Fifteen years after the end of communism, the Czech aerospace industry wants to work with Western partners to revive its ailing manufacturing base
Prague's tourist-thronged streets, elegant boutiques and luxury hotels make clear that, 15 years after the velvet revolution swept away the communists, the Czech Republic has switched easily to the service economy. Its aerospace sector – in communist times a giant workshop employing 35,000 people to churn out military, utility and trainer aircraft for the Soviet empire – has had a harder transition.
After the USSR's collapse, military orders dried up. Much of the industry was privatised and investment in the shape of Western manufacturers or private entrepreneurs began to arrive, not all of it to the good. Some of these white knights – such as Honeywell and Latecoere – have stayed; others, including Boeing, United Technologies and Ayres, have not.
Czech aircraft manufacturers are in a fragile state. Two of the biggest – ultility-aircraft producers Letecke Zavody and Morovan Aeroplanes – are being run by administrators and desperately seeking buyers, while national champion Aero Vodochody is back in state hands after main investor Boeing pulled out last year. The company developed the L-159 light attack aircraft for the Czech air force during the 1990s, but last year the cash-strapped defence ministry announced it was disposing of 42 of its 71 aircraft, leaving Aero Vodochody trying to sell the scarcely flown L-159s on the world market. Its other flagship programme remains the Ibis joint venture with Taiwanese group Aerospace Industrial Development (AIDC) to manufacture the Ae270 single-turboprop utility aircraft, but certification delays and workshare and funding disputes have bedevilled the project.
Below them, suppliers who under communism had a comfortable time knocking out annual orders from OEMs, have had to battle to find new markets as Czech-made programmes have dwindled. Companies such as engine-maker Walter, Avia Propeller, and instrument manufacturer Mikrotechna have slimmed down their workforces, found investors and brought in dynamic, young management teams in a bid to become more efficient and customer-focused. Aero Vodochody believes a large part of its future success relies on attracting aerostructures subassembly work from European and North American OEMs – it already carries out work for Boeing, BAE Systems and Sikorsky.
The Czech Republic's other great hope is the light general aviation market. The only country under communism to have a tradition of private flying, the then-Czechoslovakia's pre-war light aircraft sector continued to flourish after 1945, with thousands of gliders and agricultural, sporting and aerobatic aircraft exported around the world. Companies such as Evektor and Kappa continue to be make an impact and the Czech Republic has more applications to the European Aviation Safety Agency (EASA) for the new community standard for very light aeroplanes (CS-VLA) than any other country. Together with their counterparts in Poland , they are beginning to bring several products to market and compete aggressively in markets such as North America and western Europe. As Roger Hardy, general aviation certification directorate head at the European Aviation Safety Agency (EASA) says: "The future for general aviation is definitely in eastern Europe; they have low labour costs, an industrial base, skilled engineers and crucially originality."
In the boardroom of the Aeronautical Research and Test Institute in Prague, Milan Holl, president of the Association of Aviation Manufacturers (ALV), insists the Czech aerospace industry is still a force to be reckoned with. Its 40 or so manufacturers and other aerospace businesses – largely based around Prague, the industrial city of Brno and the region of Moravia – generate about 10 billion crowns ($455 million) in revenue and employ around 10,000 staff. This is less than a third of what it was under communism, when the state ran 19 aerospace concerns, but still ranks it eighth in Europe. "We are very confident about the future," says Holl. "We have a good environment for investment."
Lifeline
The Czech government's decision to lease 14 Saab/BAE Systems Gripen fighters last year also threw a lifeline to the country's aerospace and defence industry, which has been promised a direct offset package worth 20% of the 19.7 billion crowns ($896 million) deal over 10 years.
In 2000 the ALV was the first trade body from the former Soviet bloc to join the European Association of Aerospace Industries AECMA (now the Aerospace and Defence Industries Association of Europe or ASD), and Holl believes being part of Europe's aerospace economy is crucial to the future prospects of the country's industry. The country was one of 10 states from eastern Europe and the Mediterranean that joined the European Union in May last year. As a result Czech companies have far fewer trade barriers to deal with. Everything from certificating an aircraft (see panel) to trucking goods out of the country and cross-border investment is easier. "We want to integrate into Europe and, through Europe, build transatlantic co-operation," says Holl.
On the day of our interview, a delegation of executives from EADS and French industry was visiting the country. That Holl sees fellow Europeans – rather than US industry – as the most likely business allies in the future is no surprise; the country's record with North American investment in the 1990s was far from glittering. Boeing last year handed back to the government its controlling stake in Aero Vodochody, which it had bought in 1998 for $40 million.
GA manufacturer Ayres owned Letecke Zavody between 1998 and 2000 but ended up in liquidation itself. United Technologies sold its investment in Avia Propeller to a German company in 1999. "There were a lot of promises made," Holl recalls ruefully. "We had a terrible experience of US involvement." Now, he says, after the frenzy of excitement that followed the introduction of the free market, Czech industry has "learned to be more realistic. We had big expectations and help is difficult to expect in the business world. We learned that nobody would invest without getting their money back."
Avia Propeller is one company that has found that the global free market can be a tough place. Privatised and split off from the Avia industrial group in the early 1990s in a joint venture with United Technologies (UTC) subsidiary Hamilton Standard, it became known as Avia-Hamilton Standard before its majority stake was sold on to German propeller manufacturer MT in 1998. Largely a supplier to Czech engine-maker Walter, it also licence-manufactures for Hamilton Sundstrand and a large part of its business involves servicing and retrofitting propellers to Czech aircraft such as the Let L-410, hundreds of which are in service in the CIS and Africa.
