Research among Europe's aerospace companies reveals a growing pace of change.
Kevin O'Toole/LONDON
SPECULATION HAS BEEN rife over the fate in store for Europe's aerospace industry. Clearly, there is a period of radical change in prospect as the region gears up for some long-awaited restructuring. Yet, to date, there has been precious little firm evidence as to how aerospace companies themselves view their future.
To fill this gap, Flight International joined with Computer Sciences Corporation, one of the world's growing information-technology giants, to conduct a major piece of research. Its aim is to take a closer look at the thinking in the boardrooms of Europe's largest aerospace companies. Detailed interviews were carried out with senior executives and business planners from the majority of the largest corporations, in what is arguably the first cross-border survey of its kind in the sector.
The bulk of replies, naturally, come from the industries of France, Germany and the UK, although views from another half-dozen national industries are included. On a rough calculation, the executives who give their views represent more than 80% of aerospace sales across Western Europe.
Some of the findings are predictable enough, such as the fact that virtually every executive now sees European consolidation as an inevitability. Other opinions are unexpected, such as the fact that more than half of the companies are looking at transatlantic as well as European alliances. Still other findings are depressing, such as the apparent lack of interest in initiatives to create a new pan-European research agency.
Overall, however, the research begins to give a more complete picture of the goals and strategies which the industry has set itself over the next few years.
BUSINESS TRENDS
There is certainly no doubt that business optimism is returning as the recession begins to fade. Two-thirds of companies report an increase in sales over the past year, and only 10% have seen a decline. Looking ahead to the year to come, all but a handful believe that sales will continue to rise.
A similar picture emerges on order intake, with 70% reporting a rise over the past year, although future forecasts are a little more cautious. Nearly one-third believe that orders will remain unchanged over the next year.
The optimism is fairly universal, but there is evidence that the civil sector is picking up faster and more confidently than that of defence. The UK, which went into recession first, also appears to be as much as a year ahead as the recovery feeds through.
Despite the upturn in markets, the research reveals signs of early caution over making major re-investment in aerospace. Budgets for research and development and capital expenditure have remained largely unchanged over the past year and, on average, are expected to creep up only slowly over the next year.
Employment levels also appear to be stabilising, rather than recovering. Over the last year, more companies have been cutting workforces than increasing them. Again, the exception comes from the UK, which was early in making cuts, and where companies have been recruiting again as markets return.
Over the next 12 months, companies expect the employment situation to continue to stabilise. Better news comes from the longer-term, five-year, view, during which most of Europe expects to begin recruitment. Only France, now in the throes of a belated national restructuring, appears to remain doubtful about the prospects of future workforce growth.
The outlook for employment growth appears to be tied in closely with the levels of prices being paid by customers. On balance, over the past year, the industry suffered a fall in prices, led by France and Germany, which have been worst hit by the free-fall of the US dollar.
Few expect prices to rise in the short term, but looking out over the next five years, a little more optimism begins to return, although there is no great expectation for any major recovery. Manufacturers have been preparing to pass on the effect of weaker prices by keeping pressure on their own suppliers, where prices are expected to continue to fall over the next year.
Consultants which have long been preaching the virtues of tighter supply-chain management will be disappointed, however, by the fact that only a small minority of companies seems to be bullish about the prospect of slimming down supplier bases, and most of those are in the UK.
Overall, the picture is of an industry only now emerging from recession, but optimistic that market recovery will begin to give a little more freedom for expansion in the medium term.
INDUSTRY CONSOLIDATION
Companies are also gearing up for what most believe is going to be an inevitable and potentially unsettling bout of consolidation. So far, US industry has made most of the running in restructuring, but few now doubt that the experience is about to cross the Atlantic.
All of the executives interviewed agree that consolidation will take place and virtually all identify Europe as the key market in which that will happen.
A theme running through the survey is that of the relative decline of national markets in an increasingly global marketplace. Whereas 78% of companies admit that their domestic market is the prime focus, only 62% feel that this will still be the case in future.
Instead, attention is turning to the Asia- Pacific region and, in particular, China, although it is notable that Western Europe retains its place as the single most important target market.
Consolidation at national level is largely, although not entirely, a dead issue in most of Europe. Half of the German companies still believe that there is room for further domestic restructuring, while, in France, more than two-thirds are looking for national consolidation -understandably, given the pending merger of Aerospatiale and Dassault, as well as the likely privatisation of the Thomson group.
Perhaps more significant are findings of companies, especially in the UK and Germany, which are keeping their options open on transatlantic tie-ups. Well over half of the companies in these countries identify such mergers as likely.
In fact, 56% of the respondents say that they will look to the USA for future alliances. More than one-third also identify Asia-Pacific as a likely target. Few are interested in the opportunities nearer to home, in Eastern Europe and the former Soviet Union, for example.
One worrying finding to emerge from the research is a fundamental difference in opinion over how consolidation should take place.
French and German companies still show a clear preference for non-shareholding alliances in the form of consortia or programme collaboration. In the UK, more than 90% of companies displayed a more typically Anglo-Saxon approach to alliances by identifying mergers and acquisitions as the likely form of consolidation. Other countries, apart from France and Germany, appear to agree. Which view will win remains to be seen.
An unexpected clue to the likely shape of restructuring comes from a look at how companies believe that their businesses will change in terms of the division between the civil and defence sectors.
The overall view is that Europe is divided evenly, although with a slight bias towards civil work, and that these proportions are expected to stay largely intact over the next five years.
Within the overall figure, however, it is notable that Germany, the weakest in terms of defence contracys, expects to see military work to continue a steady decline. Whereas German companies report that 38% of their current business is in defence, that is expected to fall to less than one-third over the next half decade.
The finding seems to provide further fuel to recent suggestions from Daimler-Benz Aerospace that it is preparing to cede its military ambitions in return for securing more airliner-work. That would leave a straight contest between the UK and France, both of which expect to maintain sizeable defence businesses, which represent around 47% of sales.
While much of the evidence from the survey suggests that aerospace companies are increasingly committed to looking beyond national boundaries to a pan-European future, there was a surprising lack of interest in creating new transnational bodies to back up this commitment.
Companies were asked to look at a range of possible new European institutions, including a unified aviation authority, a NASA-style research agency, a combined defence-procurement agency and a single European currency.
With the exception of the single-currency issue, which 70% of companies think will be implemented, there seems to be little confidence that any of these institutions will actually happen in the foreseeable future.
Few of the companies which have any opinion think that such institutions will benefit their companies. For example, although over half of companies think that a single defence-procurement agency will be set up, less than one-third think that it will have any direct benefit.
The issue of a unified research agency or aviation authority raises even less interest, even among the aircraft builders which have ostensibly supported calls for its creation. Just over one-half recognise the benefit of a single European currency, and the figure would have been much higher, but for scepticism from the UK, where only a quarter of companies see any benefit. Only 57% in Germany support the move.
This final set of findings suggests that, despite a broad commitment to the new Europe, the devil, as ever, will be in the detail.
Source: Flight International
