselage sections in Grottaglie. As part of its ATR joint venture with Airbus, it builds fuselages of the regional turboprops before transporting them to Toulouse for final assembly.
On the defence side, its aeronautics business includes the Varese-based Aermacchi military trainer business, which continues to enjoy modest success, securing recent deals with Poland for eight examples of the M-346 advanced trainer – the first two of which were delivered late last year – and earlier this month with Italy for five of its Williams International FJ44-4M-34-powered M-345 basic trainers.
Leonardo also contributes to the four-nation Eurofighter consortium, building wings for all Typhoons and assembling examples for Italy and export customer Kuwait. The programme’s overall backlog runs to about 100 aircraft, which should keep lines at Leonardo’s Turin-Caselle plant busy beyond 2018. Moretti also wants to ensure Leonardo plays a role in any future European unmanned successor to the Typhoon, with the company participating in the Anglo-French Future Combat Air System study.
The slump in the oil and gas sector has been difficult for Leonardo, with its 16-seat AW189 and medium AW139 significant players in the offshore market. The company’s other flagship civil programme – the two-decades-in-development AW609 tiltrotor – is also unlikely to make its service-entry target of 2018 following a fatal flight test crash in October 2015. However, Moretti is upbeat about the business. “In the worst period for helicopters,” he notes, “we maintained profitability.”
In the regional airliner market, Moretti faces twin challenges with his partners in two joint ventures – Superjet International and ATR. Leonardo has long had a difficult relationship with Sukhoi on the Superjet 100 regional jet, with Leonardo participating in the programme itself in Russia, and leading the marketing and support of the aircraft in the western hemisphere in a separate joint venture. Moretti insists Leonardo will “continue to support Sukhoi – there will be no change”.
Meanwhile, although ATR has enjoyed a lucrative few years – becoming the runaway market leader in turboprops – Leonardo and Airbus differ on where they would like to take the partnership. Airbus appears content to continue offering the 75-seat ATR 72-600 and its smaller ATR 42-600 sibling. Leonardo, by contrast, sees a strong potential market in a larger, 90- or 100-seat variant, especially in regions such as Southeast Asia with remote communities and basic transport systems, and wants to invest.
“We are in discussion with Airbus on a new platform. In parts of the world where you don’t have good land infrastructure, there are important opportunities,” he maintains. “We are considering what we can do to give our customers the right answer. While we can offer them an improvement project on the current [ATR 72-600] we are looking at a new, 100-seat design, which would also be a multirole platform for military or security use.”
Seventeen years from the region’s last major industrial consolidation, Europe is still home to three big aerospace players (four, if you count Dassault). After the failure of then-EADS chief executive Tom Enders to pull off a merger with BAE Systems in 2012, an eventual marriage of Leonardo and its UK counterpart could still be on the cards, despite Brexit. Other smaller asset swaps are possible too: a divestment of Leonardo’s 25% stake in missile house MBDA to partners Airbus and BAE perhaps.
At the London event, Moretti, 63 – who was recruited by Italy’s then-prime minister Matteo Renzi to get the ailing, partly state-owned aerospace group back on its feet – repeatedly refused to answer questions about his eventual departure, although he had earlier said he wanted to “complete his mission”. With the rebranding, the reduction of debt levels and a return to profits, that mission may be partly completed. It remains to be seen how much more Moretti intends to do.
Source: Flight International