Like most Czech aerospace companies, Avia Propeller had a gruelling time in the early 1990s as orders for Czech-built aircraft and engines dwindled. It survived on refurbishment work and the odd original equipment order such as the Polish PZL-130 military trainer. Under Hamilton Standard, it targeted the US agricultural and utility aftermarket, becoming a supplier to Lycoming and Continental. "We had to convert ourselves to the world's biggest aviation market," says managing director Igor Brunclik.
Ironically, its reliance on dollar sales for 85% of its business and the country's appetite for inward investment and consequent strengthening currency are now Avia Propeller's biggest problems. Although its $2.6 million revenues are higher today with just 36 staff than they were in 1992 when it employed 100, in terms of Czech crowns, a dollar is worth half what it was five years ago. Because it pays its workers and its local aluminium suppliers in crowns, it has had to axe 30 staff in the past two years, says Brunclik.
Walter – Avia Propeller's main customer and one of the Czech Republic's most famous aviation names – is also going through a new phase a decade after being privatised. Half of its imposing Prague factory stands empty after the company – which makes the M601 family of two-shaft turboprop engines which power the likes of the Fletcher FU-24 and Beechcraft King Air C90 as well as a variety of Czech aircraft – slimmed from 1,350 to just over 500 staff over 10 years. Over that time, Walter, now controlled by a US investment house, has whittled away huge annual losses and an $80 million debt, and last year almost broke even on $26 million revenues, says chairman Michal Cerny.
Refocused
The company has also refocused. Like Avia Propeller, the aftermarket is the biggest part of its business – it has a service operation in West Helena, Arkansas. But third-party manufacturing of engine components for Rolls-Royce, Snecma and others is the fastest-growing segment and will be worth almost $5 million this year. "It's a good complementary business," says Cerny. "We have all the approvals and processes for our own production so we have the infrastructure here." Cerny is also realistic about prospects for developing new programmes beyond the core M601 product. He terms these a "distraction" from the task of "focusing on the financial performance of the company and getting our own house in order first".
Aircraft instrument manufacturer Mikrotechna is furiously trying to remodel itself as a classic western small or medium-size enterprise (SME) a decade after being cut adrift from state ownership. A supplier largely to the Soviet Bloc military during the Cold War, the Prague company had to first redesign its range for civil applications. Its products are on Diamond, Grob and Robinson aircraft.
Now it is facing having to refocus the business again as demand for traditional gyroscopes, altimeters and airspeed indicators diminishes as the general aviation industry moves increasingly to glass cockpit technology, and manufacture of Czech-built aircraft dries up. A quarter of its 60 million crown revenues comes from manufacturing precision parts and general manager Vladimir Nyvlt is keen to apply for some of the Gripen offset funds to develop this side of the business. "We're ready to make any changes that are needed to secure offset. We have educated people, clean assembly lines and are ready to accept anything," he says.
The company has set up a network of dealers to focus on retrofit opportunities in Europe, "hired young people with English skills" and will be exhibiting at air shows such as this month's Aero 2005 at Friedrichshafen, Germany. "We want to be a standard European company. We've cut times from order to delivery from three months to six weeks, following [Japanese industrial constant improvement process] kaizan," he says. The company's 78 employees (in 1990, it had 1,200) achieved a 14% increase in productivity last year and will generate 850,000 crowns revenue per head this year. Although this is double what it was two years ago, it is still well below the EU average of 1.8 million crowns, says Nyvlt.
Membership of the EU has been a "very big deal" for the Czech aerospace industry, insists Nyvlt, a former manager with Aero Vodochody. "It has opened the door to the global market." Controversially, he believes the future of Czech aerospace lies not in developing new aircraft but in becoming a lower-cost production centre for western partners, filling capacity as delivery schedules tighten on the back of a recovery in the aviation industry. "As an industry, we must start making money and generating cash, rather than just spending on R&D. We must get it out of our heads that we can be taking new products to market."
Opportunities
One company still taking new products to market – but looking increasingly at supplier opportunities with western industry – is the country's biggest aerospace player, Aero Vodochody. Until the Ae270 is certificated or it finds a foreign customer for the L-159, the manufacturer has only three income streams: logistics support for the Czech air force's L-159s, refurbishment work on older L-39s, 2,000 of which are still in service around the world, and subassembly work. Its biggest contract is currently on the Sikorsky S-76, where it builds the aerostructure and integrates the avionics and landing gear. "It's a huge part of our business and I strongly believe subassembly work will go up year by year," says company president Antonin Jakubse.
Delays to the Ae270 programme and the absence of export orders for theL-159 were among the reasons for Boeing's messy departure from the country last year. However, two other western aerospace players are still prominent investors. French manufacturer Latecoere bought part of the former state-run Letov concern, Letov Letecka Vyroba, in 2000. The operation employs 320 staff and turns over 190 million crowns and its output includes passenger doors for Airbus narrowbodies and the Embraer 170. Honeywell – one of the earliest and biggest US investors in eastern Europe – opened a R&D facility in Prague in 1993, following it up with a flurry of acquisitions this century, including aviation components manufacturer Mora Aerospace and Invensys, which makes automotive sensors. The company now employs 1,000 people in the Czech Republic.
Whether any other major suitors are waiting in the wings for the ailing giants of the Czech industry is uncertain. Lubor Smericka, commercial director of Letecke Zavody, says the company expects to have "a new owner by the end of the year", while Morovan's commercial director Michal Hamsik insists inquiries have been strong: "The number of potential buyers is high and they are both Czech and foreign". Jakubse has no doubt that Aero Vodochody will also find a new owner – or owners. "The government has no intention to be a 100% shareholder forever. There are plenty of investors abroad interested in all of it or part of it, so the government won't face any difficulties in privatising us," he says.
MURDO MORRISON & LUBOMIR SEDLAK/PRAGUE
Source: Flight International
