As it prepares to meet for the Farnborough air show, the European aerospace industry is bracing itself for the full effects of the current slowdown. The question now is the extent of the recovery in 2003
The European aerospace industry has had a turbulent year. And as the industry gears up for this year's Farnborough airshow in UK at the end of June, there are no guarantees that the bad times are over just yet. The region's champion, Airbus, has delayed its order and delivery forecast for 2003, a worrying sign that market conditions are still far from stable. The company expects to have a better idea of prospects next year by the time of the air show opens for business on 22 July.
In the meantime, Airbus has been putting great emphasis on cost-cutting. Last year it claims to have netted savings of €85 million ($80 million) and says it is on schedule to reach a target of €350 million savings by 2004. The manufacturer may be helped by its change in structure from a loose consortium to a fully fledged manufacturing company, owned 20% by the UK's BAE Systems and 80% by EADS, the European giant formed out of the merger of the French, German and Spanish national aerospace champions two years ago. In fact, the last Farnborough show in 2000 marked the first major outing for EADS. For its part, the ongoing process of integrating operations at Airbus still offers plenty of opportunities for cost savings.
Airbus has thus far refrained from the swingeing job cuts seen at its arch rival Boeing, which axed 30,000 jobs after 11 September. Instead, it has relied on what it describes as "flexibility" in its agreements with labour and subcontractors to meet the challenges posed by the industry downturn. This includes reduced overtime and short-time working, a reduction in the number of temporary workers and a reduction in short-term sub-contracting.
"This will preserve the skills and experience of employees in view of the end of the crisis and recovery in 2004," says Airbus president Noel Forgeard. Chief operating officer Gustav Humbert also notes that adapting the production capacity to delivery levels over the next few years is one of the key challenges facing the manufacturer.
Production cut
Airbus expects to deliver 300 aircraft in 2002, down from 325 last year. Production had reached a running rate of 350 before the crisis and Humbert says Airbus is looking at a capacity cut in the region of 20% to cope with the lower than expected demand.
The question is whether this will this be enough? After 11 September, Airbus cut its annual delivery guidance to analysts from 400 to 330-350 in both 2002 and 2003. However, even then there was a feeling in some quarters that this was optimistic. For instance, Banc of America securities predicted that deliveries would be 290 units in 2002 (15% below the manufacturer's guidance) and 275 units in 2003 (19% below).
However, Forgeard is confident that Airbus will surprise the financial community. Commenting on the decision of one analyst to reduce the recommendation on EADS to neutral, he says: "They are underestimating the capacity of Airbus to meet its objectives in 2002."
Indeed, despite the nay-sayers, there is a definite sense of confidence within the company, and a barely suppressed belief that Airbus has the advantage in its tussle with Boeing. Chief commercial officer John Leahy repeats that the manufacturer wants 50% market share but that it "has no goals to go above that".
In terms of orders Airbus took a 42% market share in the 100-200 seat category in 2001, comparing its A320 family with the Boeing narrow bodies. However, in the core twin-aisle categories it took well over half the market. In the big aircraft market above 375 seats Airbus has taken an even more commanding 85% share, reflecting the 85 orders taken for the A380 (plus 12 waiting to be inked) since it was given the go-ahead last year. At the same time the market for new-build Boeing 747-400s has shown signs of flagging.
The A380 project is gearing up to its peak requirement of 5,000 engineers in 2003, and the aircraft is due to enter service in 2006. With a total cost of $10.7 billion, signing risk-sharing contracts with large subcontractors has been of key importance. Partners will cover $2.1 billion of the cost on the airframe, with another $900 million taken by equipment vendors.
Although the A380 is the main focus of aircraft development, this year will see the launch of the high capacity A340-600 and long-range A340-500. The -600 was certified in May and the -500 is expected to be certified in October. At the other end of the market, the small A318, the latest addition at the bottom of the A320 range, is expected to enter service in 2003 with CFM56 engines, and in 2005 with the Pratt &Whitney PW6000 engine.
However much management attention at Airbus is being taken up on the military side, with the A340M dogged by political infighting and wrangles over commitments to orders necessary to ensure the $16 billion project's viability.
While Airbus believe it holds the aces in its battle with Boeing, the US giant does hold a major advantage in its more even balance of defence, airframe and systems businesses. By contrast EADS is heavily reliant on Airbus, which accounted for nearly 90% of its operating profits and 40% of its revenues in 2000. With the civil business facing downturn, that raises concerns. Banc of America Securities notes that the four other EADS segments - military transport, aeronautics, space and systems - generate just 8% of total profits and the group has made no secret of its desire to develop these divisions.
Regional watershed
While Airbus thrives, Europe's regional aircraft sector has continued to wind down. As Farnborough approaches, ATR could be just about the only regional aircraft manufacturer still delivering aircraft. Fokker and Saab shut up shop years ago and others have followed this year. At the end of last year BAE Systems finally announced that it would halt production of the Avro RJ, which has been winding down for a decade when the predecessor built up so many liabilities for the group. The German/US Fairchild Dornier has drifting into court protection and a European rescue looks remote. Forgeard effectively ruled out interest from Airbus: "We have enough projects for the time being."
