Last year, when UK defence giant BAE Systems sold its 20% stake in Airbus to EADS, the move was seen as a major milestone in its westward push - the logical next step in its strategy of seeking contracts and acquisitions in the lucrative US defence market.
While the proceeds from the sale may not have been as much as BAE Systems initially hoped, the deal allowed the company to take a step back from the commercial aerospace market and free up funds for more acquisitions in defence. But the company has not cut its civil aerospace ties completely.
A side effect of the deal was to leave BAE Systems' Regional Aircraft division isolated within the group, more a relic of an age gone by - albeit one that serves as a reminder of the UK's former aircraft manufacturing glory - than a viable contributor to today's business.
Nowadays Regional Aircraft is split into two main areas of focus. The "legacy" leasing and management business is by far the larger in terms of cashflow but, thanks to the terms of leasing contracts signed on the aircraft in its fleet in the 1980s, it is unlikely ever to turn a profit. The other is the more lucrative, but much smaller support business.
"BAE Systems has made no secret of the fact that it is exiting the Regional Aircraft business," says Regional Aircraft vice-president sales and marketing Steve Doughty.
A glance at BAE's balance sheet shows why: Regional Aircraft posted a £95 million ($186 million) loss in 2005 and, with a £46 million loss in the first half of 2006, it is on track for a loss of £100 million in 2006.
In 2005, the losses at Regional Aircraft cast a shadow over Airbus's strong performance, offsetting earnings growth at the airframer and pushing commercial aerospace earnings 11% lower to £179 million, compared with £201 million in 2004. The group as a whole turned in earnings of £1.2 billion.
But BAE is not turning its back on Regional Aircraft just yet: "Our mission is to manage the fleet for cash and to provide the best value for BAE Systems and its shareholders," Doughty says. Profits are not the key, rather "our benchmark is how well we are doing in placing those aircraft," he adds.
From a product perspective, Regional Aircraft is no longer a core business for BAE, Doughty says - the decision to stop manufacturing the aircraft (see graph) demonstrated this long ago. But for the lifespan of the existing aircraft, the company is still committed to managing a fleet of around 258. "It is very much core from a financial perspective," he says.
Managing director Alan Fraser agrees: "When you have this number of aircraft on a company's balance sheet, you are certainly part of the core business."
To this end, Regional Aircraft is continuing to pursue new opportunities for its fleet, and is pleased with the $350 million of new business it has generated in 2006, with a total of 131 aircraft transactions.
Freighter conversions are a key part of the company's business. It is investing between $5 million and $6 million in the relaunch of BAe 146 Freighter conversions, which will take place in Romania with the involvement of a Romanian partner.
The company could see demand for 20-30 of the conversions in the coming years, Doughty says. Meanwhile, he adds: "I think the ATPF will be a feature of the freighter market for some time." And although it is not currently available, there is considerable market interest in the Jetstream 41F, says Regional Aircraft. Doughty also has high hopes for placing its aircraft in the corporate aviation market.
Apart from new business opportunities, the company has already made some progress in ridding itself of the residual value guarantees on its fleet that threaten to harm its profits in the future. Last year, the unit succeeded in renegotiating many of the outstanding contracts, through sale and leaseback agreements with airlines including Lufthansa and SN Brussels.
Whatever happens to the aviation industry over the next decade, Regional Aircraft will be a different business from the one it is today - most likely with a much smaller portfolio of aircraft for lease by the time the insurance coverage it has in place on leasing income runs out in 2013.
By then, the focus of the unit is likely to be on the more profitable, but smaller support business. Whether this changes the way Regional Aircraft fits into BAE remains to be seen. But there is little doubt that the industry at large will have undergone some major changes by then as well.
Source: Flight International
