When Leonardo Helicopters managing director Gian Piero Cutillo says there are no “structural problems” with the business, he could be speaking quite literally of a structure. The helicopters final assembly line at Vergiate, about a half hour’s drive from Milan, is housed in a most magnificent example of 20th Century industrial architecture – a structure so fit-for-purpose, and indeed beautiful in its function-fulfilling form, that it remains in use today. Built by SIAI Marchetti in 1938 as an aircraft factory, the 365m-long (1,200ft) building somehow survived the RAF’s wartime pummelling of the region’s infrastructure and, post-war, housed Marchetti and Aermacchi fixed-wing assembly until switching to helicopters in the late 1970s.
To walk along the line – two lines, actually, one on each side, as the building and its doors were built wide enough to handle fixed-wings – is to tour most of Leonardo’s product range: AW169, AW189, AW139 and AW109 in various configurations, and even an ICH-47F Chinook – the last of an order of 16 being built under licence from Boeing.
About 1,000 people work for Leonardo at Vergiate today, most on this final assembly line; these days, two shifts push four or five helicopters a month – 50-60 a year – through the “out” end of the building. At the peak of the market in 2012-2013 the line was known to run three shifts plus Sundays to build 100 or so, but one imagines that then, as now, what characterised the operation was – as at any modern assembly plant – prevailing calm. Whether calm, metaphorical or actual, prevailed during much of 2017 is another question, one that lies at the root of Cutillo’s concern for the structural wellbeing of his business.
In short, 2017 was a year that saw revenue and profit falter despite Leonardo’s command of 30% of the world’s civil helicopter market – up from 25% in 2013 – and more than half of the 3-10t intermediate weight class, in large part owing to the popularity of the AW139 model. Helicopters accounted for 30% of Leonardo revenue in 2016, so if the division stumbles the group feels the pain. Full-year 2017 figures are due to be published in mid-March, but investors have been warned to expect numbers at the low end of expectations; at the nine-month mark, helicopter division revenue was down 8.2% at €2.4 billion ($2.9 billion) and profit (EBITA) had slumped 16%% to €238 million.
Leonardo's assembly building at Vergiate was built in 1938 - and remains well-suited to the tasks
Leonardo
The good news as Cutillo sees it – and his boss, group chief executive Alessandro Profumo, made the same point when the two of them addressed investors and media at Vergiate on 30 January to lay out a “new industrial plan” – is that the business suffered from two problems last year, and both can be addressed. One, the “external factor”, is the simple fact that the civil helicopter market globally has declined dramatically since 2013, when some 950 deliveries generated total industry revenue of $5.6 billion; 2016 figures were just 550 deliveries and $3.1 billion, and 2017 was about the same. Falling oil prices hit helicopter makers particularly hard – the offshore market all but collapsed, from $2.2 billion revenue in 2013 to just $600 million in 2016 and 2017. For Leonardo, total helicopters revenue – military and civil – fell from €4.2 billion in 2012 to €3.6 billion in 2016 and about €3 billion last year.
The other problem was “self-inflicted”. Cutillo, who was group chief financial officer until appointed head of the helicopters division in October last year, sums up this internal shortcoming as one of “lost discipline” in a challenging market. Simply, as sales teams got increasingly anxious about their numbers, they promised more than the production system could deliver, which is to say that agreeing to late changes in specification of individual helicopters left suppliers unable to keep up and disrupted the smooth running of the final assembly line. The company has “taken action to restore discipline in our processes”, Cutillo says; there will no longer be changes to specification once an order reaches final assembly.
Those late changes were doubly disruptive, as they interfered with the ramp-up of the newer AW169 and AW189 models. And in any case those models, he says, are younger than the mature AW139 and therefore yield, for the moment, a lower profit margin.
So Leonardo Helicopters has, he says, “changed our operating model” – organisation, processes and key people – to correct these “self-inflicted” troubles. The plan calls for “execution excellence”, with discipline in management, clear accountability and financial awareness across the organisation. A key objective, Cutillo says, is to make the internal and supplier production process more “agile” and flexible, to change an organisation built to the old “push” model of production to a more modern, demand-led “pull” model.
But whatever damage was done by internal slips in discipline, there is no question that the market environment has been brutal, for Leonardo and all its rivals. Much of the downturn in revenue since 2013 can be traced directly to the collapse in oil prices, which has all but wiped out the previously lucrative market for helicopters suitable for transporting crew to and from offshore oil platforms – the AW189 being a prime example.
Moreover, Cutillo says, the 3-10t market segment has split into three distinct strands. In the “intermediate” middle, from 3.2-5t, is the AW139. That machine has been a star performer, raising its market share from about 60% in 2012 to about 65% in 2017. Unfortunately, the size of the market has halved in that period, from some $1.3 billion to just $600 million.
Lower down, in the sub-3.2t lower-medium segment, the story is more positive. The smaller AW169 has gone from nought to a 45% share, while industry revenue in that segment doubled from $300 million to $600 million between 2012 and 2017. But smaller and newer – in the ramp-up phase, anyway – also means less profitable.
A similar story holds in the 7-10t super-medium segment. Heralding a “market leader in a new category”, Cutillo points to the AW189’s roughly 50% share of a $400 million 2017 market. The segment barely existed in 2012. And, again, at this early stage the programme’s contribution to helicopters division profitability is mixed.
The upside, which Leonardo aims to exploit with renewed process discipline, is that 2017 may have been the market low point. Company forecasts have industry revenue growing at an annual rate of 5%, to reach $4.3 billion in 2022. Within that, the light-, intermediate- and super-medium segments could grow 6%, Cutillo says.
Separately, the military side of the business underperformed in 2017, with “some order slippage and some challenges in the tender processes in major campaigns”, says Cutillo, who describes the year as one of “missed opportunities”. Military sales are “non-linear” – characterised by all-or-nothing tenders – and are generally under pressure as countries’ procurement budgets come under strain and a new procurement cycle is yet to kick off. But there are opportunities; Cutillo says Leonardo’s forecasts show the market is likely to decline by about 2% annually until 2022, but Leonardo group is ramping up its overseas sales forces. A reorganisation of the sales operation carried out late last year will see 500 more people – including 400 outside of Italy – dedicated to capturing new business. Across the group they will be targeting some $20 billion in potential orders from 70 competitions – and that orders pool is separate from “big shot” contracts such as the US Air Force’s T-X jet trainer and Bell UH-1N replacement deals.
The helicopter business accounts for about 30% of Leonardo's revenue, so if it is up or down the impact on the group is significant. The fact that the division’s return on sales went from 11.2% in 2012 to 11.8% in 2016, and then slumped to “high single digits” in 2017, is a major factor in a group-wide “reset” of expectations; at that investors meeting in Vergiate, Profumo made clear that for the group to have dropped below 10% return on sales in 2017 was “disappointing” – but action is being taken, in all divisions, to restore the “steady, sustainable growth” that had characterised 2016. The attention to discipline and execution being stressed in helicopters is a group-wide mission with a clear objective: to return to double-digit return-on-sales in 2022. The task, Profumo said, was “to set Leonardo up to win more often”.
Meanwhile, with corrective action on a clear view of why the helicopters business stumbled in 2017, Cutillo is confident. “We have a world-class helicopters business by any analysis,” he says. "Despite the issues last year, we are still achieving high single-digit profitability.” Leonardo’s product strategy, he declares, is “absolutely correct”.
Source: FlightGlobal.com