Rival manufacturers and the financial community profess little surprise at Fairchild Dornier's problems, noting the cash burn involved in its development of the 728 regional jet. The cash requirement situation worsened as the programme came to market and tested the patience of major shareholders Allianz Capital Partners and Clayton, Dubilier & Rice to the limit.
BAE and EADS both ruled out a rescue for the beleaguered manufacturer, although BAE managing director Alan Fraser hints that the UK firm may be interested in parts of the company if, as he suspects, it is eventually broken up. Boeing, which had its fingers burnt in the regional sector in the 1980s when it brought De Havilland Canada, is also seemingly reluctant to take up Fairchild Dornier. That left Bombardier as the most likely source of salvation. The Canadian manufacturer looked seriously at the possibility of taking over the 85-seater 728 programme, as well as the 100-seat 928, but has since ruled it out. However, Fairchild Dornier says talks are ongoing with other companies on the aircraft as well as the 328JET.
Meanwhile, BAE Systems Regional Aircraft continues to reinvent itself as a service company, concentrating on customer support, engineering and leasing. Through necessity, BAE has had to build up a slick asset management and service organisation to handle its regional aircraft liabilities over the years and this looks as though it will continue to expand despite the closure of the manufacturing lines.
The company has a new management team and is investing £20 million ($29 million) in new IT systems and facilities, accompanied by a rationalisation of sites and facilities. The centre of engineering and support is gradually relocating to Prestwick in Scotland; asset management wil be located at Hatfield, near London; and spare parts at Weybridge, also near London. It will also maintain a support and asset management centre in Washington DC, a spare parts operation in Sydney, Australia, and a customer training and engineering facility in the former Woodford manufacturing site near Manchester.
The company sees possible opportunities in the cargo sector, and is considering a freighter conversion programme for the BAe 146, as well as promoting the conversion programme for the ATP turboprop. In addition, it is also pushing for third-party maintenance business.
On the leasing side, BAE has a portfolio of 447 BAe 146s, ATPs and Jetstream turboprops. It is, however, considering adding more of these as well as types from other manufacturers such as the Airbus A320 family.
ATR, owned by Italy's Alenia Aerospazio and EADS, has continued to turn out its 40-70-seat turboprops at a steady pace, although the group underwent restructuring last year which cut costs by 20%. Last year ATRtook in 25 new orders and delivered 20 aircraft, and is looking for similar numbers in 2002. A tie-up between ATR and Brazilian manufacturer Embraer which would provide a link with Airbus, has not materialised despite much speculation. ATR's part-owner, Aerospatiale Matra is a member of a French consortium including Dassault, Thomson-CSF and Snecma, which holds a 20% stake in the Brazilian concern.
Engine cuts
The engine market has closely mirrored that of the civil aircraft manufacturing sector, with a steep decline in orders. Rolls-Royce predicts that its civil engine deliveries will decline by over a third, from 1,362 in 2001 to 900 in 2002. The UK group made 5,000 employees redundant in the wake of 11 September, taking a hefty £230 million ($329 million) charge in the process.
Some analysts have also expressed concern over the practice of reporting revenue provided up-front by risk-sharing partnerships as operating income during the development phase, as the partners' share of revenue from engine sales will only be recognised when engines have been sold. This effectively means that profits will appear higher now but will take a hit later. The manufacturer has been boosted, however, by the success of the A380, where the majority of sales have been specified with the Trent engine.
CFM, the joint venture between Snecma of France and General Electric of the USA, is also experiencing a steep fall in orders, with sales of its CFM56 this year expected to be 740, compared with 1, 040 in 2001, although the company warns that this figure could well be hit by delays and cancellations. Predictions for 2003 show a further decline to somewhere in the region of 550-650.
Further decline
Elsewhere, there were similar stories. Typical is conglomerate Smiths Group of the UK, which derives nearly a fifth of its revenues from the civil aerospace sector and has reduced its headcount by 3,000 to 34,000 since 11 September. The company has warned that sales in this sector could fall by as much as 40% in 2002, although it is reallocating some resources to its defence interests, and is still talking about acquisitions in the aerospace sector.
Those companies which have only a limited exposure to the civil aerospace sector have the most positive outlook. For instance Thales, which gets most of its revenues from defence, reports that sales and profits should continue to grow, but only "despite the expected tapering-off of civilian aerospace sales". Thales has recently gained full control of several subsidiaries, including the outstanding third in Thales ATM, which specialises in air traffic management, from Siemens.
Much uncertainty remains over the strength and timing of a recovery, and the natural delay between orders being turned into deliveries means that both this year and next will be tough ones for the European sector. Most companies have already implemented hefty cost-cutting measures, however, positioning themselves for the hoped-for recovery in 2004.
Source: Airline Business
